How to Prepare Yourself to Face the Financial Risks of Starting a Business—Even Now

Real Simple's Money Confidential podcast takes money questions and concerns from real people and offers practical advice from experts and host Stefanie O'Connell Rodriguez. Together, these pros have real, open conversations about money and how it makes us feel. On this week's episode, O'Connell Rodriguez talks with a woman eager to start her own business—but fearful of leaving the financial stability she currently enjoys behind.

This week's caller—we'll call her Mia, though that's not her real name—is 28 years old, works in the northeast, and is celebrating five years at her corporate job. She has a comfortable emergency fund, lives within her means, and has opportunities for growth at her current workplace: Her career path is pretty linear and offers financial security. Still, Mia dreams of starting her own business. And even as she can't shake the feeling that she wants to become self-employed and feel passionate about her work, she also can't escape the fear of leaving her financial security behind and taking the risks that come with entrepreneurship.

To help Mia decide if the risks of starting her own business are worth it—and if now, during a pandemic and economic crisis, is a good time to do so—O'Connell Rodriguez turns to Paco de Leon, the founder of bookkeeping agency and personal finance community The Hell Yeah Group who has experience as a financial planner, a debt collector, a small business consultant, and a bookkeeper.

"You kind of just have to start," de Leon says of taking that initial leap to starting a business. She recommends starting small and paying attention: "As an entrepreneur, it's your job to kind of be in collaboration with your audience and the people that you're serving." If your initial, small effort doesn't appeal to your audience, you can modify your approach and try again.

More than that, though, de Leon addresses the fear and uncertainty that comes with the financial risks associated with entrepreneurship—and how Mia (and aspiring business-starters like her) can address those emotions.

Listen to this week's Money Confidential—"Is now a bad time to start a business?"—for de Leon and O'Connell Rodriguez's conversation about financial risk, starting a business, and balancing the two. Money Confidential is available on Apple podcasts, Amazon, Spotify, PlayerFM, or wherever you listen to your favorite podcasts.

___________________

Transcript

Jane: 'I'm ready for a career change'

Yazmin: 'I'm not as fulfilled and satisfied as I think I could be.'

Shonda: 'I just don't know when the right time is and that's a difficult decision to make.'

Stefanie O'Connell Rodriguez: This is Money Confidential, a podcast from Real Simple about our money stories, struggles and secrets. I'm your host, Stefanie O'Connell Rodriguez and today I'm talking to a listener we're calling Mia (not her real name).

Mia: if I could do anything and not fail, what would I do? Or where is that passion that I'm finding in my life right now to then carry that into my next step?

Stefanie O'Connell Rodriguez: Mia is 28 years old, based in the Northeast, and she just celebrated her 5-year anniversary at her corporate job, but ….

Mia: While I liked the people I work with and the day-to-day work is fine, I'm curious where I would be if I started my own business or changed careers, both of which immediately jumped to a pay cut.

Stefanie O'Connell Rodriguez: The idea of 'being your own boss,' 'having unlimited potential for growth' and 'taking pride in what you build' by pursuing small business ownership is a version of the American dream that nearly two-thirds of Americans share, according to a 2019 survey. Mia is one of them.

If you could have your dream career or dream business, what would that look like?

Mia: So immediately my mind goes to being a goat farmer, which is hysterical, because I think I crave that sort of simplicity, you know. You have manual labor, but then you're also, you know, connecting in a different way with different people. Perhaps that means selling goat products like goat milk and all of that, but then also you know you set your own timeline, so you don't really have to answer to anyone else. And I think that that's something that's really interesting to me to say that I like having that independence, but then also recognizing that I crave structure.

Stefanie O'Connell Rodriguez: While the excitement and appeal of entrepreneurship is something most Americans identify with—self-employment estimates prior to the pandemic ranged from just 17 to 28 percent of the American population in recent years.

