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Are You Ready to Jump Into the World of Self-Employment?

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Tom Peters, co-author of In Search of Excellence: Lessons from America's Best-Run Companies, noted in a 1993 column titled "A Return to Self Reliance" that self-employment is not a new concept in the United States.

Peters wrote that 50 percent of Americans were self-employed in 1900 but that by 1977 the figure had dropped as low as 7 percent. By the time Peters wrote his article, the figure had gained a little ground, hovering at 13 percent.

According to the U.S. Small Business Administration (2009 statistics), we are now back to a point where roughly half of those employed in the United States own or work for small businesses.

Most Americans understand this. A paper written by David Blanchflower, an economics professor at Dartmouth College, said that 70.8 percent of Americans preferred to be self-employed as opposed to being an employee. In other countries such as Japan, France, and Great Britain, the number is closer to 40 percent.

If Americans like the idea of self-employment and know it presents the greatest opportunity for growth, what is stopping some of them from taking the plunge?

Many factors. Most obvious are lack of capital, education, skill sets, investors, and opportunity. People who are working double shifts at their existing jobs don't have time to start a business. Others do not handle money or free time well.

People often come to me when they are thinking about self-employment. I ask three essential questions, the answers to which tell me more than reams of data or business plans.

1. Are you cut out to be self-employed?

2. Do you have a dream you are working toward?

3. If you have a good job, should you leave it?

Are you really cut out to be self-employed?

Few people are suited to be their own bosses. Most people want a regular work routine. Their lives are based on forty-hour work weeks and steady paychecks. When people tell me they want to start their own business, I ask them whether they can really live without regular income.

I tell them to talk to their families and get their honest answers. I ask them whether they could go weeks or months without money coming in and how they would deal with it.

They need to understand they are trading their steady paycheck for an unsteady paycheck.

Many people want their own businesses for the wrong reasons. Like in the Alan Jackson and Jimmy Buffett song, It's Five O'clock Somewhere, people decide they don't like their jobs and that it would be fun to be self-employed. They don't realize that self-employment means it is never five o'clock anywhere.

I've told many professionals they should not go into business for themselves. They may be good workers with good ideas, but they couldn't handle the stress of not having a guaranteed income.

Never being off work can be hard on families. A friend of mine tried being an independent financial planner. He worked a lot of hours, and his wife started calling his office in the evenings. She put their children on the phone to tell him how much they missed him.

He went back to a steady paycheck at a big insurance company. He has less independence, but he is still married.

Some people become self-employed because no large organization will hire them. I did not plan to be self-employed, but I could not find a job out of graduate school other than cleaning up at the Kentucky Horse Park in Lexington. After I started my financial business, I realized I needed the independence of being self-employed more than I needed a steady paycheck.

Education and upbringing are important in deciding whether a person can make it as an entrepreneur. I was with Barbourville, Kentucky, attorney Sam Davies when a woman told him she was sending her son to military school. "He will learn how to follow the rules," she said. Sam replied, "He would be better off if he found a school where they taught him how not to follow the rules."

Sam, who never had a partner until his son Samuel joined him a few years ago, is one of the best attorneys in the United States, in my opinion. Most great trial lawyers practice by themselves or with a few associates. Few are in large firms. The attitude that makes them unafraid to take on billion-dollar businesses makes it impossible for them to fit into big corporations.

They produce an "unsteady paycheck," and they never know when five o'clock rolls around. Or Saturday or Sunday, for that matter.

Before a person decides on self-employment, he needs to figure out how important a steady paycheck and a steady calendar are in his life.

Do you have a dream you are working toward?

I primarily work as a structured settlement consultant. My clients are injury victims, lottery winners, and others who are receiving large sums of money.

Somewhere along the way, I stumbled on a way to get them to tell me about their deep-seated financial dreams.

I call it the lottery question.

I ask every person the same thing, "Forget about what is going on today. If you won the lottery, how would you spend the money?"

The initial answers are usually vague, such as "invest" or "put money in the bank."

Then, I tell them that when I become a billionaire, I am going to buy the Cincinnati Reds. When I tell them about my lifelong dream, they often start talking about the things that interest them.

