Are you ready to join the 40.9 million Americans currently working as independent consultants? Knowing when to leave traditional employment for the exciting world of independent consulting is a big decision composed of many factors, including financial readiness, depth of expertise, and yes, even the right psychological mentality.
In today’s blog post, we explore several key factors that can help an individual determine if (and when) making the leap is right for you.
There’s no magic number needed to quit one’s job and make the leap to self-employment, but typically one should save between three to six months of general expenses. The finite number depends on the person and their experience as a consultant—if you have a career where you’ve done consulting in the past and are diving back in, three months might be enough. If you’re looking to make the leap right from full-time employment to consulting, 6 months is a safer cushion.
Many independents also use side-gigging or part time independent work as a “runway” to self-employment. In some cases, particularly among older workers who want to ease into retirement, independents may even be able to transition from an employee to a consultant of their current company. By leveraging the security of a regular paycheck, they can concentrate on building their network, gaining new clients, and adjusting to the cadence of consulting income, which often comes on a project milestone or completion rather than a standard biweekly paycheck.
While those traditionally employed and independent alike should maintain a savings cushion, independents should be extra diligent due to the occasional income variations that come with being independent.
How one saves is a personal choice, but people may choose to utilize higher-yield savings accounts, maximized 401(k) contributions, or simple lifestyle and budget streamlining techniques to save enough money to make the transition to independence.
Independents should also be aware that their paycheck may not reflect taxes, and should plan to budget 25% to 30% of their net pay in taxes, or utilize a service such as MBO Partners where they can pay themselves a wage on a W-2 basis, and account for taxes with each paycheck. MBO also allows independents to opt in to portable benefits such as group health insurance and tax-advantaged retirement savings vehicles.
In addition to savings, independents should plan for items such as paid time off, as well as a bill rate that accounts for taxes. MBO Partners offers a simple to use bill rate calculator that can help would-be independents and experienced consultants alike determine how much to charge for their services.
Making the leap to independence is more than just about having enough in the bank; it’s about the independent mindset. MBO’s 2017 State of Independence in America study shows that while men and women go independent in similar numbers, men often cite “I like being my own boss” (69%) while women say that they value flexibility over money (74%) or pursuing a passion (83%).
Working for one’s self comes with advantages and disadvantages. Some feel empowered by the flexibility to work when and how they choose. Others may find independence lonely; there aren’t peers to consult for guidance, a boss to set priorities, or colleagues to brainstorm with. Professional development is also a challenge. Independents must seek their own path to career advancement.
When it comes to making decisions such as these, know that most successful independents are already experts in their field when they make the leap—the average independent has more than 8 years of professional experience, according to the State of Independence.
Successful independents come from all walks of life and pursue any number of different types of work, but all are entrepreneurial, have marketable skills, and, perhaps most important of all, know the ins and outs of the independent lifestyle, including the freedom, flexibility, and occasional uncertainty it brings.
Companies such as MBO Partners can provide the business operating system needed to set up and manage an independent business virtually overnight, but they can’t provide the skills and mentality needed to succeed in the long term.
However, the State of Independence shows that more independents than ever before (74%) are highly satisfied, and 65% say that the decision to go independent was their choice completely.
Independence can have other benefits as well—70% of Full Time Independents say that they are healthier, and 43% say they earn more money working on their own than they would in a traditional (payroll) job.
Remember, becoming independent is not just making the decision to leave a full-time employer, but also includes making the decision to run your own business. This involves many “back office” tasks often taken care of by an employer, such as billing and invoicing, accounting for vacation and paid time off, office space and more. Using a business operating system such as MBO Partners to manage your back office can alleviate some of these issues, but others require time, planning, and occasionally, money.
For some, this includes a work location, if you do not work onsite at a client. If you don’t have a dedicated space in your home, you may wish to secure paid office space at a co-working location, which is often tax-deductible, but not generally billable back to the client.
Successful independents value the flexibility of working when and how they choose, but also need to be able to have the cash flow to cover a paycheck that comes in on project milestones, or a break in income between projects.
Of course, it’s still important to remember to put money aside for things like retirement, or, if you’re already retired and working part-time as a consultant, to plan for health-related expenses as you age.
These, and other concerns, suggest that while independence is an exciting and often prosperous choice, it is not to be taken lightly!
This article from MBO Partners does not constitute legal or financial guidance.
The Weekly Independent is a summary of news of notes for independent contractors and their clients. This is the November 7, 2016 edition.
News and notes from around the web for independent contractors and their clients. This is the December 5, 2016 edition.