Planning a smooth transition to a new career
April 27, 2005 - By Thomas B. Horton

If you are reading this, chances are you are about to embark on the fascinating and sometimes scary journey of opening your own business. This journey often results in a change of financial circumstances, temporary or permanent, up or down, large or small. Whatever the outcome, the transition will be smoother if you consider the financial implications before you start.

Gather information

First, familiarize yourself with your current financial situation. What reserves do you have to draw on? Does a family member have benefits package at work? You will need to develop a thorough start up budget for the business.

Stay covered

Maintaining health care coverage should be a priority. Investigate all of your options before leaving a current employer, for example.

Watch your expenses

If you expect a significant decrease in income during start up, decrease your expenses accordingly. Determine your monthly expenses, estimate how they will change, and don’t forget business start up costs. Estimating will help you save for interim needs.

Build a cushion

Although it is always a good idea to have an emergency fund of 3 to 6 months expenses, its especially important if you’re earning less. Consider increasing your cash cushion if you’re unsure how long the lean times will last.

Give yourself some credit

Try to avoid taking on a lot of debt prior to this transition. If you need to purchase a big ticket item and can make the payments, it will be easier to get a loan approved now while you can show a steady income. Also, consider securing a home equity line of credit now. This will increase your available emergency funds and you owe interest only if you actually use the money.

Plan for Uncle Sam

Self employment creates many opportunities for tax planning. Health insurance and personal retirement plans are just two of many areas where you can add benefits and enjoy a tax savings. As always, where possible, consider timing income receipts and expense expenditures to reduce overall tax liability.

Create a safety net

If you’re starting a business and not already covered by an employer or individual policy, consider purchasing disability insurance while still employed. Once in business for yourself, you will generally have to show a years’ track record of income before you are eligible to purchase disability insurance.

Monitor other goals

Depending on the timing, career change can have a significant impact on your ability to meet financial goals like retirement, college funding, and more. Consider working with a financial planner to determine the extent of the impact and to develop strategies to cope.

End notes

While starting a new small business can be very rewarding, it can also dramatically change your financial situation. Plan for and manage the impact where you can. Money should not be the only factor considered, however. Few things in life are as satisfying as creating personally and financially rewarding work. To successfully make the journey from where you are today to this destination, you must take into account personal goals and satisfaction, long-term opportunities for growth, and the effect on your families lifestyle. Then apply a healthy dose of money smarts.

Thomas B. Horton, RFC, is an independent, fee-only financial planner in Shelby Township. He offers objective, no conflict advice on an hourly, as-needed basis. His practice specializes in comprehensive financial planning for individuals and families. Visit his web site at www.HortonFinancialPlanning.com or call (586) 997-3717 to schedule a no obligation appointment.

© 2005 All Rights Reserved. No part of this article may be published without advance written approval.