“Annual income twenty pounds, annual spending nineteen-six, results in happiness. Annual income twenty pounds, annual spending twenty pounds and six, the result of misery” Charles Dickens

The question of “how will I allow myself to make the change” comes up with every person who is considering self-employment.

Research shows that people who move easily and successfully into self-employment have plans to ensure some kind of positive cash flow or income stream during their initial start-up period. A general rule of thumb is that people feel they need a guaranteed lump sum that covers six months of living expenses.

An essential part of planning to become self-employed has to be an analysis of your financial situation. Here are the three key steps you need to take:

1. Calculate the personal expenses you need to cover A good idea when you become self-employed is to reduce your monthly living expenses as much as is reasonably possible. This has to be an accurate calculation. You can’t lower your rent payments (although you might be able to change your mortgage to a lower payment plan), but you can postpone a holiday this year. You can’t lower your heating bill, but you can eat out less often.

Start by completing a IDB Survival budget. BID means:

• Bbasic necessities, for example, mortgage or rent payments, home insurance, life insurance, gas, electricity, water, city taxes, telephone, car, and cleaning
• Iimportant needs, for example, television, school fees, gym membership
• Ddesirable, e.g. holidays, gifts, meals away from home

Most people are amazed to discover how little they really need to survive. Whether you are planning to jump in or waiting to be pushed, knowing your true financial situation can be very empowering and will allow you to identify the lowest monthly spending level that you (and your family) can reasonably commit to.

2. Calculate the business expenses you need to cover A helpful rule of thumb when starting out is never spend until you need to. But you must also recognize that all businesses face one-time startup costs that you will have to bear. These start-up costs are often easy to overlook, especially if you’ve been working in a large company where they are part of the infrastructure. It’s also important to plan for all your monthly expenses, no matter how small.

Having taken these first two steps, you should now be able to determine how much money you need to manage during the first six months of self-employment, so next you need to

3. Establish a fund for the first six months To have a financial cushion, you need to find enough money (guaranteed money, not business or future projections) to finance your personal and business expenses for at least the first six months when you must assume that you have expenses but not extra income from earnings.

There are several options for financing your transition to self-employment. For some, it may involve savings and investments, and for others it may involve the use of a severance pay. Financial support from a partner may be an option or landing a part-time job may be the short-term answer.

Analyze your financial situation, slowly and carefully. Talk to people you trust. And most importantly, follow the advice. It is wise to seek professional financial advice for your particular circumstance.