The Entrepreneur Fund: One Year of Projected Expenses

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.

Comments

  1. It will be scary but I’m sure will be the best decision you have ever made. How long are you giving yourself once you make the official transition?

  2. @Frugal dad With more attention focused you should be able to hit that mark. Pretty remarkable you are doing so well and clearly have the basis already to make the transition. It will be worth the extra free time.

  3. its just as i was told, entrepreneurship is an addiction and you, my friend have it. its something that we are born with and we can never shake. entrepreneurs always have the tendency of venturing on their own and that is why we rule the world. i like the fund though, its a nice way to shield the loved ones from stupid risks

  4. The Entrepreneur Fund is a must for anyone wanting to make the switch. becoming self-employed is not an easy task and depending on what you do, it can take years before you become profitable and in the meantime you still need to meet your obligations. For us it was much easier as we can live off just one income and no kids, however for someone in our position, with a family detailed calculations and planning is needed.

    good luck!

  5. @Craig: Thanks for mentioning the benefits of putting a spouse at ease. My wife is much more reserved than me, by nature, so the thought of walking away from a guaranteed income frightens her even more than me. Having a year of expenses socked away goes a long way towards making her more comfortable with the idea.

  6. I’d like to hear a little more about what your business plan is: just freelancing or something more?
    Your plan sounds very wise. Have you included costs such as increased liability insurance? For some odd reason, our court systems like to award people an inordinately large amount of money for doing stupid things when they are at your business. While not as common as other tragedies, it’s one that has bankrupted many small businesses. You mentioned office space, which leads me to assume you will have clients in and about the premises often. Be sure to protect yourself.
    Best wishes!

  7. @Sid: I plan to write more about it in the coming weeks, but as a teaser, my basic plan is to continue writing here while picking up a couple freelance writing opportunities.

    Over the last couple years I have had to turn down, or drop out from, a number of chances to write for other sites and publications. With more time to develop ideas I would be able to accept a few of these opportunities which would help my bottom line.

    I also have an interest in social media, particularly as it relates to helping market small business and organizations. Some of my time may be spent partnering with local businesses to develop a social media plan (build a blog, get engaged with Twitter/Facebook, etc.). I think there are some opportunities here, but I just can’t carve out enough time to devote to developing this angle while working 40-50 hours a week at a full time job.

    Your point regarding liability is a good one. Still undecided on office space – whether it is a home office physically inside my home, a separate tiny house or converted storage building on my property, or space I rent completely away from home. There are pros and cons of all three, and I’m weighing my options.

    I look forward to sharing more about my plan as things begin to take shape. But first things first; I have to finish off the remainder of my debts and build up my Entrepreneur Fund.

  8. Reading about this is a real encouragment. We have 5 children. My husband and I both work. I just recently started working after being at home with the kids for many years. Our youngest is only 2 so it has been hard to leave her. I wish to some day get back home but be able to have things paid off to where I can.

    Thanks.

  9. Good for you FD! I have been freelancing for about 11 years and have not had a day off since I started. That can be a good thing, or it can be a bad thing. I would HIGHLY recommend setting aside at least one day a week where you do not even look at your email. Otherwise you will be all-consumed. I’ve been really lucky, but I also work very hard. Remember too, to have a good lawyer for back up. You will encounter clients who are slow/no pay and will need a letter or two drawn up at some point. Also make sure you are insured! Errors & omissions insurance has been a lifesaver. One typo goes to print or something goes wonky in the social media world and you will be the fall guy. Trust me. Also don’t forget short-term disability. If you are relying on your income you’ll need it if something happens. For me, subcontracting people worked much better than staffing and having a payroll. Many, many less headaches and I had a bigger pool of skills/talent to choose from. You’ve probably already thought of all this, but I learned a lot of it the hard way. :-)

  10. Very wise!!

    One thing that might help people too is trying to adjust to living on a basic budget. Most people will spend all they earn. Their expenses tend to go up when the income goes up. I love to see that you are not living on all your income! I am sure it will encourage many people to read this post!

    Frugal Dad, when are you going to write a book? I am sure it would sell out very quickly!

  11. @Mrs. White: About a year ago I was contacted by a publisher and put together a book proposal. They asked for writing samples, so I provided a couple chapters of a manuscript, and things were clicking.

    Unfortunately, they decided to go in another direction and left me hanging. I haven’t had an opportunity to develop the idea further, but writing a book remains on my “bucket list!”

  12. Thanks for the link! And be sure to check out our posts on other self-employed retirement plan options :)

    Best of luck to you, you sound like you have a great plan. One day I hope to join the ranks of the self-employed.

  13. @Craig: My window of opportunity to significantly ramp up earnings is one year from the time I leave paid employment. Right now I’m averaging about 70-80% of my regular, full-time earnings through “side hustles.” My thought is that within one year of focusing full-time attention on these efforts I can close the remaning 20-30% and then some.

    The flip side is that I may not need 100% of my current full-time earnings once debt free. I can still hit my goals on a reduced income, which I may be willing to trade for the freedoms of working for myself.

  14. Excellent ideas for those looking to eventually freelance full-time, something I’d like to do within the year. It’s scary enough of a step to take without worrying about having a backup plan. Thanks for the post!

  15. What a great idea! By establishing this fund, you’ve essentially taken the motion sickness pills before the boat leaves the dock, enabling you to handle the ebb and flow of going at it alone.

    I think your chances of making your “pipe dream” a long term reality are much higher due to your willingness to prepare properly.

    Good Luck!