From a planning standpoint, the lottery question is a great one. Everyone has dreams and desires but usually keeps them hidden in the recesses of his or her mind. The lottery question gets those dreams and desires out in the open, on the front burner.

Once we start the conversation, the list gets longer and longer. My goal is to get people to think long term. They need to clear their minds of everyday life's rat race. The lottery question makes that happen.

Everyone getting ready to start a business really needs to ask themselves the lottery question. Why are they doing it? What is the long-term goal? Do they plan on being in the new business the rest of their lives? Are they looking to make money or do other things, such as make an impact on society? If money is the goal, what do they plan to do with it after they make it?

When people look in the mirror and truly answer those questions, then they can decide whether they should start their own businesses.

Few Americans really think long term. Many people go through life without developing real goals or good habits. We need a lottery question to help guide the people in Washington and Wall Street. Those of us on Main Street need it, too.

Someone once said that American business people think quarter to quarter, Japanese business people think decade to decade, and Chinese business people think century to century. We've watched short-term myopia destroy Wall Street. We need to take a lesson from our friends in the Far East.

Should you quit the job you have?

The Johnny Paycheck song "Take This Job and Shove It" was a big hit because it resonated with a lot of people. They hate their jobs. They would take another job tomorrow if it had the same pay rate and economic opportunities.

Other people don't have the opportunity to quit. My friends in the newspaper business are being laid off in rapid fashion. Most of them never planned on doing anything else and do excellent work. Changes in how people consume news and some really bad corporate decisions impacted their careers.

But if you have a secure, well-paying job, you have to look at some obvious economic factors. Can you afford to quit? If so, for how long? Do you plan to use your 401k or retirement money to help start your new business? Although it is a common strategy, there are tax considerations and the chance you might run out of money in your old age.

I've met a lot of younger people who quit a job, lived on the 401k money for about a year, and then couldn't find another job. They were left with no money and a large tax bill to boot.

(When you make a 401k withdraw, you are taxed at ordinary income rates on the money you receive. Then, depending on your age and situation, you could get hit with a 10 percent tax penalty on top of that. I warn people not to do a 401k withdrawal unless it is absolutely their only option.)

The workplace is the social hub of many Americans' lives. My mother was an operating room nurse for twenty-seven years, but a workplace injury ended her career about ten years before she had planned to leave. All of her friends worked at the hospital, and being cut off from them pushed her into a depression that lasted several years.

Her situation is more common than people think. A number of my professional friends have retired and then un-retired because they missed their friends and routines. Also, some people are married to their jobs. They don't have hobbies or outside interests. Those people need to forget about a severance package and stay put.

I had the unique experience of helping many with the question of whether to take a buyout when the IBM plant in Lexington, Kentucky, became Lexmark in 1991. IBM had offered employee severance packages. People could take the package or take a chance that Lexmark would keep them on.

Several IBM employees came to me for advice. Many of them were engineers or had backgrounds in statistics. They wanted an answer they could quantify, so they sought me to calculate the present value of their package.

After thirty seconds of crunching the numbers, I asked the essential question: "What are you going to do with the rest of your life"?

Some had well-thought-out plans. They wanted to do charity work or start a second career. Others didn't. Working at IBM was not just a job; it was a lifestyle. They had never thought about life outside the corporation.

IBM employees were like a large family. They had generous benefits and perks. Most socialized with other IBM employees. People who went to work at IBM generally stayed for life. The idea of leaving the company was painful.

Companies that offer severance packages are generally established companies that sell the concept of lifetime employment. I've found that people leaving old-line companies, even with severance packages, are more bitter than those who work for companies that treat employees like interchangeable parts.

If you work at a company with high employee turnover, getting fired is not a total surprise. People at a company such as IBM never thought about working anywhere else.

Keep in mind that some severance packages are lucrative and offered on a one-time basis. I've seen people pass up a buyout and have their company go down a few years later. People often think their own industry is healthier than it is. It is good to get an objective opinion.

If your company is downsizing, find out whether severance compensation or insurance benefits are offered if you leave. If so, find out the amount of compensation. If you are receiving company health, life, or disability insurance benefits, ask whether those benefits will continue and for how long, then ask yourself if you can afford to pay for them on your own.