There's a huge disconnect between wanting to start a business and actually doing it. Not surprisingly, money is a major factor, with 40 percent of Americans identifying their financial security, 35 percent of Americans citing the financial commitment to operate a business and 35 percent citing fear of failure as their biggest obstacles to pursuing their small business dreams.

Mia: I'm definitely a planner. So it's one of those things that if I don't have an outline, I get very nervous and almost that sort of perfection, as it comes in to say, if I am not going to do it right, I don't want to do it at all. So you kind of get that level of procrastination to say, well, you know, it's something that I'm really interested in, but I'm scared because I don't know if I will do it in the best way that I know that I can.

Stefanie O'Connell Rodriguez: And do you worry that that perfectionism or that fear of taking a financial risk might keep you from doing that thing you really want?

Mia: I do. What it comes down to is that if I can continue to make the living that I have become accustomed to, or identify what sacrifices I would need to make, is that going to justify the change that I'd make?

Stefanie O'Connell Rodriguez: One thing I learned while talking to Mia is that her finances are actually in great shape. She's living below her means, she already has a six-month emergency savings fund, she's done a great job investing for retirement in her employer 401k plan, and she's on the advancement track at work.

But there's something challenging about walking away from that kind of financial security, and the peace of mind that comes with a linear and clear career path, especially at a time like this, when there's so much uncertainty and insecurity in the world around us.

Even in the best of times, how do you know when you're ready to take a risk, and what does having 'enough' to walk away from the security and validation you know, to pursue what you don't know, even look like?

What would it look like or feel like if part of your financial security went away, but you were living more in alignment with what you want to be doing?

Mia: Yeah, it's really interesting because I can picture who that person is. And that person is definitely like living their most authentic self and living that life that has that balance of, you know, getting that sort of work-life balance, but then also feeling fueled and passionate by the work that you're doing. What's so interesting is like, is if in my own business, what would I say is the measure of success? Like, is it a financial goal? Is it, you know, a social goal, where, where do I want to put that sense of structure and that recognition pathway to say, you know, if I hit this much in income or sales, or what have you then, you know, will I be happy?

I don't know. That's really not where I think I need to have that sort of sense of happiness, but it is so easy for money to have that as a source of measurement.

Stefanie O'Connell Rodriguez: Even if we intellectually know that money isn't an accurate way to measure our success, it makes sense that we have trouble making that separation in practice. Money isn't everything, but it's something. It's tangible, we can point to it, we can track it, we can measure it in a way that we can't measure so much else, like fulfillment and purpose. But if we get too stuck on using money as a metric for success, risking our money can also start to feel like risking our success, our source of validation, and potentially, even our identity - which might keep us from pursuing the things we really want

I want to ask if you've spent any time or money investing in even a small iteration of your business idea.

Mia: Not money. I would say I have started to attend some workshops to just kind of see what has worked for other people. To see, you know, if they can do it—why not me?

I think for me, a lot of it is like, I have so much that I think I want to do. It's like, what do I choose first?

Stefanie O'Connell Rodriguez: And what do you worry about if, if you do take that leap?

Mia: Probably that I won't succeed.

Stefanie O'Connell Rodriguez: And what does that mean?

Mia: Failure is hard.

Stefanie O'Connell Rodriguez: Does failure look like something to you when you use that word?

Mia: It's so interesting because I think that it's a lot about other people. When really, like, I want to do something for myself. And knowing that it's like, so, so bizarre to really be like, how do I not let the opinions or feedback of others really change what I'm doing? Like if I do something for me, I'm doing it for me and no one else.

Stefanie O'Connell Rodriguez: Is there anything financially that would make you feel that you can do whatever you can set your mind to?

Mia: If I didn't have to worry about money, I think that that's a big one.

Stefanie O'Connell Rodriguez: What amount of money would make you feel that way? Or what does that actually look like in dollars and cents to not worry about money?

Mia: To me, like seems like it has to be like, a six-figure number, like a hundred K. I'm going to have an emergency fund for my business. I want to be able to. You know, if I want to bring on other employees, how do I provide for them as well?