  16. Hi Frugal Dad,

    I had to sort through my thoughts on this post. My first thought was that it’s nothing like what I did when I started my business. Then again, I enjoy the crazy. ;)

    Here is my main issue with your plan. If you pay yourself a “paycheck” that’s the same every two weeks, that doesn’t give you a whole lot of motivation to make more income. Part of the fun of pushing yourself to make more income and take risks is the visualization of what you will do with the money — and then doing that once you earn it!

    And the other piece: You are taking freelancing writing jobs? WHY? You are giving up one job and replacing it with another in that case! Create your own products, start a membership site, write ebooks, do videos…but sell your own stuff. Otherwise you’re not an entrepreneur; you’re just another contract worker — without health insurance.

    Try the risk of doing something totally your own. It might feel scary at first, but with 100% ownership of any project you do, you’ll eventually be able to skyrocket your income.

    Feel free to contact me directly if you would like to talk–I’m working with some other PF bloggers behind the scenes and helping them design plans to take their businesses to the next level.

    -Erica

  17. @Erica and Lisa: Thanks for sharing your perspectives. Erica, I know a bit about your story, and I think it is safe to say we’re starting our businesses in much different situations. A hungry spouse and two kids forces you to be a little more conservative with your plans. I’ll be rather choosy about my freelance opportunities (assuming I can afford to be) and see them as a chance to build my clip file and grow Frugal Dad. The money is (somewhat) secondary with regard to freelancing writing.

    Definitely have plans to develop some type of ebook/newsletter/publication to expand on the content here at FD with the hope of generating some revenue from my own products.

    Appreciate Erica’s thoughts on paying myself a flat salary. Maybe I’ll rethink that part of the plan, or at a minimum give myself quarterly raises as income increases.

  18. It is great to hear about your plan to be an entrepreneur full time. One thing I was wondering…are you going to be putting extra money into the “entrepreneur” fund instead of using it to finish paying off your debt? If it were me I’d definitely put that money toward the debt as the very first thing.

    Second, office space can be a huge drain on your expenses. You need to work from home. When you have to meet clients you can meet them at their offices, coffee shops, or rent from one of those shared workspace places as a last resort. I have a home office and have never regretted it, even though I also have two young children hanging around.

    Also, consider your wife’s potential earnings as a safety net. Should you not bring in any cash from your business she can always bring in extra money by working. I assume she has skills and education but even if she doesn’t there are part-time retail jobs, admin positions, etc. to be had. Many people forget about their stay-at-home spouse’s ability to earn an income when the finances get rough.

  19. First of all, congratulations to you and I wish you the best on your venture! I am a lifelong entrepreneur and have started 5 different companies and I would pose that if one has the know how and the work ethic then being an entrepreneur is actually less risky than having to depend on someone else to keep you employed. Of course, it definitely takes time before any new venture will really start to pay off and the mind set needs to be much different from those who are accustomed to just getting a paycheck every week but it is very fulfilling. Keep us posted on your progress! – Joel

  20. It sounds like a sensible idea, considering how many businesses fail in the first year. This post does not yet pertain to my situation, though I hope it will in the future. I am thankful to be add it to my idea box (my brain!). :)

  21. Hola FrugalDad, great idea on this fund! If you don’t mind my asking, aren’t you already an entrepreneur with this site? With 10,000 readers, you’ve got to be making a pretty good coin / month no?

    I’m just trying to get a grasp of how much one can make with a site such as this. Could you just quite your full time job and blog? I know several guys with just 1,000-3000 readers who do quite well.

    Even though I’ve decided not to put ads on FS, I will probably try to monetize after I get to an certain comfort level.

    How about them Tigers?

    Best

  22. I think I’ll be stealing yet another one of your ideas, FD. :P I really like this!

    Then again, since my husband has a steady income… I was planning on working part-time in my future “real” job anyhow and working on the freelancing stuff the other half of the time. (Gonna have to pay off SL’s with something, heh.) That way I’ll have a regular income that *should* be higher than what I’m making now part-time and would cover what I need it to while I hack it out on my own. If I do well, I can consider axing the part-time stuff, unless I like it. If I do bad, I can move to full-time or what not. Either way, it’s not so bad when I’m just starting out and the risk seems a bit lower than moving down in pay.

    Either way, I’m stealing this when I graduate and get that “real” job. ;)

  23. As I said on Twitter, you seem to have a savings fund for everything, Frugal Dad! :)

    Congrats on your well-deserved expansion and growth. I took the entrepreneurial leap in Jan 09 and am loving it – though it is absolutely a massive amount of work. Seriously. But the daily challenges keep me on top of my game and I am much more satisfied than in any previous job. The flexible schedule is also a MAJOR perk.

    Good luck!

  24. I love the planning. I do think that 1 year of expenses is being too conservative.

    If you consider the $ you are making now with your part-time activities then it’s hard to imagine that income being less if you are working full time on those endeavors.

    Regardless, nothing wrong with waiting until the right time!

    With your work ethic, intelligence and creativity, there isn’t a doubt in my mind that you will be able to work full time at free-lancing, consulting, blogging etc.

    Mike

  25. Cool idea :)

    About the self-employed health insurance though, be sure that you don’t decline COBRA just in case you can’t get private coverage. It is *much* harder to qualify for it than most people realize.

  26. Ahh… being your own boss. I think it’s the unsaid (maybe sometimes said) secret of just about any personal finance blogger – and probably no less than half of all bloggers. I can’t say that it hasn’t crossed my mind. Best of luck in getting there and I look forward to hearing your experience.

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