Severance pay is not an entitlement. Unemployment insurance is the only benefit that an employer must provide by law. Even if your employer has been generous in the past, that could change. The Wall Street Journal noted that prior to 2011, Pfizer gave departing employees three weeks' pay for every year of service. It then dropped to two weeks' pay for every year of service.

If an employer files bankruptcy, severance pay is rarely offered.

Some employees, especially those represented by unions, have employment contracts that specify a severance pay package.

There are employers who offer severance but demand employees give up any right to sue or file grievances as a condition for receiving the benefits. This is frequently the case when harassment, discrimination, or a hostile workplace environment has been alleged.

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) gives departing employees the right to continue their group health insurance benefits for eighteen months after employment ends. The former employee has to pay premiums that an employer may have fully or partially subsidized, so it can be extremely expensive to maintain COBRA coverage. A more affordable option may be to join a spouse or domestic partner's insurance plan.

It is not uncommon for a person to stay in a job they don't like in order to have health insurance and other employee benefits. Legislation designed to make health care more accessible and affordable passed Congress in 2010 but will not to be implemented until 2014.

Wall Street is one of the few places where severance packages are still a common practice. Upon departure, top executives usually receive stock options, cash bonuses, and generous insurance benefits.

Even executives who run companies into the ground sometimes receive generous severance. According to MSN Money, CEO Chuck Prince left Citigroup in November 2007 with a pension, stock awards, and stock options worth a total of $29.5 million. On top of that, he was entitled to a year-end bonus of $12 million. He also got an office, a car, and a driver for five years.

As Prince announced his resignation, Citigroup announced it would suffer more than $8 billion to $11 billion in losses due to subprime loans. A year later American taxpayers bailed out Citigroup. Prince was not required to pay back any of the benefits he received.

Main Street severance pay is much different. As noted, many businesses offer none at all. Others will offer lump sums, such as $1,000 a month for each year of service. Companies sometimes pay for the departing employee's health insurance for a limited time.

The time you may see a lucrative severance package in a Main Street environment is when a major company, with highly compensated and (and usually unionized) workers, wants to downsize its work force.

A good example is Ford Motor Company. In 2009, it offered a buyout plan to all 41,000 employees represented by the United Auto Workers (UAW) union in order to get them to leave their jobs.

Employees who wanted to leave were offered $50,000 in cash and the choice of a $25,000 voucher to buy a vehicle or $20,000 more in cash. Enhanced early retirement was offered to employees fifty-five or older.

Although receiving a cash payout or severance may be the opportune time to look at a new career, I warn people who get lump sum packages not to make any sudden or stupid financial decisions. When severance plans are offered, hucksters come running, pitching everything from financial products to fast-food franchises.

Which leads to my final thought about starting your own business: Find a business you know. Lots of people make money running restaurants or franchises, but the failure rate is high, especially if you have never done it before.

I love being self-employed, and after doing it for thirty years, I can't imagine doing anything else. I encourage people who fit the profile to look at self-employment. I also encourage people who don't fit in the corporate world or who are out of work to seriously consider self-employment.

As Tom Stanley pointed out in The Millionaire Next Door and several of his other books, millionaires normally don't make their money investing in Wall Street stocks. They own Main Street businesses; they are building contractors, electricians, and plumbers.

My next-door neighbor is a plumber. I don't know if he is "the millionaire next door," but I know he has a beautiful home, a great family, enjoys his work, and has all the business he can handle.

He is a better definition of success than anything Wall Street has to offer.

Don McNay, CLU, ChFC, MSFS, CSSC of Richmond Kentucky is an award-winning financial columnist He is the author of the book, Wealth Without Wall Street: A Main Street Guide to Making Money, which will be released on September 20.

McNay founded McNay Settlement Group, a structured settlement and financial consulting firm, in 1983, and Kentucky Guardianship Administrators LLC in 2000.

McNay has Master's Degrees from Vanderbilt and the American College and is in the Hall of Distinguished Alumni of Eastern Kentucky University. McNay is a Quarter Century member of the Million Dollar Round Table and has four professional designations in the financial services.