Thursday, January 17, 2008

How to prepare financially for your home business

Photo: Piggy Bank by annia316 ?

I've been uneasy about my earlier post about preparing to leave my office job, because I think I glossed over the financial part of the preparations. I only mentioned that I was learning about frugal living because I didn't expect to replace my office income with a home business right away.

But that is only half of the story.

The other half is making sure that I have money set aside to tide my family over while I'm still building up my home businesses.

How much do you need?

I don't know how much money you should save before quitting your day job. In my case, I do not feel comfortable with anything less than one year's living expenses. But that's me and I'm no financial expert. It's what I think is reasonable and sensible for somebody like me who has children and contributes significantly to the family income.

Obviously, a couple who don't have any children, or a single person with no children, will require a smaller financial safety net.

It also depends on how much you contribute to the total family income. If your spouse is the main income earner and makes enough to support your family, then you'll probably only have to worry about the money you need to set up your home business. But if you're the breadwinner, then having one or even two years' worth of living expenses as a buffer is more prudent. You'll need even more if your current job provides health insurance and other benefits that are essential to your family.

Aside from replacing your office income, you'll need money to set up your new home business -- money for a new computer, perhaps, or faster Internet connection, office supplies, home office furniture, a printer, fax or modem, web hosting, web designing, etc. And if you plan to sell, you'll need money to buy inventory or raw materials.

I had the guts to plunge into self-employment because I was thrust into it: my position in the United Nations was abolished. Sure, I could have applied for a new position that opened, but I chose to pursue my dream of becoming my own boss instead. I felt it was the perfect opportunity to do so because my separation pay assures me that I won't bring my family to financial ruin. Otherwise, I would probably have gone slower (as if waiting 10 years wasn't slow enough) and more gradually into self-employment.

How do you get the money?

Preparing financially for a home business is pretty simple, at least on paper:
  1. Increase your income. The more money you earn, the more you can save. I say "can" and not "will" because it's not automatic. More often than not, our expenses grow as our incomes grow. DH and I are amazed at how we survived with so little in the first few years of our marriage. But as our incomes grew, so did our cost of living. And it wasn't just because we were having more children. We were buying more expensive things, going on more vacations, just generally buying more stuff that we previously could live without! Resist the urge to spend what you earn, and move on to step number 2.
  2. Increase your savings. I read a number of years ago that you should automatically save at least 10 per cent of your gross income every month. Pay yourself first. Put these savings into a separate account that you will not touch except for investments or real emergencies. I read elsewhere that if you saved 25 percent of your monthly income, you could retire in seven years. I don't know if that's true, but I do know that it adds up to some pretty serious savings. A financial guru in the Philippines advises newlyweds to live on one person's salary and save the other person's salary. I wish I had learned that before I had gotten married!
  3. Eliminate your debt. Fortunately, DH and I are both averse to debt. We strove to pay off our car as fast as we could. This meant doing a lot of belt tightening for a while, and we did dip into some savings. But it felt real good to be debt-free! That meant that every money we earned from that point on was entirely ours. This also made it easy for us to relocate to another country; we didn't have any financial obligations tying us down. Obviously, I do not advise borrowing money to go into a home business (but again, that's just me and I am NOT a financial expert!)
  4. Make your money grow through investments. DH and I are still quite ignorant about investing, but we do know that making wise investments is the only way to make your money work for you. We're still studying and learning.
Setting a financial goal and reaching it is an essential part of preparing for self-employment.

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itsy said...

Thanks for your comment at 'notes from the floor'. As far as staying at home / working from home for single parents goes - I know I am wildly privileged to live in the UK. I have the safety net of enough money to live on - but only once I had made enormous changes in my life, like moving home so that my outgoing were manageable. As a single parent in a different country, survival would be he focus of my decisions and earning would be very very important. I do not have enough money and the drive to provide more for my family and give me the luxury of becoming more involved in the world I live in, is very strong. But I do sleep at night and I have been able to make the decision to find work I like as well as to do it in a pattern that allows me to be a full time mum.

Lexi said...

wow, you are lucky indeed! our family's move to canada is another strong motivator for me to finally take the plunge. otherwise, self-employed entrepreneurs have a difficult time in the philippines. good luck to you!