Leaving behind the security of a corporate job to pursue your dreams of entrepreneurship can be an exciting and fulfilling journey. However, it also comes with a unique set of financial challenges and considerations.
While the path to entrepreneurship is filled with uncertainties, careful planning and smart financial choices can help you navigate the transition successfully.
If you are switching from a corporate job to entrepreneurship or considering making that leap of faith to become a self-employed in Singapore, this blog post is for you!
7 financial tips for transitioning from the corporate world to entrepreneurship or self-employment
1. Build a Solid Financial Foundation
Before you embark on your entrepreneurial journey, it’s crucial to establish a strong financial foundation.
Here are some key steps to consider:
a. Create an Emergency Fund: Start by building an emergency fund that covers at least 6-12 months of living expenses. This cushion serves as a safety net and buys time for you to build up your business.
b. Pay Off High-Interest Debt: Reduce or eliminate high-interest debt, such as credit card balances, before making the transition. Lowering your financial obligations will reduce stress and increase your financial flexibility.
c. Review and Adjust Your Budget: Evaluate your current spending habits and create a budget that aligns with your new financial reality as an entrepreneur. Be prepared to cut unnecessary expenses.
2. Secure your Health Insurance and Income Protection
One significant benefit of corporate jobs is access to health insurance and income protection by your company. You and even your dependents may have been enjoying comprehensive medical inpatient and outpatient benefits. However these benefits will stop when you leave the company.
As an entrepreneur or self-employed individual, it’s important to address these aspects:
a. Health Insurance:
Research and select an appropriate health insurance plan for yourself and your family.
- Singaporeans and PRs looking for medical coverage in private hospitals or A wards can opt to upgrade from the basic national healthcare Medishield Life to Integrated Shield plans with rider to reduce out of pocket hospitalisation expenses.
- Expats can consider private medical insurance plans that covers hospitalisation and outpatient expenses or international medical plans with more comprehensive benefits including specialist, dental and wellness benefits.
- Alternatively, tap on your spouse’s company medical insurance if they provide coverage for dependents.
- As your business grows and you start employing staff, you can also take up employee benefits packages to provide outpatient, specialist and dental benefits for you and your staff.
b. Income Protection
Unlike a corporate employee who gets paid medical leave, time off work means no income for the self-employed. So it’s important to ensure your income is protected in the event you are unable to work due to an accident or serious illness.
One way is to get accident protection plans that cover outpatient accident expenses e.g fractures, sports injuries and pays a weekly indemnity amount to replace loss of income when you are unable to work.
3. Separate Personal and Business Finances
Maintaining clear separation between your personal and business finances is crucial for financial stability and legal reasons. Open a separate business bank account and use accounting software to track income and expenses. This will help during tax filing season as well.
Unlike an employee where your company can e-file your income directly to IRAS, as a self employed you will need to consider your tax filing obligations. All self-employed persons must report the income earned from their business operations as business income, and not as salary.
The Inland Revenue Authority of Singapore (IRAS) has a useful basic checklist for self employed here
4. Manage Cashflow
Cashflow is the lifeblood of any business. Do keep a close eye on your finances by regularly reviewing your income and expenses.
As an entrepreneur, sometimes you will make more money than you would have in two months worth of employment, and others, you may go for months without an income. Keep your expenses low and set aside a buffer fund to handle fluctuations in revenue and unexpected expenses.
During good months, you might be tempted to either withdraw all your profit, or put it all back into the business. Instead, learn to set aside at least 10-20% of what you earn and invest it for your own retirement.
5. Build your CPF Medisave and Retirement Funds
If you are a Singaporean or PR who left your corporate job to become a solopreneur or self employed, your income will no longer be automatically deducted for CPF contribution.
a. Compulsory Medisave contribution
However, do note that if you earn an annual net trade income (NTI) of more than $6,000, you must contribute to MediSave. Find out how much you will need to contribute to your MediSave account as a SEP with the Self-Employed MediSave Contribution Calculator
b. Consider making voluntary top ups to CPF to grow your retirement funds and enjoy tax relief at the same time.
While self-employed persons only have to contribute to MediSave, you can receive a tax relief of up to 37% of your net trade income, up to the CPF Annual Limit of $37,740, by making Voluntary Contributions to all three CPF accounts. The portion that goes into your MA will offset your MediSave payable as a self-employed. This also ensures your CPF funds continue to grow and compound for your retirement.
6. Diversify Your Income Streams
For those who are still in the corporate world and planning ahead for their next chapter, start building up passive income streams which will help cushion your future transition.
Passive income streams such as dividend and bond payouts or annuity income can fund part of your living expenses, thereby reducing the financial strain and depletion of your savings.
Relying solely on one source of income can also be risky. Explore opportunities to supplement your business income by
- Diversifying your income streams within your business, such as offering complementary products or services,
- Creating recurring income streams e.g through monthly subscriptions or membership.
7. Seek Professional Advice
Consider consulting with financial advisors, accountants, and legal experts who specialize in small businesses and entrepreneurship. Their expertise can help you make informed financial decisions and navigate the complexities of running a business.
Transitioning from a corporate job to entrepreneurship is an exciting but challenging endeavor.
By following these financial tips and staying committed to your goals, you can increase your chances of success and build a stable financial future as an entrepreneur or self-employed individual!
To Your Success and Happiness,
Yong Hui
