Financial Protection for the Self-Employed

Must be Helpful Lawyer Week at Canadian Entrepreneur (see previous post).

This afternoon Albert Luk, "The Entrepreneur-Friendly Lawyer," forwarded me an article worth blogging about. US personal-finance expert Suze Orman, writing on Yahoo, offers her four-step formula for "Protecting Yourself When You're Self-Employed."

"You should mention this on your blog," says Luk, "since small biz discussions are often done in a vacuum without addressing the personal finance part of running your own biz."

Okay. Here are Suze's four main financial cautions for people starting a business:

• Figure out the replacement cost of lost benefits. People who don't anticipate these expenses, she says, "run through their emergency cash fund at about double the speed they anticipated."

• Don't access retirement savings. Your RRSP (or 401K, as Suze calls it) "is not a business-financing tool." She says that even those who are old enough to make penalty-free withdrawals "are reckless to touch their retirement savings."

• 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."

• Don't rely on credit cards. "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."

The common factor in all of this: remain rational about your business's prospects. Assume your worst-case scenario will come true before you sink your life savings (or your kids' inheritances) into your enterprise.

Albert and I recommend you read the full story here.