As M$M has grown, I've been super fortunate to meet a lot of people that are either self-employed or hoping to make the jump in the future. Every time I get an email from a reader that looks like: “You've inspired me to start my own business“, I'm really excited for them!
But…I'm also scared as hell for them.
Starting a business and/or leaving your job is a massive life decision, and the odds of failure are much higher than the odds of success. I understand that people are ultimately going to do what they want, so I feel like my job is to give as much helpful information as possible.
If you're considering starting your own business (even if blogging sounds like something you'd like to do), there are a few critical things about full-time entrepreneurship that you need to be aware of.
Here are five things you need to know about self-employment:
1. You need a basic understanding of accounting
After I quit my teaching job, I really had to rely on my friends/mentors that were experienced in business for this. There's a big difference between reading music and reading a profit and loss statement. 🙂
The concepts are actually fairly simple once you start dealing with your books on a daily basis, but if you don't familiarize yourself with basic accounting you could really hurt yourself in the long run. Don't just assume that you can open up an accounting program like Quickbooks or Freshbooks and be good to go!
Even “automated” programs take a good amount of tweaking and have a learning curve.
2. Taxes suck (but you have to stay on top of them)
In my first year of business, I didn't really make a bunch of money. That's pretty common in any business, but as things start to grow and more money rolls in you have to prepare for potentially substantial taxes that you'll have to pay.
Since I'm less than two years in and my income is changing drastically, I'm really preparing for the worst!
My best advice is to consult an accountant when you first set up the legal structure of your business (LLC, S Corp, General Partnership, etc.), even if you don't want to use an accountant long term. A qualified accountant can help you decide the best tax structure for your business and develop a long term strategy moving forward.
3. Don't plan on buying a house
My wife and I were in a financial position to buy a house right before I left my teaching job to run M$M. However, one of the things that people don't realize about self-employment is that mortgage lenders generally want to see two full years of tax returns from your business before lending you money.
For us, that meant that we had to rent for the past two years while I grew my business. It actually turned out to be a great thing for us because of the flexibility that renting can provide, and we'll be very financially prepared to buy a house and pay it off quickly.
Just FYI, the two year waiting period isn't an absolute rule…but it is a good guideline when you're trying to plan your living situation and start a business at the same time.
4. There is no set “retirement plan”
As much as I didn't really agree with the TRS (teacher retirement system) that I paid into as a teacher, I will admit that it was nice having a set retirement plan. One of the great benefits of having a normal job is that you can either pay into retirement systems or some form of a 401k.
When you're self-employed, you're on your own.
You'll have to develop your long term retirement strategy, and I have to admit that even I am not 100% sure how I'm going to approach this over the next 30+ years. I opted to hold a large portion of our money in cash because I wasn't sure how this business would do.
Things have settled in now, so my focus is now shifting towards the future rather than just surviving.
The biggest thing to understand is that your retirement plan will change as your life does. I have friends that are near the end of their self-employed careers that are still making adjustments to their original retirement plans. There's no “right” answer unfortunately. You just have to pick a strategy and roll with it.
5. Every day you wake up unemployed
Alright – this isn't technically true, but it's a mindset that I learned from a good friend that has helped me tremendously in my first year and a half of being self-employed.
I think the number one trait of successful entrepreneurs is hunger. We are creatures of habit, and it's very easy to get set in a routine. The problem with business is that you can't put things on auto pilot and expect to get rich.
You have to wake up every day with a little bit of fear that you're going to fail. That fear of not making any money is what drives me to try different strategies, hustle a little more, and ultimately guide my business towards success.
If you can tap into that feeling of insecurity from time to time, you'll be shocked how quickly your business grows.