Episode #37: The #1 Way To Create Job and Income Security As An Entrepreneur
A lot of people are under the impression that entrepreneurs are risk takers, because we say no to what’s traditionally viewed as a stable paycheck and benefits. People are always saying things to entrepreneurs like ‘I don’t know how you can function not knowing where your next paycheck is coming from’. But the secret that a lot of entrepreneurs keep is that we’re actually an extremely risk averse group of people. I have been an entrepreneur for my entire working adult life, and I can attest to this, I am extremely risk averse, I am a planner and a systems person. And this risk aversion is a really healthy trait to have as an entrepreneur because the fear encourages you to set up your own systems and safety nets to help weather the not so good times that inevitably come with running a business. So, if you’re interested in pursuing a business idea that will allow you to start working for yourself, but are currently feeling held back by the fear of instability that comes with being an entrepreneur, then stick around for the #1 tip I have to create that same job security and income security for yourself, that you’re currently afraid to leave behind.
Set up a regular life emergency fund
First, you want to make sure your regular emergency account is fully funded, just like you would if you were working a 9-5 job. If you’ve watched my other content you’ll know that for most emergency funds I recommend keeping 3-6 months of necessary living expenses in a separate high interest savings account. If you’re planning on being self employed though you may want to consider having more in your emergency fund depending on your industry and business model. If you have a business with a really steady year round source of income then you might decide that the regular 3-6 months of expenses will be enough for you. If you run a business though that’s very seasonal or has other big fluctuations in sales then you might want to have a larger emergency account to buy yourself more time.
Look at the field you want to run your business in, look at the reasonable fluctuations in sales and income you can expect, and logically decide how much you should have saved in your emergency fund. Also, make sure you keep that emergency fund in a separate account so you’re not tempted to dip into it when it’s not necessary. I recommend keeping it in what’s called a high interest savings account so that you can earn a little bit of interest with the money in that account and it’s not feeling totally useless just sitting there as liquid cash.
2. Create a cash cushion in your daily spending account
If you’re an entrepreneur, then suddenly you can’t live the life of saying ‘I have $13.00 left from my last paycheck, but it’ll be okay because I get paid again on friday and I can definitely make it until friday’. Suddenly that next paycheck is not a guarantee, so you need to get in the habit of keeping a bigger cushion of cash in your daily spending account. This is sort of similar to an emergency fund, but your emergency fund is really only supposed to be touched in case something goes really wrong. Your daily account cash cushion doesn’t have to be nearly as large as your emergency fund. It’s supposed to cover you for just a little while in the event that you find yourself waiting on a client to sign their contract to begin a job, or if you just have a slower week of sales because it rained all week and your walk in traffic was down. Things happen as an entrepreneur that cause your income to fluctuate occasionally, and keeping a small cushion of cash in your daily spending account will help keep you from freaking out the moment you don’t sign a client that you were anticipating working with.
How much this cushion should be will vary significantly by person and by business, but it’s good to keep at least one month’s worth of living expenses prepped and ready in your daily spending account. And remember, this is different from your emergency fund, this is just to see you through the little blips and delays that you’ll encounter all the time when you’re running your own business, while your emergency fund is there to see you through the real catastrophes like injury or illness when you’re self employed.
3. Create a business emergency fund
This is where being an entrepreneur you need to go above and beyond the level of financial preparedness that you’d need if you were working a traditional job. If you’re traditionally employed and you lose your job then you need to cover your necessary living expenses. If you’re self-employed and you lose some business then you need to be able to cover your necessary living expenses AND your necessary business expenses so that you still have the ability to continue running your business. Your business is your source of income so you need to plan ahead to protect it above all else.
Now there is not much information around this concept and it’s not a widely accepted idea, if anything many of us have the opposite idea in mind because, we’ve seen over and over again countless gigantic businesses receive government bailouts when they can’t pay their expenses. Often times these big businesses have been paying gigantic bonuses to their executive suites for years, including the years when they’re in trouble, but the government can’t afford for them to go under so they get bailed out, but I want to make it super clear that when you’re self employed and running a small business nobody has any interest in bailing you out if you don’t save enough money in your business and get yourself into trouble. That’s on you, and the good news is it’s entirely possible to financially prepare yourself to protect your business. Just like building an emergency fund to cover your rent, utilities, car payments etc. if you lose your job, you can create an emergency fund to cover your necessary business expenses too. This will look different for every business but examples of necessary business expenses that would need to be covered are insurance, rent if you’re a storefront, software fees like your website and domain fees, and anything else that if you cut it out entirely would mean that your business could not continue to operate. And again the amount that you save and the amount of time you want to buy yourself to get your business back up on its’ feet again is entirely up to you.
Overall on the topic of emergency funds, there is no right or wrong answer to how much money you need to save and I unfortunately can’t give you a one size fits all answer to this. The important point that I wanted to get across is that as an entrepreneur you need to plan to protect yourself as well as your business. You absolutely can create job and income security for yourself, it just takes some advance planning, and some very diligent saving. So, to recap, if you want to be self employed but have been afraid of the perceived risk of it there are 3 things you can do to create that feeling of job security and income security that you enjoy with your current job. Number 1 build yourself a proper emergency fund, probably a bit larger than the one you have right now. Number 2 create a small cash cushion in your daily spending account so that you’re not constantly freaking out about the next paycheck. And number 3 create a separate emergency fund to cover your necessary business expenses in case you hit a rough patch so you don’t have to choose between paying your insurance to keep your business doors open, or buying groceries that month, separating and separately calculating these emergency funds will absolutely set you up for success and help you weather and maybe even thrive and grow through the inevitable storms that you’ll encounter as an entrepreneur.
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