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How To Financially Prepare for Entrepreneurship

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Everyone wants to be their own boss, make the rules, stop living under the proverbial “man,” but it can be a scary plunge to take.  Owning your own business requires financial responsibility and risk that many people aren’t willing to take on, but if you are up for the challenge and are going to chase down that elusive American dream then there are a few ways to keep things from coming to a screeching halt before they even start.  The transition into the life of owning your own business can be an expensively slow and rocky road, but there are some things you can do put yourself on the right path, from the start.  Before you venture on this journey, here’s what you need to do prepare for the ride.

1.       Payoff all your credit cards.  If you can’t pay off the balances on your credit cards now, you certainly won’t be able to once you start your business.  You will also find yourself tempted to use those cards to cover the expenses of your business.  Use these as your last resort.  Paying off those cards now will give you some room to use them later, but relying on them for too many things in the startup process can quickly shut everything down.

2.       Find your monthly budget, and then reduce it.  You need to keep track of your basic expenses for the month: rent, food, insurance, gas and so on.  When you do this think about how this will change when you start your small business.  Will you save money on gas with a shorter commute?  Will you eat out more when you have less time?  Once you have a number in front of you that highlights your current expenses, try to make that number smaller.  This isn’t anyone’s favorite part, but you will appreciate the savings later.  Do you need the run the air conditioning at home, or can you open the windows?  Do you need the super fancy touch screen phone?  Do “Fruity O’s” really taste that different from the real thing? It’s cutting back on little things that can send money your way from places you never thought about before.  Also, it’s smart to make the transition to these saving habits months before you make your move into entrepreneurship to reduce the shock you may experience when you lose those extra 30 channels during hockey season.

3.       Fill your piggy bank.  Before you take a single step towards your new business, you need to have a stock of money saved up.  You should take the cost of your monthly expenses determined earlier, multiply that by six months, and set the bar there.  You should have at least six months of your expenses saved up before you begin.  With this, you need to make sure that you are realistic about how often you will be cracking into that piggy bank.  A lot of people get the “do-it-yourself-bug” when they start their own projects.  They think that they will do it all by themselves to save money.  Know what you can do, and what you will need others to do.  Will you hire an accountant? Will you need a handyman for small changes to your business space?  Think about these future expenses when you are saving for your plunge.

4.       Understand the benefits that you will lose.  One of the biggest changes that small business owners incur is the cost of individual health insurance.  Think about how to reduce this cost, for example switching your insurance plan before prior to your next birthday before they can increase the premiums based on age.  Look at your retirement plans and understand how your investments will change when you don’t have a 401(k) matching plan to double your contributions.  These changes don’t have to be life altering, but they are simple things that, if planned for in advance will remain simple.

5.       Don’t get hasty and quit your job.  You need to give yourself time to startup your small business, and keeping your source of income can be a huge help during this time.  There is a long list of expenses you need to pay before you can even think of opening up your doors, and it’s smart to keep your current job until you have those taken care of.

Entrepreneurs are some of the hardest working, committed individuals in the workforce.  It can be the most frustrating and rewarding experience at the same time, but taking the time to plan before you plunge can save you some of that frustration and bring forth more of the rewards.

Photo courtesy of: http://www.innovatrs.com

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The Small Business 401(k) is the Holiday Gift That Keeps on Giving

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Eagle with flag in background.
Image via Wikipedia

Business owners understand that they cannot rely on the government for their retirement. A 401(k) plan can not only help them save for their retirement but also help attract and retain talented employees.

The Benefit That Keeps on Giving and Can Pay for Itself

There’s no doubt about it, giving each of your employees a fat check around the holidays would feel great. But, in the long-term, giving them free money every two weeks — via matching contributions to their 401(k) — can actually work out even better for both you and your employees.  And, for smaller firms, the plan may actually pay for itself outright.

Here’s how 401(k) saving and tax advantages can really add-up.  Consider a scenario of two businesses. Each has seven employees including the owner, and the owner earns $150,000 a year.  One offers a 401(k) plan with a “safe harbor” match to maximize her contributions and one does not provide a retirement plan at all.

So which owner keeps more of her money? In this situation, the owner with the 401(k) is much better off than the owner without a plan.  The owner with a 401(k):

  • Keeps  $2,729 more of her own money
  • Pays $7,465 less in personal and business  taxes
  • Saves $22,087 in tax-deferred income for retirement

That’s just year one. Take a ten year view, and the numbers get even more exciting.  The owner saves nearly $75,000 in taxes and builds a nest egg $305,000 assuming a seven percent annual return over the period.  Tax credits, deductions of any match and plan expenses, and matching can all have powerful effects on your bottom line.

Small business 401(k)s are in everyone’s best interest and bottom line. Now that’s a concept that even Scrooge could love.

via forbes.com

There is a human tendency to believe when times are good they will always be good. And when times are bad they will always be bad. This is not the case, the economy and the world will get better. Now is the time to begin a retirement plan for yourself and your employees. It will pay dividends for you very soon.

Please comment or call to discuss how this affects you.

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Why Leave Money on the Table—Make the Most of Your Employer’s 401(k) Match

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Handouts for the Retirement Planning Club for ...
Image by Newton Free Library via Flickr

Plan participants will begin to realize that the federal governement may not be able to support them in the retirement years. Sacrifices will be required to adequately prepare for retirement. It may include cutting expenses and / or increasing income.

According to a recent report,1 29.4 percent of 401(k) participants do not contribute enough to their 401(k) to receive their full employer match—with higher rates of foregone matches seen among younger workers age 20 to 29 (43 percent) and those automatically enrolled into an employer-sponsored defined contribution plan (41 percent). An earlier report showed that 40 percent of employees making less than $40,000 fall short of contributing the full extent of their employer’s match.2Millions of workers are leaving money—free money—on the table. 

FINRA is issuing this alert to educate investors about the substantial boost to their retirement savings that can come from taking full advantage of an employer’s matching contribution. As more and more companies reinstate matches that were cut or eliminated during the economic downturn, workers whose companies offer a match should make the most of it.

 

The Value of a Corporate Match

 

A 401(k) or similar employer-sponsored retirement plan can be a powerful resource for building a secure retirement—and an employer match can add a substantial amount to an employee’s nest egg. Let’s assume you are 30 years old, make $40,000 and contribute 3 percent of your salary ($1,200) to your 401(k). And, for the sake of this example, let’s also assume you continue to make the same salary and same contribution each year until you are 65. After 35 years, you will have contributed $42,000 to your 401(k).

 

Now let’s assume you get a match from your employer. One of the most common matches is a dollar-for-dollar match up to 3 percent of the employee’s salary. Taking full advantage of the match literally doubles your savings, even assuming no increase in the value of your investments: Instead of having set aside $42,000 by the time you retire, you will have set aside $84,000.

 

via finra.org

If you receive a 3 % match from your employer it is like receiving an extra 60 hours of pay per year. That’s a week and a half of extra pay per year tax deferred.

Please comment or call to discuss.

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