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Are you financially ready for self employment?

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by Elizabeth MacBride

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Ted Jablonski started his own small marketing business at arguably the worst time in living memory: spring 2009, with the economy near its post-crash trough. The market for corporate communications looked like the Sahara Desert.

He had just turned 50 and had two kids on the verge of going to college – but when his employer, LPL Financial, downsized, he decided the moment was right for the move he’d been contemplating for a while.

“It was a risky time,” he says now. “Sometimes opportunities are greatest then.”

It took Jablonski about six months to begin bringing in enough money that he and his wife could stop dipping into their savings, and a full two years before he had replaced his entire corporate salary with the income from Marketing Consortium, a solo business in Wellesley, Massachusetts, that counts many financial services companies among its clients.

“I am tremendously happy,” he says. “I love the work I do. I like the way I do it.”

Jablonski gained the confidence to open his own consultancy by doing a thorough assessment of his finances: He and his wife, Susan (already self-employed as a human capital consultant) had a year of ready cash to cover their living expenses, in addition to 401(k)s they didn’t want to tap.

He looked ahead at his finances for three years, asking himself: “What will be going out the door and what needs to come in?”

“That cash-flow assessment was critical,” he says.

See also: Creating the Perfect Work Schedule

If you are contemplating self-employment, test your financial readiness by answering these five questions.

• How much can you make? Many people become self-employed in a field in which they already had a career. Colleagues and contacts can help you figure out what a reasonable monthly “take” is. If you are venturing into a new field – like opening a bait-and-tackle shop at the shore after a career in hospital administration – consider signing up for a class in entrepreneurship at a local college or career center to help you figure out how much those businesses typically make, says Sheryl Garrett, founder of the Garrett Financial Planning Network, a nationwide resource of 320 planners. You’ll start your business more confidently if you have determined that meeting your income goal is very possible.

“Don’t let the passion for this hobby give you the illusion that you can make a living at it,” Garrett says.

• How much do you need? Do a month-by-month assessment of your living expenses to figure out how much income you need. Don't forget to add the expenses involved in running your new business, such as travel, marketing and computer equipment. When you’re calculating your expenses, remember that you’ll now be paying self-employment taxes.

One startup cost entrepreneurs often overlook is marketing. “So many times I’ve seen a well-meaning entrepreneur hang up a shingle and wait for the phone to ring,” says Russell D. Francis, a CPA and certified financial planner with Portland Fixed Income Specialists in Beavertown, Oregon. “Unless … you are bringing clients over from a previous business, you need to do whatever you need to do to get in front of customers. Sometimes `guerrilla marketing’ will work, but most startups underestimate the need and cost of a professional marketing plan.”

See also: Single Parent, Self-Employed

• What will you do for health care coverage? Almost without a doubt, the single biggest addition to your monthly budget as a self-employed person will be the premiums for buying health coverage on your own. Jablonski had a health insurance bill of $2,500 a month.

If you have a spouse who is employed, getting coverage through him or her likely is your best option. This web site from the Henry J. Kaiser Family Foundation offers a calculator to estimate health insurance costs starting in 2014. HealthCare.gov offers lists of plans that provide coverage for individuals depending on your state.

• How much cash do you have, and how much are you willing to burn? Many freelancers and self-employed people estimate that it will take six months to a year to attract enough clients to pay the bills. If, like Jablonski, you have that much cash at hand, that’s great. If you have the option to keep working, or stay employed part-time, while you start your business, aim to build up a year’s worth of cash.


• Are you willing to use your retirement savings or borrow against your house? Most experts advise not dipping into your other assets to fund a move to self-employment – but there are exceptions. For instance, if there is a clear path to replacing that money via your new income, a move like this isn’t as risky as it sounds. Garrett gave the example of a woman with a $55,000 nest egg, making $13,000 a year. The woman had a chance to go to nursing school – and expected to be earning enough afterwards to replace the nest egg within a few years. She wasn’t necessarily going to become an entrepreneur, but Garrett sees her story as illustrating an important point about when it’s okay to tap into your assets. “Sometimes, becoming self-employed is making an investment in ourselves,” she says. “If it means dipping into your retirement egg, that’s okay.”

Elizabeth MacBride is co-editor of the $200KFreelancer (http://200kfreelancer.com/), a site focused on helping independent professionals make a good living.