As the economy tries to recover from the pandemic, worries of inflation, rising interest rates and the Ukraine crisis have increased the potential of a recession. This potential grew stronger with the release of the new gross domestic product (GDP) estimates released in July.
The Bureau of Economic Analysis reported that GDP fell 0.9% from April to June, marking the second straight quarter of declines. Two straight quarters of decline typically signal a recession, but the National Bureau of Economic Research won’t declare that for months. Due to the uniqueness of the moment – where interest rates and employment are rising as GDP falls – it’s unclear if we’ve entered a recession just yet.
Markets have certainly reacted in anticipation of this moment, though, with the S&P 500 index down 17% in 2022 (although it’s up 5% over the past month).
It’s during recessions when companies cull back hiring and institute layoffs. It’s also when self-employment rates often jump, a trend that played out during the pandemic and has continued into today. Bloomberg calculations estimate that there’s 16.8 million self-employed workers, as of June 2022, a 1.4 million increase in the past two years.
For those that may worry about their position if a recession takes hold, or if you’re thinking of turning to self-employment regardless of the economy, then it’s time to prepare in case you find yourself trying to adjust without a job in hand.
The more ready you’re for the first months working for yourself as a freelancer, contractor or other self-employed role, the better chance you have of making it work for you.
Save for the early days
Startup costs for businesses can range widely, depending on the complexity of the company you hope to launch and the infrastructure you need to succeed. Luckily, for those working in many self-employed roles, it’s not a requirement to have exorbitant costs as you begin. But you will still face costs. And if you’re launching your solo venture because of a job loss, such costs take on added weight since they come at a time when finances are likely tight.
If you see yourself moving to self-employment, begin to outline what you need from a cost standpoint. What tools does your business strategy require when you strike out on your own?
Is your personal computer eight years old, while you rely on your company’s computer for most communication? Then add in computer costs. Will you need specialized software to achieve the results and quality you demand? Price out the software. Will you need specific tools or a new vehicle to do the job? Determine the cost of those items.
Having a sense of the costs and purchasing what you need now will ease those early days.
Also, building an emergency fund can help reduce the stress in the first few months of launch. If you have built up of three to six months of expenses (six months is better for the self-employed) in a savings account, it can ensure you don’t have to go into debt to pay for simple household needs as you adjust your career. Building it now while you still have your full-time role will give you a cushion if the job disappears sooner than you expect.
Test the waters
Getting started on the self-employment journey often doesn’t occur until you’re forced to, due to the difficulty in the first step. Finding who your clients will be and who will provide you with revenue is such an unknown, that it becomes challenging for most people to overcome until they’re thrusted into unemployment. Then it becomes a battle of finding clients to ensure food remains on the table – an incentive that’s effective, but stressful.
It does not have to take that level of need to begin the first steps of feeling out your client base. In fact, you likely already know what you want to focus on in your solo-venture. You may also likely know who in your network you would reach out to first. Begin taking these steps, even if you aren’t ready to fully commit to the self-employment lifestyle yet. For those that have flexibility in their roles to take on side-projects, committing to some freelance work while still fully employed can provide you with clarity of what it’s like while also securing your first client.
It can take anywhere between a few days and a few months to go from beginning conversations with a client to then signing a contract. It depends on the level of service you provide, the need the client has and the luck when you begin connecting. For those seeking larger contracts, expect it to take longer.
Beginning the conversations now will not commit you to anything. Instead, it will provide you with clarity in how much demand there is for your services and give you confidence to start.
Form a business
Developing a business entity for your services provides significant advantages for both you and the company. First, and foremost, it gives you some liability protection in case creditors or another entity tries to go after your assets. Say you have a disagreement with a client, and they decide to sue you over the ordeal. With the right protection, they cannot seek to take your home, for example.
As a self-employed owner, you can only gain so much protection from such liability, since you’re still essentially the business. But it does provide some protection, especially if you’re selecting a limited liability corporation (LLC) or S-Corp designation.
More relevant to most people’s experience and long-term security, however, is the ability to take out credit and build savings using the business. With an LLC in your name, instead of operating as a sole proprietor, you can take out credit cards in your business’s name. This can build credit under your business and protect your own personal account if things go awry.
You can also open retirement savings accounts under the business’s name, allowing you to save more for retirement.
With such protection in place, your success as a self-employed person will begin to build upon itself, making it viable, not only in downturns but also when the economy recovers again.