5 Numbers You Need to Know BEFORE Becoming Self-Employed
So, you're thinking of becoming your own boss? That's amazing! But before you hand in your resignation and start your victory dance, let's make sure your finances are as ready as you are.
A recent survey reported that financial mistakes cost Americans, on average, $1500 annually. So, if you are considering becoming self-employed, getting your finances in order is even more important.
This way, you can make decisions informed by facts vs. guestimates mixed in with a lot of emotion.
This can be overwhelming, but it doesn't have to be. The goal is to have the numbers needed to help give you a clear picture of your finances so you can make informed decisions.
The following are the five critical numbers to know to help you create a plan to become self-employed:
Average monthly spending
Savings
Debt-to-income
Net worth
Credit Score
In the following few sections, we break down each number.
1. Determine Your Average Monthly Spending
Think of your monthly spending like a leaky faucet. If you don't know how much is dripping out, you'll eventually end up with an empty bucket (and a flooded bathroom!).
You need to know your average monthly spending to accurately calculate the amount of savings you need to cover your expenses while you're building your business.
A miscalculation of your average expenses means you may not have enough saved to cover your expenses. One unexpected expense can spiral you into thousands of dollars of debt or force you to take a job you don't want.
You can estimate your average monthly spending by doing the following:
Use last month's expenses at a minimum; ideally, the longer, the better. Most bank and non-bank budgeting apps make this process simple.
2. Create a Savings Plan
Saving to become self-employed is like planning a road trip. You need to know your destination, how much gas you'll need, and if there are any unexpected detours (like a flat tire or a sudden craving for In-N-Out Burger).
As you're planning, account for what you'll need to cover while you grow your income with your business
Living expenses
Insurance costs
Upcoming Expenses (anniversaries, birthdays, etc)
1st Year Business costs
This is a basic rule of thumb, but you must decide how much money you'll feel comfortable having to quit.
3. Review Your Debts
Debt is like that annoying friend who always comes along uninvited. It can quickly drain your resources and prevent you from reaching your goals.
The amount of your non-mortgage debts can make or break your ability to quit.
Estimating how much your debts will eat away at your future savings can help you quickly determine whether you want to pay off your debts before quitting your job.
Below are a few simple steps to review your debts:
List your debts, balances, interest rates, minimum payments, and actual payments.
Total your payments and do the math to see how much your paycheck is toward debt.
Next, ask yourself if you are comfortable with this much of the money you've saved to live off of going towards debt. If not, create a plan to pay off the debt.
4. Calculate Your Net Worth
Your net worth is simply a calculation. You take the value of everything you own (your assets) and subtract the value of everything you owe (your liabilities).
Think of it like this: Assets put money in your pocket, like your house, car, or investments. Liabilities take money out of your pocket, like credit card debt or student loans.
Ideally, you'd like your net worth to be positive. The higher the number, the better your financial health and ability to manage the unexpected.
Your net worth will impact any financial decision you make.
If you live off your savings, your net worth will drop. This means a lower safety net if you have a significant expense.
Any debt you pay off increases your net worth, giving you more financial breathing room and peace of mind when making decisions.
5. Get Your Credit Score
Your credit score is like your financial GPA. It tells lenders and potential employers how responsible you are with money.
Your credit score affects so many areas of your finances. If you're looking to get credit, it determines not only if you'll be approved but also how much interest you'll have to pay.
Some who hire contractors may look at your credit score because some employers worry that you may be at a higher risk of fraud or theft if you're in financial distress.
Your credit score may be a factor if you decide to get a loan or line of credit. We encourage you to get your FICO score. More than 90% of lenders use FICO, so you want to use the score your potential lender will most likely use.
Review your credit report while you're still employed and have income and time coming in to fix problems.
To Recap
To make sure your plan to become self-employed doesn't turn into a future cautionary tale, a ton of debt, or worse, another job you want to quit, make sure you know these 5 financial numbers:
Your average monthly spending
Total savings
Debt-to-income
Net Worth
FICO Credit
Final Thoughts
Remember, knowledge is power. By understanding these five key numbers, you'll be well on your way to making informed decisions and creating a solid financial foundation for your future.
Are you ready to take the leap into self-employment? Book a free 30-minute Job Exit call with me today, and let's explore your options together!
