Over five years ago, I made the bold decision to leave my secure corporate job, despite my inherent aversion to taking financial risks. Ever since then, I have utilized my expertise as a financial coach to support numerous aspiring business owners in their journey toward leaving their day jobs and embarking on their entrepreneurial ventures. The cornerstone of my guidance lies in equipping them with essential money management skills.
Budget for a Year
According to the U.S. Chamber of Commerce, the failure rate for small businesses is significant, with 18% not surviving their first year and half of them closing within the next five years.
The Covid-19 pandemic further exacerbated the challenges faced by entrepreneurs, leading many to contemplate quitting their businesses due to both economic conditions and a lack of financial clarity.
Throughout the pandemic, I provided coaching to numerous entrepreneurs who were grappling with these issues. One recurring theme was their limited understanding of personal finances, which often hindered their ability to weather certain circumstances.
When it comes to financial education, many of my students initially view budgeting as merely determining their essential expenses. However, it is crucial to allocate funds for variable expenses as well. This is particularly important for entrepreneurs, as they often experience unpredictable income streams.
Additionally, setting aside money for personal expenses such as holidays, celebrations, and vacations is vital to prevent burnout and maintain a healthy work-life balance.
Save for Six Months’ Expenses
In the realm of tech startups, founders often seek financial support from investors to cover their expenses while striving to make their companies profitable. This expenditure rate is commonly referred to “burn rate.”
Instead of perceiving this as a mere emergency fund, it is essential to approach it from the standpoint of investing in your own financial future, not solely as a founder. When preparing for this scenario, it is advisable to set aside a six-month fund that encompasses various essential expense categories, including:
By creating this financial cushion, you can provide yourself with the necessary time and stability when transitioning away from your current job. It allows you the runway to explore and adapt your business without the added worry of meeting your day-to-day living needs.
Pay Off Your Debts – Even Student Loans
A significant challenge faced by many of the students I teach is the burden of high student loan debt, despite having lucrative jobs. This financial obligation often makes it difficult for them to feel comfortable leaving a stable salary behind. According to the Education Data Initiative, the average borrower takes 20 years to fully repay their student loans.
When you have additional savings beyond your business runway, paying off all your debts, including student loans, can be a transformative decision. It shifts your motivation from merely meeting expenses to truly focusing on growing your business as a valuable investment.
Some financial experts may argue against paying off low-interest or deferred student debt from a purely mathematical standpoint. However, from a psychological perspective, the benefits of eliminating multiple payment accounts and shedding the mental burden of student loans can be more significant than anticipated.
Personally, I chose to aggressively pay off $53,000 of student loans within a year before fully committing to my own business. This decision not only provided me with a sense of financial freedom but also bolstered my confidence in making significant financial choices.
It spared me several years of dreading the weight of student debt, a common sentiment among my peers. Upon making that final payment, I experienced a profound sense of relief, clarity of thought, and a surge of creative energy dedicated to expanding my business.
I want to emphasize that making these three money moves is not a mandatory requirement for leaving your day job behind and pursuing your own business. If you already possess the confidence and resources to embark on this journey, that is truly commendable.
However, for individuals like myself who have faced financial instability and trauma in the past, I believe it is beneficial to invest additional time in establishing a robust budgeting routine, creating a self-funded runaway, and striving for a debt-free lifestyle.
By prioritizing financial stability and taking deliberate actions to secure your financial well-being, you set yourself up for a greater sense of security and peace of mind as you navigate the challenges and uncertainties of entrepreneurship.
Ultimately, each individual’s circumstances and comfort level will vary, but for those who have experienced financial struggles in the past, these money moves can be instrumental in fostering a sustainable and fulfilling entrepreneurial journey.