Quitting your job can look glamorous online.
You see influencers on Instagram snapping photos of their decadent lunches before cruising on a sailboat to the next island. You see startup founders taking ski trips with potential investors and bloggers traveling around the country in an RV van to meet up with readers.
While quitting your day job to pursue full-time entrepreneurship seems like #TheDream, it’s not nearly as glam once you take the leap.
Most of us who quit our 9 to 5 jobs are searching for more freedom and flexibility, but we’re quickly met with uncertainty, especially in our finances. But many times, the sacrifice comes with a big payoff (literally).
With big excitement comes big risk, so it’s important to take a deep look into your current financial situation to see if you’re truly ready to quit your job. The more financially stable you are going into your decision, the more at peace you’ll be when putting in your two week’s notice.
So let’s talk about how you can set yourself up for financial success before you quit your job.
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How to know you’re financially ready to quit your job
First, do you have a plan?
No, not just a strategic business and marketing plan, although that’s important too. I’m talking about a full, unbiased analysis of your current financial situation.
It’s easy to get caught up in the fantasy of taking the leap, but looking at the hard numbers will serve you well. And it doesn’t have to be as scary as you think.
Once you put the numbers down on paper, you’ll be able to see a clear picture of what needs to happen before you quit your job. You’ll go into the decision feeling financially stable rather than wondering how you’ll make it through the first few months.
This financial analysis will come in handy when you start to set a realistic timeline of when you’ll be ready to quit your job. For some, their timeline may be a year. For others, it may be within a few months.
So how do you know when you’re financially ready to quit your 9 to 5 and what that timeline looks like? It comes down to understanding a few key variables.
Start your business as a side hustle
Are you waiting to start your business until you’re able to leap into it full-time? With so many benefits to side hustling, you may want to start sooner than you think.
By testing the waters and experimenting while you still have a day job, you’re able to take bigger risks and build a dedicated audience. Building a business from scratch takes time, so it’s better to start now than wait for the perfect time when everything aligns just right.
After all, why wait to start something you feel passionate about? Turning your passion into a side gig gives you the best of both worlds when you’re working a day job. Generating extra side income while setting up the building blocks of your business is a win-win!
Instead of your job being the thing that keeps you from pursuing your passion, it becomes the thing that helps you pursue it. How? By giving you the security of a consistent paycheck so you can focus your energy on doing what you love during your off time.
Ready to side hustle your way to the top? We’ve got a whole Tradecraft issue dedicated to helping you do just that. Here’s the full directory of articles:
- Starting With a Side Hustle is the Best Way to Build a Business You Love
- How to Choose the Best Side Hustle Idea for You
- How to Build a Website for Your Side Hustle in the Next 48 Hours
- How to Manage the Stress of the Side Hustle with Good Habits
- How to Set a Budget for the First Year of Your Side Hustle
- Creative Fulfillment: Why Millennials Hustle on the Side
- How to Start a Side Hustle as a Full-Time Parent
- How to Use Email Marketing to Boost Your Side Hustle
Understanding and paying off debt
Does reading the word “debt” make your palms sweat a bit? Don’t worry, you aren’t the only one. One of the biggest financial hurdles that business owners face is paying off existing debt.
Here are some of the most common forms of debt:
Education can be an incredible investment in yourself, but it comes at a price. And a pretty hefty one at that. This number will likely increase as the student loan deficit continues to climb (now at a whopping $1.3 trillion, according to Forbes).
Maybe you recently purchased a home that puts you in a tight financial situation. Luckily, there are alternatives for alleviating costs like downsizing or renting out your home (or a portion of it) to make mortgage payments.
If you had an unexpected injury or diagnosis, medical bills may be affecting your current financial situation. Starting an emergency fund now is important to save you from unplanned costs.
This term acts as a “catch-all” for nearly all other debt, but the most common form we see is credit card debt. Whether the debt comes from large purchases like a car or several small purchases like picking up coffee everyday, it all adds up. Changing your lifestyle little by little can make a big difference.
Your 9 to 5 job may be keeping you afloat right now as you work toward paying off your debt in bite-sized increments, but what will it look like once you quit your job?
That may be a tough question to answer right now, but first compare your day-job salary to what your business is bringing in. Then ask yourself how much of your current income is dedicated toward paying off debt. This answer brings me to the next point.
Best practice: Assess how much income your business needs to generate to make minimum debt payments.
Having a clear understanding of the minimum payments you need to make will help you better assess your financial situation. When you quit your job, you don’t want to be worried about making your minimums, which would increase your debt.
Once you’ve seen real results and can put a number down for when you’re financially ready to leap, you’ll have a plan to help you get there.
Reducing business expenses like a boss
This is especially relevant to those of you who have already started a side hustle. To get the full picture of your financial situation, it’s important to not only look at how much your business is currently earning but how much you’re keeping.
