Good for you! It’s exciting, isn’t it? But a bit nerve wracking, scary and overwhelming too.
Since it’s kind of a big deal, I think it deserves proper consideration. So I’ve compiled a list of five questions you should ask yourself before giving your boss the pink slip.
Ready?
1. How Much Money am I Making from My Freelance Business?
And frankly, how predictable is it?
I started my own freelance business as a side hustle, and I’d recommend you do the same. Start building while you’re working full-time if at all possible. This will enable you to make sure it’s viable, use the income to pay down debt (or save it) and make sure it’s something you enjoy.
And you need to know your numbers! If you don’t know how much you made last month (gross income), how much you spent (expenses) and the difference between the two (net income or profit), you’re not ready to quit your day job.
Accounting for your business is important – even if math isn’t your strong suit. You need to be profitable and ideally well on your way to replacing your day job’s income before putting in your notice.
If you don’t know your numbers, start tracking them. Log income as it is received (and expenses as you pay them), and keep track of your net profit as the month goes on. At the end of the month, compile your gross income, expenses and net profit into a profit and loss statement, adding the results of each month that goes by.
By doing so, you’ll see trends in your business and keep tabs on your outgoing business expenses each month. It’s great if you’re making money, but if you’re spending it all then you’re not profitable!
2. What Does My Budget Look Like?
Just as important as knowing your business finances, is knowing your personal finances and budget. Are you the sole income earner? Or do you have a spouse that works and has predictable income?
Either way it makes sense to decrease your expenses as much as possible prior to leaving work behind. Write down your regular and essential expenses (i.e. mortgage, utilities, food, transportation, etc.) and your irregular or non-essential (dining out, cable, luxury items, etc.) and see what you can substantially lower or get rid of altogether.
Doing so will help to alleviate unnecessary stress as you make the transition from regular, predictable income to that of irregular, freelancing income. It also lessens the amount of money you need to make!
It’s a great idea to practice your new budget before you make the change. I used to recommend this exercise to my clients that were about to retire (I was a financial advisor in my former career). What better time to practice, then before the big transition? Plus, you can set aside any surplus to pay down debt or increase your savings to ease the transition as you leave work behind.
3. How Much Savings Do I Have Set Aside?
Having money set aside for a rainy day, emergency or just to bridge the gap for lighter freelancing months provides a huge peace of mind as you grow your freelance business. Most financial experts recommend having 3-6 months worth of expenses set aside in a cash reserve or savings account.
As a freelancer, 6-12 months is more like it. Again, this is due to the unpredictability of pay and planning for the unexpected i.e. what if a client is late in paying you?
Remember when we talked about starting your business as a side hustle? If you don’t currently have a rainy day fund, use that income to build your savings nest egg as you’re still working full-time. It’s also a great way to practice self-discipline!
4. What Benefits Will I Have to Replace?
When you quit your job, you will no longer be eligible for the employer provided benefits you were once used to and may be dependent on. You’ll have to provide your own benefits when it comes to health insurance, retirement, etc.
If you do have a spouse that is working, you might be able to get on their healthcare plan. This is also dependent of course on what country you reside in, as some provide socialized healthcare benefits.
If you are currently dependent on your employer provided benefits, figure out what coverage you have and what it will take to replace it. Get quotes on health, life and disability insurance to see what you need and how much it will cost you.
And figure out how you’ll continue to save for your future. Maybe you had a great 401(k) match, pension or profit sharing plan. How can you replace that and when? Saving for your future might not happen right away as you make the transition from employee to self-employed, but it shouldn’t be forgotten altogether either.
5. What’s My Contingency Plan?
You need to have a contingency plan in case things don’t work out. How long will the aforementioned savings support you if your freelance income isn’t where it needs to be? How can you bring in cash during dry months? Are you willing to take up a part-time job, sell some stuff or decrease your living expenses even further?
If you’re in a committed relationship this should be a joint conversation. You need to be on the same page if things aren’t working out as planned on what the next steps are. How long would you go before you look for another “real job?”
Hopefully it won’t ever come to this point, but it’s best to plan for the possibility, rather than ignore it altogether.
In Conclusion
Leaving work behind is a very exciting prospect. You’re probably here reading this post because you’re not in love with your day job. You want to do something different – something you’re passionate about and that’s great!
But before you up and quit your job, you should ask yourself the five questions listed above. Know your business’ profitability, your personal budget, how much savings you have set aside (and how long it will last), what benefits you’ll need to replace once you go out on your own and what your contingency plan is in case things don’t work out as you predicted.
If you don’t have everything covered or planned out to a “T,” it doesn’t mean that you can’t make the jump. Plenty of people have done it before you and figured it out on the fly. If you’re a little (okay a lot!) type-A like me, you might want to do a bit of planning first. Use the information listed here to do just that.
What’s obstacle is currently holding you back from leaving work behind?
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