Ready to fire your boss? There’s certainly something rewarding about being the one to call all the shots. Well hold your horses… don’t all your desires of starting your own business get in the way of reality. Sure, the very idea of being able to say good-bye to your dead end job and having the ability to generate your own money on a project that you’re passionate about is great. However, you don’t want to make the mistake of jumping out of your current situation too soon.
Did you know that the about half of all businesses fail in the first five years of starting? A fifty percent chance might seem like reasonable odds for a bet on a sports game or on a winning lottery ticket, but when you’re talking about financially providing for yourself (and loved ones if you have them) for the rest of your life, taking that risk seems less reasonable.
I’m not saying give up your dreams or anything; I’m just saying prepare yourself financially. Here are five ways you can start preparing your personal finances before starting your own business.
Build Your Credit
Just this year, sleekmoney.com reported that Wal-Mart was given an AA credit rating. While this could happen for you one day, in the beginning phases of starting a business, your personal credit is essentially the same as your business credit. Since you’ve never had any credit accounts under your company’s name, lending/service providers have no idea on how to rate your credibility. So they use your credit score and history to make a determination. Take a look at your credit score and history and see if there are any improvements that need to be made. If you have reasonably good credit, find ways to make it better as you may need to take out a loan in the first year of business.
Get Out of Debt
Whether you like your current job or not it’s a “guaranteed” income. When starting a business, your ability to sustain a reasonable income will depend upon the success of your business. Therefore, you don’t want to start off in debt. Since you’ve already evaluated your credit history, you’re aware of the areas you need to improve. Create a list of all your outstanding debts and come up with a plan that will allow you to eliminate all of your debt before you leave your day job.
Build a Nest Egg
As you can imagine the first few years of business will be up and down. You want to be financially prepared to handle those moments where things are down. Building a financial nest egg is the best way to do this. Not only should you have at least $1,000 in an emergency account, but you should also have about three to six months worth of expenses in a savings account. This way, if your business has a really bad month financially, you have the financial support to fall back on.
Start a Retirement Fund
Whether you have a pension plan or 401K account through your employer or not, you still want to have one of your own. Of course once you quit you can roll your funds from your employer account into your personal account, but you need to get in the habit of saving for retirement. Again, you will be providing for yourself and any loved ones you support for a long time. You want to make sure that when you’re ready to retire from your own business that you’re able to sustain a good quality of life. Start putting away small amounts into a retirement account to prepare now.
Get Your Health in Order
This may not sound like a personal finance step, but it absolutely is. Health insurance costs for the self employed and their loved ones might be more than the health insurance coverage you have at work. So unless you’re prepared to pay for the higher out of pocket costs right away, you’re going to want to get your health in order. Go for a physical, get all your dental work done, and get any prescriptions filled prior to quitting your day job.
Taking these steps does not mean that you’re planning for your business to fail. It is simply being proactive by taking preventative measures. No one sets out to fail, but being prepared for it just in case can make bouncing back easier. If you have not done any of the following personal finance steps yet, it’s probably a good idea to stick in there with your day job just a little while longer. Once you’ve taken the proper steps it’ll feel like a weight lifted off your shoulders.
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