Let's assume that the previous steps screamed loud and clear that this is the right time for you to start self employment. Next you need to prepare yourself for this big change. A well-planned preparation will help make this transition much smoother.
If you are currently employed then you're probably used to many perks and benefits, such as paid vacation, health insurance, disability insurance, 401K match, job stability etc. (even though I really believe that there is no such things as a "stable job" anymore).
When you are self-employed, you are on your own on these. Here are some ideas and resources to analyze the adjustments you may have to make in your lifestyle and financial aspects.
Perform a critical analysis of your financial health. Look at your –
- Assets (Savings, Investments etc.)
- Debts (Mortgage balance, School loans, Car Loans, Credit card balances etc.)
- Income from different sources
- Monthly Living Expenses
Do you feel like you are in a strong financial footing? You should have positive net worth (more assets than liabilities). Look at what expenses are necessary and which ones are discretionary.
You probably already know that everyone should stash away three-months worth of living expenses into an emergency account for unforeseen career gaps, i.e., in case you get laid off, get into an accident or otherwise take time off. My suggestion is if you are self-employed then you should have at least six months to one year worth of living expenses stashed away.
Use your discretion. If you are single and don't have a lot of liabilities then a six month savings should be okay. If you are married and your spouse is employed with a decent income (that can cover the essentials such as mortgage/rent, food etc.) then a six-month savings should suffice. However, if you are the sole bread-winner for your family then you should have enough savings for a year's expense.
Like I said before, there is no such thing as a "stable job" anymore. So, I will interpret this as "continuity". You know you will come back to the same job everyday, until you decide to quit.
This doesn't happen when you are self-employed. Companies hire you for a set period of time and/or for a specific project. However, the good thing is that you know what that period is and you can plan for it. Here is how.
The best option is to be on your spouse's health insurance, i.e., if (s)he works and has an employer provided health insurance. Else, you just have to buy your own self employment health insurance. My recommendation is NOT to go for the COBRA option even if your previous employer offers one. They are usually very expensive. That's because you are now responsible for paying the employer part of the contribution. You are better off buying one yourself.
My COBRA cost came to about $1200 a month for a family of four. I went to eHealthInsurance and bought my own. It cost me about $350 a month. The coverage was not the exact replica; but my total out of pocket medical expenses for the year came about the same. The premium price has gone up since then. But you got the idea.
Most of the insurance providers offer health insurance for the self-employed. To get the special pricing for the self-employed, make sure to chose the individual option when you ask for the quote; not the small business health insurance.
I am a non-partisan; but one thing I like about President Obama's Health Insurance Legislation is that it will hopefully offer better choices on affordable health coverage for self-employed and small-business owners.
Your employer is responsible for withholding your income taxes and depositing them with the IRS. Now that you are paying yourself, you are responsible for that. You are also responsible for paying the self-employment tax, which is about 7.65% of your gross income. You will find more details on this in the Operate section.
Use these numbers to calculate your estimated Self Employment Income. Divide them with your estimated billable hours (or days). That's the minimum rate you need to charge to maintain the current life-style.