Many entrepreneurs find themselves, at some point, wrestling with a difficult decision: “Am I ready to quit my job so I can focus on my business full-time?”
Galen Herbst de Cortina, CFP®, vividly remembers making this decision himself when he founded his business: Buff Your Finances. Now, as a financial planner who works primarily with professional video gamers, he helps clients who are facing the same dilemma.
Since Galen is both an entrepreneur and a financial advisor, he has an unusual perspective.
Financial planners, like me, are in a funny place because almost all of us made the leap to start our own businesses … but we’d almost never tell a client to do what we did because it goes against traditional, conservative financial advice.
The way I see it, though, is my job isn’t to tell clients, “You need to follow this specific advice no matter how you feel about it.” I’m here to make sure they’re informed—that they’re aware of the risks and they’re managing them intelligently. Because …what’s the money for, anyway? The money is for helping you live a life that you enjoy.
Here, you’ll find his advice on how to answer the question, “Am I ready to quit my job to focus on my business?” You’ll find some tips on how to prepare if the answer is “No, not yet” but you want to make this leap in the future.
- Calculate your true salary
- Create a realistic budget
- Estimate ramp-up time for your business
- Think about your fallback plan
- Check your savings
- Add it up
- What if I’m not ready yet?
Am I ready to quit my job?
When Galen is working with a client who is thinking about quitting their job to focus on their business, they go through a few specific steps to assess the risks and benefits—just like they would with any other major financial decision.
Frankly, starting a business is an investment in your future. Investments can be risky, right? That doesn’t mean that they are a bad decision as long as you’re aware of the risks and being practical about them.
Being self-employed comes with a few notable financial risks and responsibilities. That isn’t to say that it’s necessarily more risky than working for an employer, but since you’re reading this post, they are likely new and unfamiliar risks. Here are the specific steps you can take to ensure you’re prepared to face them.
1. Calculate your true salary
Most people are very aware of the amount that gets deposited into their bank accounts for each paycheck, but you almost certainly need to earn much more than this sum to replace your salary. Why? There are three primary reasons.
- Your employer typically withholds money from your paycheck for your state and federal taxes. When you’re self-employed, you’ll need to set aside a percentage of your earnings for income tax.
- When you work for an employer, the employer will pay part of your Social Security and Medicare tax, but when you work for yourself, you’re responsible for the entire sum. This tax is referred to as self-employment tax, and it can add up to a substantial amount.
- Many employers also offer benefits like health insurance, paid time off, disability insurance, and more. When you work for yourself, you’ll have to arrange (and pay for!) your own benefits.
Once you calculate your true salary by adding taxes and the cost of benefits, you’ll know how your current budget will be affected if you give it up.
2. Create a realistic budget
At this point, you know how much you would need to earn to replace your salary. This information is vital, but it’s not the same as knowing how much you spend—or even more importantly, how much you could be spending.
Galen puts it like this: “Your current-state spending might be matched to your current-state earnings.” Most people create budgets that are at least partially informed by their incomes, and they probably would spend more or less if their income changed. When you’re considering taking a financial risk, it’s always a good idea to know exactly how much you need to get by.
This step requires realism and time. How far are you willing to go—and how much would you be willing to give up—to pursue your goal of building a business? There are countless stories of entrepreneurs who cut their costs to the bone in order to get their business off the ground.
It’s important to think critically about everything you’re planning to give up, however. Sometimes it’s easy to create a budget that seems doable on paper, but when you start to apply it, you realize that you’re sacrificing something that’s essential to your overall health and wellbeing.
One last piece of advice from Galen on this step: once you’ve determined a budget, give it a test run. If you believe you can cut your costs by 30%, do it for a few months and deposit your savings into a separate bank account. The benefits of this strategy are twofold: at the end of the test run, you should feel confident that the budget is realistic and you’ll have a good chunk of savings that are sure to come in handy later.
3. Estimate ramp-up time for your business
Sometimes, you have to make a leap. Maybe your business isn’t earning enough to live on, yet—that doesn’t necessarily mean that you can’t devote yourself full-time to your business as long as you have savings, realistic expectations, and a decent fallback plan.
