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b&b161 How to quit your job & go full time freelance, Part 2

It’s becoming easier than ever to start your own business and work for yourself. About 1 in 3 Americans is currently a freelancer or a small business owner. By 2020, the number of freelancers is estimated to grow to 40%! But the idea of giving up a steady paycheck, retirement benefits, and health insurance can be daunting.

The good news is that most successful freelancers and entrepreneurs don’t just up and quit one day. They take their time to build a foundation for their business and personal finances before they leave their day jobs, and you can too.

In Part 2, we will talk about how to:
– Calculate how much you need to have saved to take the leap
– Put together 12-month cash flow projections to create measurable and concrete goals for how to financially transition to freelancing full time
– Determine the best business entity to set up as your business grows
– Separate your business and personal expenses and manage your self employment taxes
– Get the right insurance in place

If you haven’t listened to part 1 yet, check it out here:

Music featured in this episode:
f*ck this job I quit by Runnamuck
I quit by Mike Neuese
quit job make music by Emsee Mr Furios & the Saint

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Episode Highlights:

Pam: A good rule of thumb is you should have at least 3-6 months worth of living expenses depending on what kind of runway you want to have to be able to start making income. Now, 3-6 months is the suggested range. There’s different ways that you could actually fill in this gap if you need to. So, for instance, if you are in a situation where you are ready to quit, if you already have some side income coming in that’s pretty consistent and pretty steady ‘cause you’ve been working on this thing that you actually wanna quit into full time for a while, then that can count as part of your savings, because that’s regular income that is going to replace some of your current regular full time income…The living expenses should be based on not what you’re currently spending…Minimum viable income. We did not come up with this term but this is what we mean when we say having 3-6 months worth of living expenses is: What’s the smallest amount of income that you’d need to survive?

Pam: The other kind of income is your ideal income, and, while it’s great to figure out how to live on a shoestring, and live on as little as possible for the first part of your freelancing career, you also don’t wanna get stuck there. Dyalekt: And you don’t wanna get used to it. Pam: Yes exactly. So you do wanna have a number in your head where you’re like, you know, if I made this much I’d be happy and comfortable and feel like I’m getting paid what I’m worth…It’s gonna take 3-5 years to really get there, realistically.

Pam: This is what gave me the confidence to quit my job, is to project out over 12 months what could happen. And of course a lot of this is going to be made up, and that’s how it’s meant to be…It’ll give you an idea of how many different income streams you might need. How many different clients you might need to get. How much of each product you might need to sell. Whatever it is to actually get to that minimum viable income number, ‘cause the thing is we’re trained to think like employees. We’re trained to think about getting that paycheck once a month or once every two weeks, and planning around that, and that’s not how freelance income works. So if you can give yourself a bigger perspective on what an entire year feels like, then the month to month is less daunting because you have the ability to anticipate when the big chunks of income are going to be coming, and when you’re going to have those valleys and lean months that you’re also going to have to plan for.

Pam: You’re just making room for things that work by finding out what doesn’t work as fast as possible.

Pam: One of the things to think about when you are starting to make money on the side is you don’t wanna throw it in with the rest of your personal income. And at the beginning it might just look like a separate savings account because you don’t need this money to live while you’re still working your full time job and you’re making side income. One of the things that I often recommend to people is to actually have a separate account that you keep for any side income that you make, and part of that is, one, that means that you’ll automatically have money to pay the taxes when you need to, and two, you’ll be able to actually see measurable growth on your side income on a regular basis. Seeing a savings account that’s consistently growing as you’re creating more side income is gonna be motivating for you to start actually planning to quit your job and giving yourself a deadline.

Pam: When is it time to actually open a business account, right? …When you actually have business expenses that are starting to get co-mingled in with your personal expenses and you’re spending money on your business, it might be time to open a separate checking account.

Pam: The LLC in New York state is a really expensive entity to create, because, in New York state, you have to publish the name of your entity in some publication for eight weeks, and that could cost $800 to $1000 on top of you paying an attorney $1500 to $2000 to actually form the LLC, file all the papers, create the articles of organization, all of that stuff…When you’re ready to decide if you need to file an LLC, the main question you need to ask yourself is: Do you need legal protection? And, do you need to protect your personal assets and have a clear separation between them and your business assets? Because what the LLC does from a legal standpoint is, if someone were to sue your company and you didn’t have an LLC, they could sue you for your business assets and your personal assets. If someone were to sue you and you had an LLC, they could only sue you as your LLC, and they could only sue you for the amount of money in your LLC. And so from a legal standpoint it is an extra layer of protection. From a tax standpoint the IRS says “Nah, we don’t give a shit.” An LLC that you’re the only member of is still taxed the same was as if you were a sole proprietor.

Pam: The main difference between the LLC, and sole proprietor, and the S-corp is how you’re taxed, and the amount of work that it will take to keep it up. …With an s-corp you have to file a corporate tax return which costs usually an extra $500 to $1000…you have to have bookkeeping set up, so at least quarterly you need to produce books and a profit and loss and all of that…and you have to put yourself on payroll with an s-corp, which means you’re paying someone to run payroll for you and to pay all of the payroll taxes.

Pam: You don’t even need to start thinking about an s-corp until you’re grossing at least six figures.

Pam: Get an accountant. Please get an accountant when you’re starting to make some pretty significant income as a self-employed person. This is even the case if you’re working full time still. If you’re making more than a couple thousand dollars, if you’re making five, six, seven thousand dollars form side income, it’s probably time to talk to an accountant and have them figure out what you can start deducting. And this will also give you an idea of what you can run through a business bank account, and so the types of stuff you can deduct are plentiful and also very confusing.

Pam: You are gonna have to get your own health insurance. And you are gonna have to go on whatever your state’s healthcare exchange is…You will also most likely be able to qualify for Medicaid as soon as you quit your job, at least in the current state that health insurance is in…The other thing you’re going to need is disability insurance, and life insurance if you have loved ones.