The Amateur Financier

It’s Tuesday, and you know what that means: yes, it’s another edition of Small Business 101!  This week, we’re going to cover one of the biggest issues facing those going from the corporate world into business for themselves: taking care of everything you should do before you leave your job.  Whether you intend to start a small business of your own, get into a different job, or simply make sure you’re prepared in case of a downsizing, there are plenty of steps you can take to ensure that you will be ready when your regular paycheck from work is no longer there.  These include:

1. Building Up a Sizable Emergency Fund: I’ve already discussed emergency funds before, but if you are planning on leaving your place of employment in the near future (or fearful that your company or industry will be cutting jobs), it’s absolutely essential to be sure that you won’t run out of money before you can make your business profitable or find another job.  A standard emergency fund with three to six months worth of expenses might be enough to see you through until your business takes off, particularly if your spouse or significant other is still employed and makes enough money to cover the household expenses.

Avoid looking like this by planning ahead before you leave your job

If you are the major breadwinner, though, you should shoot for an even more robust emergency fund; while I hope that you will soon turn a profit and make your business a success (or find other employment), it’s good to have plenty of money in the bank, just in case.  Shoot to accumulate at least one year worth of expenses; that will give you a nice, healthy cash cushion, as well as plenty of time to allow your business to grow before you really need to have income.  Also, work on lowering your expenses; besides allowing you to stretch your emergency fund further, it’s just plain good for your wallet!

2. Research Health (and Other) Insurance: Amongst your other benefits, there’s a good chance that your company provides you with health insurance, or at least a rather substantial discount on your health insurance coverage.  Once you are no longer working at your current company, you’ll need to purchase insurance on your own.  While you’re still employed, it would be a good idea to look into the costs of buying insurance of your own to cover all the policies currently provided by your company.  Be sure that your new endeavor will provide enough income to cover these additional costs (and the cost of your insurance needs is included in your emergency fund calculations).

3. Have a Plan For What You’ll Do Next: If you’re quitting your job in order to start your own business, this should be pretty simple; after all, you’ve already created a plan for how you’re going to get your business up and running, right?  But it’s worth making a plan for how you’ll build up your clientele, generate income, and generally get your post job life up and running.  The more specific you can be, and the more contingencies you include (after all, sometimes things don’t go as we plan), the better, as you’ll have a valuable road map to your post-employment life.

4. Build Up Your Network: It’s always good to know who you can contact for help, advice, or simply some friendly encouragement.  With some luck (and plenty of effort to reach out to your coworkers), you’ll have a substantial list of references from your professional life, who might be able to provide you with support as you start your own business.  But don’t overlook friends, neighbors, and even family members who might be able to help you in the next stage of your life.  Be sure to join some small business organizations to get help from people who have experience in the field, as well as sharing your own experiences with those who come behind you.

5. Be Sure You Want To Leave: There are many advantages to starting your own business, from freedom to the opportunity to do what you want and earn a living.  But there are advantages to being employed by someone else, as well; regular paychecks, social interaction with your coworkers, and defined responsibilities (rather than having to do or delegate everything involved with the business) are all among the some times overlooked benefits of working for someone else.  You’ll have to weigh the relative pros and cons of your current position with the potential to work for yourself, in order to determine which path you should take.  If you do still feel that you want to leave your job, the previous steps will help to ensure that you can do so without having too much trouble in the transition.

What other actions should someone take before quitting their job?  Would your recommendations depend on whether they are trying to get another job or start their own small business?  How big is too big for an emergency fund?

• Can You Plan for Unexpected Expenses?
• How to get More From Your Work in a Down Economy
• Prosper.com and Your Emergency Fund
• Advanced Charitable Giving using Life Insurance
• Escaping The Rat Race