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How to Finance a New Business – Part 1

Working too hardA common question people ask me is how they can start their own business if they earn barely enough money to live on. Being in the situation of having barely enough to live on means that some sources of funding for a new business, such as the earnings of a spouse or a savings account, are not available to you. If you’ve been in the same situation for your entire career, it’s doubtful you’ll have significant funds in an IRA or 401(k), so a self-directed retirement plan is out.

One possibility is to get part-time or full-time work in addition to your current job. I did that to get the money to purchase the first dump of a house I bought and fixed up, when I was 22.  I was working the evening shift at a restaurant in the Hyatt Regency Hotel in Houston, so I got a day job in an insurance agency. My job was to sit at a desk all day and talk to people who wanted to file a claim for a casualty they’d suffered. It was very different from the evening job, and it was interesting to listen to people’s stories about their casualties.  I don’t think I could have handled two shifts of the same kind of work, but since one job involved walking around all evening, and the other was sitting, it wasn’t too bad, except for the lack of sleep. I don’t recommend this for old people. I’m pretty sure I wouldn’t be able to pull off something like that now, but healthy young people can do it for a while.

When you have two jobs, there is no time for a social life, for going to the gym, going for walks, reading, watching movies — pretty much all you do is work, eat, and sleep. Think about it: 16 hours of work a day is longer than the 12 hour work day of Victorian era factory worker.

You do, however, usually get two days off per week from each job.  When the weekends came around and I only had to work my 8 hour shift at the restaruant, I felt as though I was taking life easy. I worked two full-time jobs for about 6 months, by which time I’d saved up enough to make a down payment on a house.

Another possibility is to save money you’d otherwise be paying in taxes. If you work as an employee, your scope for tax savaings is very limited. There are retirement plans, but that’s not going to work for you, since you have barely enough money to live on already, and it’s not as though you get a dollar-for-dollar deeuction for the retirement plan contribution. If you’re in the 15% tax bracket, your taxes only go down by 15% of what you paid.  You’re just out the other 85%, and that doesn’t get you anywhere.

What you want to do is to get deductions for things you are spending money on anyway. Say your employer requires you to have a cell phone and also requires you to purchase a uniform to work. In theory, you could deduct these as Employee Business Expenses, but in reality you probably won’t get any tax benefit at all since this is an itemized deduction with a 2% of Adjusted Gross Income “floor.” (more on this later)

If you can manage to work as an independent contractor rather than an employee, you can deduct busines expenses. The downside is employers pay 1/2 of your social security and Medicare taxes, as well as paying unemployment taxes. As a self-employed person, you will not be entitled to unemployment benefits, and you’ll have to pay 100% of your social security and Medicare taxes. You may also lose any help your employer was providing to pay for medical insurance.

In part 2 I will show you how to calculate how much extra you’ll need to earn in your own business to make up for the loss of benefits you received as an employee, and Part 3 I’ll talk about how to avoid the problems people often have when they switch from being employees to working as independent contractors.


Posted in Uncategorized on 11/16/2015 07:58 pm