As debt freedom moves closer to reality in the Frugal household, my dreams have again turned to the idea of venturing out on my own. I’ve been fortunate to enjoy some growth around here these last couple years, and my combined earnings from all freelancing ventures are enough to support us comfortably once we are debt free.
Most of you know that I’m a pretty conservative guy. Let me say it another way – I hate risk! The idea of becoming an entrepreneur is exhilarating and terrifying at the same time. But it is something I have wanted to try since the very earliest moments of my career. Until now it has been a pipe dream.
To overcome my fear of crashing and burning, and taking my family down with me, I’ve decided to implement a couple actionable steps that should provide an adequate safety net, both for my household, and my business.
Building an Entrepreneur Fund
1. Take an inventory of all household expenses. Make a master list of all household expenses using last month’s records. Apply no filtering here; just list.
2. Develop a projected household budget after leaving the workplace. When I turn in my notice, a few things will change around our household, financially. Some “employment” expenses will go away or be lessened (gasoline, clothes, meals out, etc.). Other expenses will increase (self employed health insurance, etc.). Get quotes on things like health insurance and office space rentals now, and factor those new expenses into your projected budget.
3. Save one year of projected expenses in an “Entrepreneur Fund.” Think of it as an emergency fund for your business. Worst case scenario – my idea completely flops after six months and I have to hit the pavement looking for work. In that case, a year of expenses in the bank would make me much less desperate!
Since I included a few self employment expenses in the mix, I recognize those go away if I give up the entrepreneurial endeavor. For instance, the expense of leasing office space eventually dies off with the end of a lease or rental agreement. Self employed health insurance stays around until I’m working again.
*From this point forward, the steps are highly individualized for my situation. Maybe it could work for you, too, or maybe not. Do what works best for your circumstances.
4. Move Entrepreneur Fund to an online savings account and schedule a biweekly draw to your personal checking account equivalent to half of monthly household budget. My income as a freelancer is somewhat erratic. There are a few forms of ad income that hold steady each month, but nothing is a sure thing.
To offset the peaks and valleys, I plan to “pay” myself the same amount from the Entrepreneur Fund every two weeks, just as if I was receiving a paycheck from my employer.
5. Transfer monthly profits from my business account to Entrepreneur Fund. At the end of the month, I will make two transfers to online savings – one to my self employment tax sinking fund from where quarterly estimated tax payments are made, and the second to transfer profits to my Entrepreneur Fund.
During months where earnings are high, I’ll be replenishing more than I’m spending. At the end of the year I’ll plan to do a re-balancing of my account taking the balance back down to 12 months of household and business expenses. The excess profits will be invested as profit sharing via a self employed retirement account.
In lean times, the Entrepreneur Fund will allow us to continue to receive the same draw in the form of a paycheck. In other words, temporary downturns will not affect your household. Of course, long-term downturns could be problematic as my Entrepreneur Fund balance slowly drains. Without cutting expenses, or turning around earnings, I’d be looking for other sources of income and fast, but at least I’d have a few months as backup.
If you are like me and have always dreamed of becoming an entrepreneur, I hope you will consider building a healthy Entrepreneur Fund before taking the leap. I believe many more businesses could stay afloat if they had a stronger cash position early on to survive that first inevitable income dip. Without savings, business owners are often forced to turn to borrowing to pay expenses, make payroll, etc. The debt creates yet another expense, and without a quick turnaround, only speeds up the demise of the fledgling business.