So you wanna be an entrepreneur? Here’s what you’ll need
You grew up in a world of YouTube stars, pro-bloggers and self-made millionaires. Traditional jobs? No thanks. Having a boss? Pass. You’re a free thinker, and you want to live—and work—on your own terms.
You’re not the only one. Three in five young adults have toyed with the idea of starting their own business, while 67 percent long to leave the traditional work structure and become self-employed. And thanks to the new gig economy, earning a living through nontraditional means is a lot easier than it used to be.
“With hordes of young people selling homemade clothing on Etsy, driving for Uber and opening food trucks on every corner, and with a much smaller group founding influential tech companies, this generation embodies the spirit of a ‘startup culture,’ ” says NPR.
So far, however, fewer than 2 percent of young people have made that dream come true. Why? Because of the tight economy. It’s rough out there, and more than 40 percent of would-be self-starters say lack of financial means is what’s holding them back. The corporate shackles may make you chafe, but they do come with some nice perks—like having your health insurance, retirement plan and income taxes at least partially paid by your employer. When you work for yourself, you’re responsible for all of it.
But take it from someone who’s self-employed: You can make it happen. It just takes some careful planning, diligent budgeting, and enough self-discipline to save for the future. Here’s how I did it:
Start a budget.
The first thing you need to know before launching your own business is how much you’ll need to make each month to live the lifestyle you want. You may even need to revise your idea of what that lifestyle entails. For me, the freedom of self-employment was worth giving up a few conveniences, but your mileage may vary.
Creating a budget gives you a specific income target to aim for as you start planning your new business. If you’re not sure how, there are some great budgeting apps that can help. Start by adding up all of your monthly expenses, including rent, utilities, car insurance, credit card bills and loan payments. Use your best guess to estimate variables like gas, food, entertainment and basic life necessities; factor in a sum for savings and retirement; and add a little extra padding for those unexpected expenses that always crop up.
Don’t forget to include all the new costs you’ll take on as a self-employed individual. Since you won’t have health care coverage through your employer anymore, you’ll need to buy your own insurance plan. And since income taxes will no longer be deducted from your monthly paycheck, you’ll need to set aside money throughout the year to pay your taxes. (More on that below.)
Save up an emergency fund.
When you start your own business, you no longer have the luxury of a steady paycheck. Some months are leaner than others, and in the beginning it’s hard to estimate how much you’re going to make. So it’s important to have some money saved up to cover your bills during those tight months.
Try to save up at least three to six months’ worth of income to serve as your safety net. Anytime you have to dip into it your emergency fund, make sure you replenish it as soon as possible.
Plan for taxes.
Ah, taxes. When you’re self-employed, you no longer have the luxury of thinking about them only once a year. Instead, you’ll need to make quarterly estimated tax payments every three months. To avoid getting behind, it’s important to factor taxes into your monthly budget.
In the beginning, estimating how much your taxes will be is tricky. My general rule of thumb is to set aside 25 percent of my income each month in a special savings account just for taxes. Keeping my tax savings separate from my regular savings helps me avoid draining my emergency fund whenever tax time rolls around. Consider opening a savings account specifically for your tax savings, like a secondary savings account from OCCU. This will make tax time a lot less painful.
Invest in a retirement plan.
When we’re young, we think we have all the time in the world to worry about retirement. But thanks to the magic of compound interest, starting a retirement plan now means you’ll have exponentially bigger stacks once you retire.
Most people contribute to a 401k through their employer, but as entrepreneurs we’re responsible for creating our own retirement plans. A traditional IRA is a great option if you’re young and unemployed. You can contribute up to $5,500 a year, and your contributions are tax deductible. That’s a huge break for you once tax season hits!
Being self-employed comes with some financial responsibilities most people don’t have to worry about. But once you nail down the right budgeting and saving habits, you’ll be surprised at how easily things fall into place. And believe me—it’s worth it.