So it's wanting to feel like I can still contribute to my current lifestyle and my partner, just say, like, I'm not putting a financial burden on you because I'm doing something quote unquote, so risky. So, you know, but I'm the one who's identifying it as risky.

Stefanie O'Connell Rodriguez: It also feels like, it feels like you need to see the, how the full financial picture is going to come together before you feel like you're ready to take the risk?

Mia: Yeah, I think that's it, like to set that up and know that. I can see a way out potentially. If it doesn't work in the way that I've envisioned it, where do I pivot it? And to accept that. I can learn from those and recognize that I don't have to do everything perfectly, but I still aspire to do those sorts of things.

Stefanie O'Connell Rodriguez: Well, your perfectionism has in so many ways served you, right? It's been this tool that's allowed you to succeed in your career thus far and in your financial life thus far, and maybe even positioned you to take this kind of risk, but then it's like, well, if it's the thing that keeps you from taking the risk on the flip side, there are certainly, I don't know, maybe fear or some feeling there?

Mia: Definitely. I know once I go through that door, I'll be like, why didn't I do that sooner? Like gives you that sense of, you know, stopping yourself even when you set yourself up for success to be like, 'Oh, well, I'm so afraid of not having that financial security that I've set myself up over the past five, 10 years.' Versus knowing what's comfortable in the position you currently are.

Stefanie O'Connell Rodriguez: And I wonder if there's a way for you to conceptualize these things in tandem rather than a before and after. For example, what does it look like to maintain some of that sense of security you have now? Whether it's just keeping your job, um, and maintaining your savings and everything else while also taking some risks, but maybe not all the risks and not knowing the full path from the start.

Mia: Yeah. That's, that's a really interesting way of thinking about it because I'm so concerned with having all of my eggs in one basket and really I don't think that's a sustainable way to like set off the path because what if I don't even know until I'm on it that, you know, this is what is supposed to be working out or supposed to be happening in that way.

Stefanie O'Connell Rodriguez: And do you just want someone to tell you what that is or is that something you think you can come to on your own?

Mia: It would be so much easier if someone could tell me what it is, but I know that's not right. I know it has to come from me.

Stefanie O'Connell Rodriguez: Coming up after the break, we're taking Mia's story to this week's expert guest to see if we can answer the question of aspiring business owners everywhere, what does 'enough' money even mean when we're talking about starting a business? And is now even a good time to consider it?

Growing up, Paco de Leon was not what you might consider a 'risk taker.'

Paco: I grew up in an immigrant household and my parents, they came to the States when they were relatively young. I feel like I kind of stumbled into finance because the practical immigrant thing, I was like, if I like choose music or art school, I think my parents are probably going to be bummed if I can't, you know, get a job and do something practical. So that was one of the seeds that was always planted where like you can never, you can't expect to earn money from being artistic.

Stefanie O'Connell Rodriguez: But after studying finance and economics, then working in wealth management, consulting, and other traditionally 'stable' jobs, Paco started to explore her more creative side, and eventually started her own bookkeeping agency and personal finance community called The Hell Yeah Group.

Paco: I've worked as a financial planner. I've worked as a debt collector. I worked as a small business consultant and a bookkeeper and pretty much in all of those areas, it was all about the practical. It was all about the, make sure you educate the customer on the credit score and teach people how to do this and teach people how to do that.

And I feel really lucky that I got such a crash course in understanding the practicality of money and finances, but it wasn't until I went off on my own that I really had the time to sit and think about—we know there's no shortage of information of practical information. If practical information solved everyone's problems would have been solved when the internet started. But it hasn't and of course there's these larger systemic issues at play, but, um, for a lot of people, there's just not been a lot of space to talk about the emotions of finance.

Stefanie O'Connell Rodriguez: I think it's actually going to be really helpful specifically to dive into this listener question, because one of the biggest roadblocks that she's experiencing is that she feels like she needs to see the whole map of where her business is going to go and how it's going to succeed before she can even start entertaining an idea of what a first step is.

