Self-Employment Series: Pros and Cons of Working for Yourself
“It always feels too soon to leap. But you have to. Because that’s the moment between you and remarkable.”
While a regular paycheck and benefits can provide a lot of safety and security for many who are starting and building their careers and families, there sometimes comes a time when the pull towards independence and self-actualization is stronger than the need to stay in place. As with any decision that introduces a whole lot of uncertainty into your life, it’s best to take the leap with eyes wide open.
Whether you already own your own business and want to reevaluate, or are thinking of joining the ranks of the self-employed, here are some of the benefits and drawbacks of working for yourself. (I’ll start with the “cons” because I’m a realist and also want to end on a high note)
CONs:
1) Fewer Employer Paid Benefits
When you give up a regular paycheck, you aren’t just giving up your salary, any other benefit with a financial value like employer paid health insurance premiums, retirement contributions and employer-sponsored group life and disability insurance also go away. This includes the employer-paid portion of payroll taxes like unemployment insurance and social security contributions. Instead of needing to replace the income from a salary, you’ll need to consider how to backfill the total compensation you receive from your employer.
2) Lumpy Income & Need for Savings
Depending on the type of business you start, cash flows are likely to be chunkier and less consistent, and it could take years to grow revenue to the level that would replace the compensation you received from an employer. Many people use their savings and sometimes take out loans to fund the start-up capital required to launch the business and cover their personal expenses during the ramp-up.
3) Time-off is Tricky
Sick days and vacation time off are no longer paid by an employer, and if you are a solopreneur or have a small team of staff, it can be hard to find coverage for when you can't work due to illness or injury or simply need time off for rest & relaxation. When you are starting and launching a business, many times you settle for short periods of respite rather than truly rejuvenating long vacations. And there is an extra cost to purchasing short-term disability insurance if you want to protect against times when you physically or mentally can’t work.
That hammock on the beach might be a few years off.
4) You don’t get to punch the clock at 5 pm
As an owner of a business, your mind has a mind of its own, often still chewing on how to solve that problem or thinking of new ways to improve. It’s harder to distinguish between your personal and work life, especially when you work from home. And since you probably don’t have a lot of peers inside your business to talk to, your spouse or friends will be your default water cooler buddies.
5) Small businesses face many unknown risks
There are risks that are pretty obvious and impact businesses of all sizes, like interest rate risk if you need to borrow money or a downturn in consumer spending because of inflation. But there are many risks that are unique to small businesses that operate within small communities. Customer and supplier concentration, local regulation risk and reputational risks are all very real. Perhaps the most important is “key person” risk, or the risk you face when you are injured or ill and aren’t able to lead and operate the business without significant loss of income and major disruption to the operations of the business.
PROs
1) Self-Actualization
It’s what sits at the very top of Maslow’s hierarchy of human needs: the desire to become the most that one can be, or the realization and fulfillment of ones talents and potentials. The value of the opportunity to build your dreams and ideas into the physical world, determining your path and leaving a mark on your community and those you serve cannot be underestimated.
https://www.thoughtco.com/maslows-hierarchy-of-needs-4582571
2) Your Decisions are Impactful and Immediate
Take out all the layers of management and hours spent in meetings that should be emails, and you have a wide open road to make decisions and implement them with an efficiency that can be breathtaking. Small is beautiful, and the ability to be nimble is a luxury but also a necessity in today's fast-moving economy.
3) Sweat Equity
You may feel like sometimes you are literally making a $1 an hour during your start up years, but all of those hours build your business's core value over time, and if you are the sole owner, all of that growth and value is yours to keep. In addition to the earnings you make along the way, this equity is the reward for taking the risk of working for yourself.
4) Flexibility
If you have a family or other responsibilities at home, being able to set your own hours and work from home is truly a gift. Fewer hours spent commuting means more time for keeping up the house or making and eating meals together at home, or even fighting through the middle school math homework together.
5) Community & Culture
The comradery that comes from meeting and bonding with other business owners, clients, vendors, bankers and non-profits in your community also feels so amazing. Instead of relying on others to set a positive culture for you and your coworkers, you get to make your business be all about the things that you value. If you've ever had a horrible boss, here's your chance to be better.
When you work for yourself, make sure to be a good boss to yourself and celebrate all the small wins!
At the end of the day, most of the cons listed above can be addressed with careful planning and risk management strategies. (I'll be sure to share more of those in a future post!). But for me, especially as a working parent, the pros of self-employment way outnumber the challenges. And a recent Pew Research study shows that those who are self-employed in the U.S. are more likely than others to be highly satisfied with their job.
I also truly believe that owning your own business is a way for women and people of color to make their own opportunities in the workforce. Tired of waiting for the gender pay gap to close?? Work for yourself and set your own wage at your true worth. And when all of the value you create with your company stays with you and your employees, the money you spend in your local economy has a multiplier effect that ripples across the community. For example, a recent study by Civic Economics showed that local retailers recirculate 48% of their revenue back into the local economy, compared to only 14% of chain stores. Working for yourself is literally a way to make positive change in your community and your life.
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About the Author:
Stacy Dervin, CFA, CFP® provides fee-only financial planning and investment management services in Eugene, Oregon. Tailored Financial Planning (TFP) serves clients as a fiduciary and never earns a commission of any kind. As a financial advisor, Stacy is on a mission to help Gen X and Gen Y be truly proactive about their financial futures.
