While cutting back on expenses and saving more of your paycheck may gradually increase your pool of wealth over time, the best way to significantly improve your financial situation is by starting a business.
Now having a steady job is all fine and good, but one of the biggest problems with having a job and being a salaried employee is the amount of work you put in is not directly proportional to the amount you get paid.
For example, no matter how hard you work and how much money you make for your employer, you always get paid the same amount and there’s very little upside. Even if you were to create an incredible new product that made your company millions, you would never see any of that money in your bank account.
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In contrast, when you start and own your own business, you get to reap all of the rewards of your efforts. If you make a million bucks, you get to keep it. And if you follow Boomer and Echo’s philosophies on sound investing, you’ll achieve financial freedom much faster than with your day job alone.
So what’s the catch? The problem most people face when starting a business is risk. Most start-up ventures require some amount of upfront investment and in order to be successful, you have to carefully plan your financial strategy so you can stay afloat long enough for your business to show a profit.
A Personal Story
About 5 years ago, my wife became pregnant with our first child and decided that she wanted to quit her job in order to become a stay at home mom. Now quitting her job wasn’t an easy decision to make. After all, she was making a healthy six figure salary at the time working for a Fortune 500 company.
But being there for our child during the early years was very important to my wife and I so we decided that quitting her job was the right thing to do. No matter how you look at it, giving up 100K a year is very hard to do.
But ultimately, we decided to take the plunge and started an online store selling ladies wedding keepsakes and table linens specifically targeting special events.
Now what was nice about our business idea was that my wife could run the business from home, take care of our child full time and hopefully (eventually) replace the lost income from her day job.
But what was absolutely terrifying was the prospect of investing time and money into a business that could potentially make no money at all.
Today I want to talk about how we got over those fears and to provide some words of advice on how to prepare yourself mentally and financially before you start a business.
Don’t Quit Your Job Right Away
First off, if you want to start your own business, don’t quit your day job right away. Some seasoned entrepreneurs will advise you to put yourself in a situation where it’s make it or break it. But not only is putting yourself in a do-or-die situation extremely stressful but you’ll also take on unnecessary financial risk.
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Honestly, if you need to put yourself in dire straits in order to get motivated, then you probably shouldn’t be starting a business in the first place.
The ideal situation is to work on your business on the side while still working your full time job. In fact, that is exactly what my wife and I did.
By being a little more efficient at work and devoting extra time on nights and weekends to work on the business instead of watching television, we managed to launch our online store in just a matter of months. Best of all, there was no financial pressure since we still had our day job salaries.
Save 6 Months Of Cash Or More
Ideally, you should keep your day job until your business makes enough money for you to quit. But things don’t always work out that way. In the event that you need to rely on your business for income, you should always plan ahead and have a small nest egg saved so you can keep your business afloat.
Now if you’ve been following Boomer and Echo’s excellent financial advice, chances are you have a good amount of cash stashed away already, but the actual amount you need depends on your risk tolerance. For my wife and I, we had about a years worth of expenses saved before we took the plunge – but keep in mind that we are more paranoid than most people.
Don’t Take On Any New Loans
As cash flow may be tight during the early stages of your business, it’s absolutely essential that you don’t take on any additional new debt or monthly payments. If you think you need to buy a new car, then think again. If you feel the need to buy a house, then give yourself a slap on the cheek.
The more cash you have and the less monthly liabilities that you have, the more comfortable you’ll feel about your business. Remember, the goal is to create enough runway for your business so that it takes off before you run out of money.
One of the beauties of starting a company is that you can expense many of your purchases as long as they are used for your business. Without getting into too much depth, you can easily deduct a portion of your rent if you set aside some space for your business in your apartment. You can also deduct the mileage on your car whenever you use it for business purposes.
Note: Please check with your accountant before deducting expenses on your tax return.
Ease Yourself Into Spending Less
If you’re going to be making less money in the short term, then you need to spend less as well. Before we started our business, my wife and I used to go out to eat for every meal. In addition, we spent a lot of money on entertainment and other frivolous purchases.
Cutting everything cold turkey can be pretty difficult, so in the months leading up to our business launch, we eased ourselves into it by making small cuts. Instead of eating out every meal, we tried to eat out only once or twice a week. Rather than going out for entertainment, we stayed in or hung out with friends and played board games.
If you try hard, you can easily find some ways to cut back a little bit and live within your means until your business revenue starts rolling in.
Starting a Business: Is It All Worth It?
Our business managed to earn 100K in profit within our first year of operations. And our little online store has been growing in the double and triple digits every single year for the past 4 years. The best part is my wife now works only a few hours a day and gets to spend all her time with the kids.
Did it require some amount of risk in order to start a profitable business? Absolutely! But it should never be do-or-die. If you prepare yourself financially for the risks ahead, you’ll provide your business with the necessary runway to take off.
Oh and if you follow Boomer and Echo’s sound financial advice in conjunction with your business, you’ll achieve financial freedom in no time.
Steve writes for MyWifeQuitHerJob.com where he teaches entrepreneurs how to start an online store.