And I think a lot of that roadblock is probably some of the emotional stuff that you're talking about.

Paco: The illusion of control is really easy to, to kind of fall into that spell and that trap, especially when you're like working for another company and that company has like their quarterly goals and they're, you know, they're half your goals and their annual, their five-year their 10-year goals.

I think I held myself back because of these same things. Where's it going to go? Um, is there a guarantee that was, you know, that was really hard for me, this just like jumping kind of without a parachute, not knowing where I would land. But you kind of just have to start because once you start and it could be small, I'm not saying like, you know, get a six figure loan or anything.

I'm saying like, whatever you sell, if it's jams or a service. Just start really, really small, find three and five customers do it small batch, as cheap as possible and start because as soon as you begin the data will then get returned to you. The world will say, yep, we want it keep doing it. Or it'll say we kind of want it, but not in this way. And then you modify, so as an entrepreneur, it's your job to be kind of in collaboration with your audience and the people that you're serving.

I think as you progress as a business person, you see that the phases, each new level, there's a new devil. And so the fears that you're overcoming in these earlier stages are different than the fears that you're overcoming in these larger stages.

And you have to kind of dig in and say, am I going to let the fear, tell me to move back? Or am I going to let the fear, tell me to move forward? And I think where I'm at right now, I have conditioned myself to use fear as a positive reinforcement signal. If I don't feel fear about something, like, I feel fear about being open as I am on this podcast right now, but if I don't feel that, to me that's a signal that I'm not, no, I'm not pushing myself to do what I need to be doing.

Use those moments to feel that fear and to say, like, to really be curious about it. Like, Oh God, what is this? What is this sensation in my body? And is it going to kill me? Probably not. Um, okay, cool. Well, can I sit here and will it pass probably.

Do we know if Mia is already participating in the 'goat economy?' Even if a hobby, even at the hobby level.

Stefanie O'Connell Rodriguez: So this is a question I asked her, I said, have you even pursued the smallest iteration of what this business idea would be? The answer so far has been no.

Paco de Leon: I mean, I think first figuring out whether it's do you want to be around goats all day long? That is what you desire or do you want to be a person that you want to start a business, a product-based business? Cause those are two very different things. And the answer is really easy.

If you want to be around goats all day long, um, you know, get into goats, hang out with them, volunteer at a farm. I think if you want to build a product-based business, I would just start to look at what it would cost to start manufacturing those products.

Like who would your suppliers be? What are the options that you have, um, in terms of suppliers, um, like how many bars of soap would you have to manufacture on the smallest run and what does that cost?

What would packaging cost? Would you be handling, I mean, thinking about the logistics, it, it would probably be quote unquote cheaper for you to handle all of the, uh, shipping, but then also look into that, look into, okay, well, hey, I just want to have a farmer's market booth. Every Saturday and Sunday, we can, you can hop around to different farmer's markets and you know, how much product do you think you would need to have on hand? I don't know, a couple hundred bars. Are there people at the farmer's market that you can actually begin to talk to? One of the things I would do is I would try to find a company that's already doing what you're doing and see if you can work for them, if you can do an internship or if you can work there part-time or work there full-time and if you do something like that, okay.

Now we're looking at, okay. At what point does this go from I'm exploring to 'Oh no. I'm draining my emergency fund.' So I would bump up that emergency fund to 12 months, which I know nobody likes hearing that. But, uh, especially with COVID happening and the world changing a lot. I don't, I don't know if you agree with this, but a lot of people who used to say, Oh, three to six months is fine.

All of them are revising their recommendation to 12 months.

Stefanie O'Connell Rodriguez: Like Paco mentioned, I have been working to build up my emergency savings account to include 12 months worth of living expenses, especially as a business owner and especially after a year like 2020.

Setting aside dedicated business savings, separate from my emergency fund, has also been a way for me to dip my toe into new business ideas, without feeling like I'm putting my personal finances at risk.