This gets into the conversation of Revenue vs. Profit. Revenue is how much money your business generates from your products and services. Profit, however, is how much you earn after expenses are taken out.
Profit is your most important metric because it shows your net income. It’s possible that by making a few cutbacks on expenses, you could be closer to quitting your day job with the same income you had before. Seriously!
Here are a few ways you can cut back on expenses:
DIY vs. outsourcing: If you want to save on cash, take time to learn how to DIY your next business project instead of outsourcing it to contractors or hiring employees. You may also gain a new skill by investing time in doing it yourself. You can watch YouTube tutorials, enroll in free courses, or take a free seminar. We have some resources on DIYing your website design and creating online products if you want to flex your DIY muscles.
Lower operating costs: While some operating costs are necessities for your online business (like your computer, Internet, etc.), you may have other operating costs you can cut. Do you need a big office space in a prime downtown location? Do you need the best, state-of-the-art equipment? Do you use all of the tools and software you pay for on a regular basis? Take a hard look at your expenses and scale back accordingly.
Personal expenses: Changing your lifestyle could seriously improve your financial situation. Could you go a few months without TV or movie streaming? Could you eat out with friends twice a month instead of twice a week? Could you refrain from buying new clothing for a full season? These small changes can make a big impact on your wallet.
Best practice: Have at least six months of expenses saved before you make plans to quit your job.
This includes business and living expenses. Approaching your finances holistically will help you best plan for business success.
To know you’re covered for the first two quarters of business will help you free your mind to think “What can I do to grow my business?” rather than “What can I do to pay my next bill?”
Do your business finance homework
When you start a business, you become not only a student in entrepreneurship but also in finance. To run a profitable, sustainable business, you need to know the dollars and cents behind it.
When I decided to turn my blog into a business, I didn’t take the numbers seriously enough. I told myself that to be successful, all I had to do was exercise my passion and creativity. Well, you can guess how well that served me. (Hint: not so well!)
It wasn’t until I dove head-first into my business finances that I came out with a successful business. I updated my client onboarding and invoicing systems, did my own yearly taxes (and learned a lot), raised my value-based prices, and got comfortable with talking about money.
By taking the power away from the “mystery” of finances and putting it in my own hands, I was able to take full reign of my business and turn it into a profitable, sustainable career. I know you can do the same, but it starts with understanding the numbers.
Dig into your accounting
I know, I know. Numbers aren’t the sexiest part of running a business, but they’re incredibly important when quitting your job.
What kind of tools do you use for accounting? Some may use various software programs to help them balance their books. Others may use a simple spreadsheet.
No matter your preference, it’s important to keep a record of everything that goes in and out of your business. You’ll need this not only for making your big decision to take the leap, but also for tax time (and your own sanity!).
Understand business taxes
Speaking of accounting, you’ll want to make sure your bookkeeping is up-to-date when tax time rolls around. Set aside time every week or every month, depending on the volume of your business revenue and expenses, to update your records.
In addition to helping you understand how much your business is earning, consistent bookkeeping efforts will outline what taxes you need to pay. It can turn hair-pulling stress into quick, painless updates before tax time.
Here are a few types of taxes to keep in mind:
- Income tax: If you’re a sole proprietor, you’ll pay different income taxes than someone who has an LLC. It’s important to know the differences so you’re able to choose the best business classification for you.
- Sales tax: These taxes can depend on the location of goods sold, the type of goods sold, selling goods online vs. in-person, and beyond. This can get a little tricky so if you have any additional questions, look into your local Department of Revenue website.
- Property tax: Are you hoping to upgrade to a dedicated office space for your team? If so, you’ll want to look into property taxes that are specific to small businesses. Again, your local Department of Revenue website will have more information on this.
Know your insurance
Health insurance, disability insurance, property insurance, oh my! Coordinating (and paying for) insurance is often perceived as one of the biggest roadblocks to self-employment. It seems like there’s insurance payments for everything under the sun.
Luckily, you have the power to decide which insurance plan is right for you. This will depend on a few things like:
- Relationship status: Are you single or married? Do you have children? All of these factors will change your insurance.
- Age: Someone at 28 looking for health insurance will mostly likely be looking at different coverage than someone who is 50+ years old. Keep this in mind when researching insurances.
- Gender: Yes, even your gender will influence your insurance.
- Location: Insurance rates are often influenced by your geographical location.
Use this time before you take the leap to research different insurance companies and plans so you can make the best informed decision. Your future self will thank you!
Financially ready to quit your 9-5 job?
Excellent! Now it’s time to create an exit plan. This is where everything becomes much more real. We'd advise setting up a sixth month income and expense tracker to help you know exactly when you're ready.