This is actually the choice Galen made himself when he started his career as a financial planner. He says, “You know, my first year in business, I think I was slightly above the break-even point. That means I didn’t really earn anything for that year.”
He was able to make it through and grow his business because he did two crucial things to prepare. He had realistic expectations for how long it would take to start earning money, and he created a financial plan to get through this extended period with no income.
To get these realistic expectations, Galen spent a lot of time talking with other business owners and learning from their experiences.
In my experience, most people are generally open to talking. If I reach out to someone in my industry who’s a bit ahead of me in the business and ask them a question, they’re usually willing to tell me about their experience. I did a lot of this kind of research before starting my business, and it did a lot to help me manage my expectations and create a realistic plan.
4. Think about your fallback plan
The alarming statistics say that 50% of all small businesses fail in the first 5 years. You can reduce that risk through hard work and smart decision-making, but you should always consider what you’ll do if things don’t work out the way you hoped.
Galen clearly remembers thinking through his fallback plan before he started his career as a financial planner.
I realized I could get a job, or I could take the opportunity to start my business. And I was like, “Okay, if I started my business, worked at it for a couple of years and it didn’t work out, I could get another job pretty easily.”
Since he knew he could deal with the worst-case scenario, he was able to deal with the financial risks that he’d inevitably face as an entrepreneur.
5. Check your savings
When you quit your job to focus full-time on your business, you’re going to need some savings. The question is “How much?” More is better, obviously, but that’s not really a helpful answer. Here are some tips on forecasting how much you’ll need.
At a minimum, consider establishing an emergency fund. Conventional financial advice suggests that everyone (even people with regular income from an employer) should have 3-6 months of living expenses. If you’re the primary income-earner in your household, consider setting your goal at six months of expenses. If you have a partner with a secure job or a fallback plan you can implement quickly, you might be comfortable with just three.
Next, consider the difference between your current business revenue and your realistic budget. If you’re not earning enough to live on yet, you’re going to need added savings to cover the gap. This is where your projections of ramp-up time are going to be useful—you can use them to calculate roughly when you’ll be earning enough to match your current spending. From there, you can estimate how much you’ll need to cover day-to-day expenses until that point.
Finally, think about whether or not you’ll need more money to invest in the business. When you quit your job and spend more time growing your business, your costs may also increase and they might not be in direct proportion to your revenue.
6. Add it up
Once you’ve gone through all these steps, you should have the information you need to evaluate the level of risk and make a decision.
Is the business earning enough to pay you a living wage, and if not, do you have enough savings to cover your expenses while you build the business? Do you have a fallback plan in case the business doesn’t succeed, and an emergency fund to cover unexpected expenses? If the answer to any of these questions is “no,” then you’ve identified it as an area of potential vulnerability.
What if I’m not ready yet?
It takes most entrepreneurs a lot of time and preparation to get to the point where they can quit their jobs and earn a full-time income from their business.
If you’re not quite ready yet, the answers to all these questions should show you what you can do to prepare. If your current budget is too high to realistically sustain with your business, look for long-term strategies to cut costs. If you need more savings, set a goal and create a savings plan. Remember to check in on your financial plan regularly so you can make adjustments as needed.
In the meantime, look for creative ways to grow and scale your business while you continue to work for an employer. For example, consider looking for a different job (perhaps one that’s less stressful or more flexible) that will allow you to spend more time and energy on the business. Alternately, consider hiring someone to help with the business on a part-time or freelance basis, or invest in tools that will allow you to do more with less time.
If you keep growing your business, increasing profits, and saving money, you’ll eventually reach the point where you can confidently make the leap from employee to full-time entrepreneur.
Disclaimer: This content is for informational purposes only and does not constitute tax, accounting, legal, or other professional advice. The opinions expressed in this post are those of the interviewee(s), and do not represent Azlo. Please do not rely on this content for any specific purpose without obtaining personalized professional advice. Also, Azlo doesn’t endorse any third-party sites that are linked in this post.