But the thing that struck me most about what Paco said, wasn't about those financial steps...

it was interesting because, um, it came back to your idea of this emotional exercise of thinking, okay, well, what is it you want to feel?

Paco de Leon: Totally. Yeah, because if she's like, I want to change the face of goats' soap, the goats soap industry forever, like I want to take goat soap to the top. Forbes, baby. That's really, really different than I want to pet goats all day. I think what a lot of people struggle with is. In Western culture, there's an over-emphasis of your work being so meaningful and your work defining who you are.

Stefanie O'Connell Rodriguez: I will say one of the emotional things that Mia definitely identified in herself that she kind of wanted to feel was this feeling of being able to be her own boss and have that kind of independence. But she's holding this need for structure and having the whole plan and having kind of like all of the things that have allowed her to really succeed and excel in a corporate setting. How does she hold onto that at the same time as trying to like be her own boss?

Paco de Leon: That's interesting. I actually think that the desire for structure will really serve you as an entrepreneur. I have a problem with authority, and I've kind of always just been like, I don't want to have rules. And when I first started working for myself, I would just wake up whenever I woke up and work out whenever I worked out and the first two years were really just fast and loose, and I didn't accomplish that much.

I didn't really make that much money. And then the moment that I was like, 'Hey, maybe you should put in these like processes and procedures and structures.' It just changed everything. Like I made a hundred percent more revenue and I took the business more seriously. So I actually think that desire for structure will be really helpful.

Stefanie O'Connell Rodriguez: I think so much of the fear people experience when they talk about starting their business is the idea that they have to give up everything they already have in order to do even this initial exploration. It's like I'm either traditionally employed or I'm a business owner.

Paco de Leon: People feel really uncomfortable when they don't know what they're going to do next and they don't know what that's going to look like. And of course you do have to be a decisive person. You have to make a decision and stick with it, but sometimes the process for getting there is being steeped in the data, being steeped in the information, being steeped in the questions that you're asking yourself.

That can be a process you can save for an hour every morning. 'The first thing I'm going to do is I'm going to sit down and I'm going to give myself thinking space to systematically kind of take apart, you know, what the answer is for me, I think that would be really, really helpful.

Stefanie O'Connell Rodriguez: Yeah, it's this funny dichotomy between letting ourselves be in this gray, exploratory, curious spaces. And then also having a lot of structure, like money is so tangible. So I wonder how people like Mia or anyone can balance that practical need for enough, because that, that is, it is a practical need. We do need enough. But how do they balance that against the fallacy of enough?

Paco de Leon: Yeah, that is a tough one, because it is definitely a moving target. I'm going to go with what you said earlier in terms of it doesn't have to be binary. It doesn't have to be black and white. I think if you can build something slowly on the side, the number will kind of click at some point, right? You might reach a level of sales that can result in a salary that replaces, I dunno, 50% of what you're making at your job.

And that might feel suddenly like it's enough. I think that's a hard one because it is also, you know, it's mushy. It's not like everybody agrees that $10,000 in your emergency fund is enough. It depends.

Stefanie O'Connell Rodriguez: I want to take a second to also talk about this within the context of the economic reality that is the pandemic and the fallout of the last year—is now even a good time to start a business?

Paco de Leon: I believe that there is always an opportunity in crisis. I've had a lot of adversity in my life and in the moment that you're feeling that it's painful and it's hard and you want it to pass and you want it to go away. But it gives you an opportunity to reflect and deposit, to think about what truly matters to you, and are you willing to fight for it? Are you willing to be uncomfortable for it? Are you willing to face your fears for it?

Stefanie O'Connell Rodriguez: Are there any general financial rules of thumb or best practices you give to aspiring or growing business owners?

Paco de Leon: I would say that you should definitely spend the time to understand what your personal economics are. The first bucket is everything you need to live. Groceries, roof over your head, student loan payments. The second bucket I look at as future and goals. What does that number and what are you trying to save for? Probably retirement, probably an emergency fund, probably your new business. And then the third bucket I like to look at is, you know, fun stuff, crap, you don't need, but it makes life fun.

