Feeling that entrepreneurial itch? If you have an idea or several ideas to open up your own business, then you might be itching to quit your 9-to-5. But feeling financially stable during this transition can be worrisome. How long do you have to wait until you start bringing in revenue? And what do you do in until then to make ends meet?
Starting your own business is terrifyingly exciting, but to ease some of the entrepreneurial stress, it helps to have a savings cushion to fall back on. To help you out, here’s a guide to figure out how much money you should save when you start your own business.
Set aside money each month into a separate savings account
Before you turn in your resignation letter, you should have some savings set aside to help offset your start-up costs, which includes the time it takes to drum up paying customers. Having a “start-up” fund will help you ease into running your own business and maintaining your current standard of living.
Determine if you need any seed money of your own to start your business. Realize that you won’t immediately replace your income, so a separate savings account that will cover your cost of living for a while can help you feel less stressed. Don’t forget to research best savings accounts, and ensure that there aren’t any hidden fees and you’re getting a good interest rate.
Bankroll existing vacation days
Sarah Glatt, founder of Paper Crane Associates, a consulting firm for nonprofit leaders and entrepreneurs to launch mission-driven organizations, used vacation days to transition into entrepreneurship.
“I had four to six weeks of paid vacation days that I cashed in when I quit with my employer. Each of those vacation days were a golden ticket. They represented a day of work that I could cash flow into entrepreneurship,” Glatt shares.
View paid vacation days as additional cash flow for your new venture. Any unused vacation days can be paid out to you, depending on your employer’s policy. From there, Glatt says to move it into a savings account.
“I moved the money into a savings account. I thought about it as a pile of money that I could use instead of a paycheck. It gave me confidence and time to figure out how I was going to launch without feeling desperate.”
Glatt emphasized that even though you might get a contract or sale, it doesn’t always immediately translate to cash. “Cashing in on unused vacation days helped me pay living expenses and start-up expenses.”
Create a one-year plan
Cash flow will probably be one of your biggest concerns when starting your business. In fact, 49% of small business owners say that cash flow concerns keep them up at night. One way to ease that burden is to create a one-year plan. That is, have one year’s worth of living expenses saved up prior to launching your business.
First, you’ll want to determine how much you need in income to cover your basic living expenses. Things like rent or a mortgage payment, utilities, food and car maintenance should be included. In essence, you’ll be creating a written budget that shows exactly how much each of your expenses cost. If you already have a written budget, great! You can take an average of how much you spend in each category to get a baseline.
Then, start setting aside cash each month until you have one year of living expenses in a savings account. Let's say you have $3,000 per month worth of living expenses to cover, for example. In this case, you would want to set aside $36,000 in a separate savings account to cover one year of expenses. If you can open a high yield savings account to keep it safely stashed away, that's even better.
If one year sounds like a lot, think of the alternative. What if you have no savings to fall back on and you didn’t bring in any income within the first year? On top of trying to figure out how to build, market and sell your product or service, you’d also be trying to figure out how to keep the lights on.
Yesenia Roque, co-founder of Write & Day, a copywriting and editing business, knows first-hand about not having a pile of cash to lean on.
“I was working in retail and finishing my undergraduate degree when my business partner and I launched Write & Day. I had $500 to my name and had no money saved for the business,” Roque admits.
While she hustled on Write & Day, she also held two part-time jobs to get her through, but the savings were lackluster. Since then, she’s been able to bring in more clients through her business, which helped her transition out of her part-time jobs into full-time entrepreneurship.
“If I could do it over, I would have more money to lean back on while we were launching,” says Roque.
Ease your way into your own business by hustling outside of your day job. When you can start bringing in money from your side hustle, you can make your transition to a full-time entrepreneur that much easier.
Learn how to live off of one income
If you are married or living with a partner who also brings in an income, you may choose to live off of their income while you get your business up and running. You can trial-run this strategy by creating a budget based off of your partner’s income. What necessities need to be covered in order for the two you to get by?
Discuss shifting some of your money goals temporarily while you make efforts to build your business. Living off of one income can be a big adjustment, so discuss expectations up front. If you spend the majority of your day browsing social media or scrolling for a new logo design instead of making a decision quickly, your partner may end up feeling resentful.
It could be advantageous to your relationship to discuss what you’ll be doing in your first few months of business. Consider having weekly check-ins with your significant other so that you are communicating what you’re working on and how it’s going to bring in income.