I must be getting soft hearted but almost agreed with Suze Orman on a few things. Guess she is ok if you just have to read her stuff. Watching and listening is pure torture.
She had an article on starting your own business and who hasn't sat there and dreamed of owning their own business? No more busy work and no more office politics. Maybe.
Here is the article http://finance.yahoo.com/expert/article/moneymatters/24050 and here are the good parts.
• Figure out the replacement cost of lost benefits.
If you leave a corporate job, you probably leave behind plenty of benefits, too, including health insurance, life insurance, flexible spending accounts, and company matching of your contributions to a 401(k). Exactly how do you expect to pick up the slack and cover those costs yourself?
If you have a big financial cushion, then you're sitting pretty. But most people quit their jobs and give themselves six months to get their new venture up and running, and it isn't until after they quit that they sit down and tally up the cost of all the bills they're now 100 percent responsible for.
The result is that they run through their emergency cash fund at about double the speed they anticipated. Pretty soon they have no savings left, yet their new business is still far from breaking even.
In addition, it's almost a given that in the first two or three years of being self-employed, people give themselves a retirement break: they tell themselves its OK that they aren't setting aside any money while they concentrate on getting their business off the ground.
That's a costly gamble. If you were contributing $10,000 a year to your 401(k) and receiving a $1,500 company match, that's $40,000 or so over three years that won't be compounding for you. This is fine if you're incredibly successful (and diligent) and manage to catch up with big retirement contributions once your business becomes solvent, if it becomes solvent at all.
Actually, this is about all the good advice she gives and in your case it is not that big a deal. If you have all your fingers and toes and no real medical problems, health insurance is pretty cheap at your age. Figure $60 a month for a high deductible policy. Life insurance you don't need. Flexible spending--get all your eye stuff and teeth stuff done and forget about it. 401k--assume your new career will more than make up for it. Her last sentence is kind of a bummer but is something you have to think about.
But thing about this first--if you are unwilling to give up your life insurance, your cozy health insurance, flexible spending and forego your retirement planning for a while, you are probably not entrepreneur material anyway.
You can probably ignore this part to as you won't have much.
• Don't access retirement savings.
Your 401(k) is not a business-financing tool. Even those who are at least 55 and thus can make penalty-free withdrawals after leaving a job are reckless to touch their retirement savings.
Let's say you use $50,000 to live on in the first year of your new business, and plan to "replace" the money once the business takes off. What if it doesn't take off? You've just siphoned off a serious chunk of your retirement security. Consider that if the $50,000 had stayed invested for another 10 years and grew at an annualized 8 percent, it would be worth nearly $108,000. That could cover a lot of retirement expenses.
The no-raid policy is just as important for those in their 30s and 40s. Not only will they be hit with the 10 percent early-withdrawal penalty (as well as the regular income tax everyone pays on 401(k) distributions regardless of age), they're throwing away precious compounding time.
Leaving $50,000 untouched for another 30 years would result in it growing to more than $500,000, assuming an 8 percent average annual return. Withdrawing it at age 35, however, means you'd be lucky to have $30,000 left after paying the penalty and tax.
But she is right. If you have retirement savings, try not to use them as you pay tax and the 10% penalty. But if you are really serious and really want to do your own business, that money is there. One last dash of reality--you cannot borrow against your retirement savings. At least not from a bank.
This doesn't count for much either as you probably have little, if any, equity built up.
• Keep the home-equity tap turned off.
It's the height of financial lunacy to tap your home equity to finance a startup. Even if it's relatively safe to assume that your business is going to be successful, you're still converting what was an asset (your home equity) to a debt.
Can your new cash flow cover the extra cost of that home equity line? If not, you could lose your house. And who's truly prepared for the cost of the home equity line of credit to go up every time there's an uptick in short-term interest rates? Based on what I've observed over the past year, very few homeowners anticipate their interest rate going up two, three, or four percentage points, and many are now experiencing extreme mortgage stress.
This is getting sillier by the minute but we will include so we can't be accused of missing something.
• Don't rely on credit.
Even if you get a great low-introductory rate on a credit card, it's going to be incredibly hard to keep that rate low for very long. Many introductory rates adjust after six months to a year, and in the meantime the credit card company is scrutinizing your every financial move to see if it can come up with an excuse to boost the rate even sooner.
If you insist on financing some of your startup on your credit card, please give yourself a set-in-stone conservative limit you will not exceed. Remember, you can pull the plug on your business, but if you have $20,000 or $30,000 of credit card debt you're going to be paying for that for years to come.
Don't expect to just walk away from it: It's never been harder to qualify for bankruptcy, and besides, if you go that route your credit is going to be awful for at least 7 to 10 years.
Ok, the closer.
The Responsible Route
So how can you responsibly afford to venture out on your own?
Start planning for it today. Set aside separate savings that will cover your family's finances for at least a year if you decide to become an entrepreneur. If you can't imagine where to come up with the money, it's time to get back to basics: Scour your spending and make sacrifices so you can build up your entrepreneurial financial cushion.
You might also consider taking a part-time job while you're launching your own business. I realize you want to devote all your time to your own business, but keeping some money coming in will go a long way toward giving you and your family financial breathing room.
I always say finance is simple. Suze can't say that because she would be out her job but every once in awhile she hints at it. For those that missed it, here it is again.
Scour your spending and make sacrifices so you can build up your entrepreneurial financial cushion.
Put another way--spend less than you make and save the difference to fund the business.
Next week we will take a look at why you should think about starting your business--NOW--and some things that will make starting a business less scary.
A REASONABLE HEALTH CARE PLAN
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