And when you can kind of know that, that number in broad strokes, I think it makes it a lot easier when you are transitioning to an art, to entrepreneurship, to starting your own business, because then you could see, okay, cool. Let's just take some nice round numbers. If you need a thought, let's say $3,000 for your essential is great.

You can gauge with your growing business when you're going to reach that stage and then you can start to make decisions. Okay, cool. I can go to part-time with my job because my essentials are covered or, um, since my essentials are covered, I'm willing to cut back on my, uh, non-essentials my fun stuff.

And maybe I'm going to even take the risk of turning off future investments for the next, I don't know, three months. I'm just going to go for it and see what happens. So looking at your finances in these broad strokes in these three buckets, I think helps people. It's a lot easier to digest. Of course, I think everybody needs an emergency fund. I don't think I need to say it. I think our collective experience of what is happening to us right now says everything that needs to be said about that.

Stefanie O'Connell Rodriguez: And what financial questions should people who currently work for someone else and want to start working for themselves, be asking?

Paco de Leon: I mean, I definitely think they should be asking—the thing that you want to sell to other people, do they really want it or do you just want to make it?

If I just want to make vegan artisanal cat sweaters, like sweaters for cats to wear that are vegan. If I want to make that do cats and cat owners really want to buy that, I'm not sure. They don't have to just want it. They have to be willing to pay for it. So if you are thinking about starting a business, I would say, try to find some customers. It will probably be your mom and your cousin. And somebody else, but if you can get people outside of your circle, who know you, interested, like if your mom or your cousin starts telling their friends and they tell other people's friends, then that is that's the data that's, you know, that's the audience saying we want this, we want this to exist.

So you can, you know, there's really, low-cost, low-pressure, low-tech ways to get feedback on your idea.

Stefanie O'Connell Rodriguez: Right, I don't need to go build the whole cat sweater factory and like invest $300,000 in supplies, labor materials, before you test the idea and see if there's actually a customer base out there.

Paco de Leon: Exactly.

Stefanie O'Connell Rodriguez:So is now a bad time to start a business, for Mia or for anyone? In Paco's words, 'there is always opportunity', even in times of crisis.

You can start with the financial fundamentals—save up six to 12 months of living expenses in emergency savings

And calculate your essential cost of living so that you can make more informed decisions about what 'enough' savings, or 'enough' income from your entrepreneurial ventures actually looks like.

Starting a business does not have to mean making a major upfront investment. It doesn't even have to mean quitting your current job or leaving behind the safety and security of a steady paycheck.

It can mean finding someone who's already doing what you're doing and seeing if you can work or even volunteer for them. It can mean testing out your ideas on the smallest scale to see if there are people out there who want and are willing to pay for what we're offering.

And it can mean doing some research and exploration to see if the business you're working to build is actually going to bring you closer to what you want to feel, or if there's another way to get to those feelings before you invest too much time or money.

Because, as Paco said for Mia, 'I want to change the face of the goat soap industry forever,' is really different from 'I want to pet goats all day.'

And digging into what it is you're really trying to feel and work toward, will tell you a lot more about what you need to do financially to get there.

This has been Money Confidential from Real Simple. If, like Sofia, you have a money secret you've been struggling to share, you can send me an email at money dot confidential at real simple dot com. You can also leave us a voicemail at ‪(929) 352-4106‬.

Money Confidential is produced by Mickey O'Connor, Heather Morgan Shott, me, Stefanie O'Connell Rodriguez. Thanks to our production team at Pod People: Rachael King, Matt Sav, Danielle Roth, Chris Browning, and Trae Budde.

If you like what you hear, please consider leaving us a review on Apple Podcasts, or telling your friends about Money Confidential. Real Simple is based in New York City. You can find us online at realsimple.com, and subscribe to our print publication by searching for Real Simple at www.magazine.store.

Thank you for joining us and we'll see you next week.