Are you ready to make the leap to self-employment? If you are considering quitting your day job to work for yourself, you may be both excited and nervous. While you may be sick of your job and can’t wait to leave, it is prudent to carefully plan for the financial instability self-employment may bring.
There are a number of aspects of your financial life that you should reevaluate before you make the big leap:
Emergency fund. How large is your emergency fund? Self-employment typically comes with erratic income. One month you may make double what you did the month before, and the next month you may not have enough money to pay your basic bills. A 6 to 8 month emergency fund (or more) can help you handle erratic income.
Mortgage. If you are planning to buy a home in the near future and have some money set aside for the home purchase, you may want to buy it now, before you become self-employed because home loans are difficult for the self-employed to obtain. You can use online mortgage calculators to help you determine the monthly mortgage payment you can afford. If you do decide to buy a home before moving to self-employment, make sure you leave yourself an ample emergency fund to cushion yourself against variable income.
Health insurance. One of the largest expenses of being self-employed is health insurance. If you have a spouse with health insurance, it may be wise to join that policy. If not, you should have the option of COBRA insurance for up to 18 months from the employer you are leaving, but those policies can be expensive. You can also apply for independent health insurance, which may be more reasonable depending on your age and health. A good health insurance broker can help you consider different policies and premiums.
Business contacts. Ideally, before making the leap to self-employment, you have been working nights and weekends to build up your business and clientele. Many experts recommend that you have your side business bring in a significant amount of income before you make the leap to working on your own. Business contacts are also important as they will help you grow your business when you are self-employed. They can also help you find the social contact you may miss when you leave your day job and work independently.
Contemplating working on your own is exciting. However, there are many benefits your day job provides such as health insurance, that you must put in place before you quit. In addition, make sure you are in a healthy financial state so you can weather ebbs in income.