What should you do from a financial standpoint before becoming self-employed?

Are you tossing the idea around of starting a new business in the New Year? While you are still employed full-time, there are many financial issues you should address prior to becoming self-employed and stating a new venture.


Here are some of our top suggestions of things to do before you become and entrepreneur:


  1. Set up a budget so you know exactly how much you are going to need during the first year of business.
  2. Make a business plan to estimate your business related expenses and estimate your revenues. A business plan is critical because it identifies goals to shoot for and hopefully exceed.
  3. Hire an expert wealth advisor, to help you determine how much you should save, where to save your money and in which investments you should invest. One of the main reasons businesses fail is due to the fact that they are under funded and do not have enough in cash reserves and investments. If you have money in a taxable account or a money market you can easily access the money. If your money is tied up in your 401k or IRA there is usually a penalty to access it prior to age 59.5, except if you take a loan from your 401k, but that is not recommended. It will be satisfying to know someone is taking care of your finances.
  4. Review your insurance to make sure your life and heath insurance is the best for your situation.Get disability insurance before you leave your job. Understand that it might take some time to get group insurance under your new business. You will be able to get insurance, just not group rate insurance for your business.
  5. Talk to an attorney and an accountant to find out the best structure for your business. It is important to speak with an accountant or attorney so you can set up your business with a structure that is most advantageous for the type of business you will be getting into.
  6. Think about refinancing your house to lower your monthly payments, if the interest rates make sense. Another option maybe to reduce your payments by going from a 15 year mortgage (if you have one) to a 30 year mortgage. Banks and mortgage companies will typically loan you more money if you have a steady income than if you don’t. Once your money is in your house, it is usually hard to access it if you have little or no income.
  7. Get a home equity line of credit set up while you are employed full time. You don’t have to access right away, but you can use it if you run into trouble down the road.
  8. Remember it is all marketing, marketing and more marketing! You can be the best at what you do but if no one knows who you are then it will be hard to survive. Understand the difference between pull marketing and push marketing.
  9. Read books about running a business such as Michael Gerber’s E-Myth. It is important to think about the long term vision of your business right from the start.


These are just are some important ideas to think about before becoming self employed. It will be tough, but in the long run, working for yourself can be very rewarding.


Once you have been established in your own business for a few years and are able to save some money, you should seriously consider setting up your own retirement plan. There are many different types of retirement plans for self employed persons. Depending on your age and income you can save a significant amount of money per year in tax deferred accounts. Also, depending on your income, you may also be eligible to contribute to a Roth IRA (tax free account).


There are lots of things to consider when planning a business, starting a business, and running a business. Make sure you surround yourself with the right team of experts.



Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.


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