In my post asking what you’d like to see me write about, two readers asked me to address the specifics of how my husband and I set up our home-based business, and I’ve also had numerous emails about this subject over the years. So I’m going to lay out the basics of what we did, and what has worked for us. This post is a bit long, but since I’ve had so many questions about this subject over the years, I want to add as many details as possible – both the things we did right, and the stuff I wouldn’t repeat. I hope it helps!
**** EDIT: I would add that just because this stuff worked for us, obviously it’s not a how-to manual and it won’t work for everybody or every business. We worked hard, but we also had a lot of luck on our side. This post is meant to highlight the steps we took, some of which might work for you if you’re thinking of starting your own business. But please don’t feel like you have to do the same things we did or make the same decisions we did. The world is a much different place than it was ten years ago, especially when it comes to online businesses. ****
1. A disclaimer… We’re in the individual health insurance industry. It has been great for us for nearly ten years. But I wouldn’t recommend it right now to someone starting from scratch, simply because everything is so up in the air with health care reform. The reform law that passed last year has significantly cut our commissions (and likely driven a lot of newer agents out of the industry, because it’s a lot easier to weather commission cuts if you have a large, established client base), and there are a lot of unanswered questions about how the industry will work as of 2014. And of course, the whole law is headed for the Supreme Court, so it’s anybody’s guess how this will all shake out. In a nutshell – insurance is great, but if you want to become self employed, I would steer clear of individual health insurance at least for the next few years.
2. We eased our way in. My husband quit his corporate job in early 2002 and started selling health insurance. I kept my corporate job for another year and half so that we could live off of my income while he got things started. At that point, I quit my job and joined him. During the first year he was self employed, he made very little money, and it would have been particularly rough if we had both jumped into being self employed at the same time.
3. We had no kids and very little in the way of financial obligations when we first became self-employed. On the other hand, we also had no savings or assets to fall back on. Our rent was about $700/month, we had no debts, and our living expenses basically amounted to food, gas, utilities, etc. So it was relatively easy to make do on very little income. It would have been nice to have a little bit of savings to cushion us, but we were very young and living paycheck to paycheck. We bought our first house after my husband had been self-employed for about a year, and that bumped our housing costs up to about $1280/month. Definitely a stretch.
4. We used credit cards to get by. I know this is a big DON’T when starting a business, and I wouldn’t recommend it. But it worked for us. By the time I had been working with my husband for about a year, we probably had $35,000 in debts. This was partially due to making barely enough money to pay the mortgage and using credit cards for stuff like groceries, although most of the debt was business-related. We spent a lot of money on marketing: pay-per-click with Google, multimedia business cards, buying leads from an agency we worked with in the first couple years… it all added up, really fast.
5. We played the credit card game, transferring balances from one card to another in order to get zero-interest deals. It actually worked really well for us, but that’s because I tend to be extremely detail-oriented with stuff like that, and I always made sure that I read the fine print and got things paid off before the promotional periods expired. Again, using personal credit cards to start a business is probably not the best idea.
6. We incorporated. This was an excellent move, but one that we didn’t make until 2006. Looking back, we should have done it sooner. Once we incorporated, we were able to completely separate our business and personal finances, and become W-2 employees of our business. Much more official than the self-employed status we had for the previous few years. By that point, we had nearly paid off our various debts, but once we incorporated, we had the option to get a business loan if we needed it, and we did get a business credit card. That would probably have been a smarter way to go about financing the start-up costs of our business, but we didn’t know what incorporation entailed and didn’t become educated about the benefits until we had been self employed for a few years. We went through an online company that specialized in incorporation paperwork (e.g. Sun Doc Filings), and I think it cost us about $500. We’re an S-corp, which has worked perfectly for us (there are several options for incorporation – do your research from both a business and tax perspective before you settle on an option).
7. We lived poor. I think “fake it till you make it” is terrible advice. I know some people will disagree, and I know that there are a few professions where it might actually be good advice. But for most of us, clothes from a thrift store (which look just like clothes from the mall!) and a used car or bike will work just fine. So does a small house or apartment. Even with our frugal lifestyle, it took us until 2007 to pay off the debts we incurred to start our business (most of that money was spent in 2003 and 2004). If we had financed new cars, eaten at fancy restaurants, bought new clothes, etc., it would have taken much longer.
8. We transitioned to working on-line back in 2003. This was probably the best move we made in setting up our business. Over the course of about two years, we went from having a mostly car-based business to having a mostly home-based business. These days, we literally never leave the house for work at all. We can “meet” with far more clients in a day than we ever could have when we were driving all over the state. We can work from anywhere as long as we have high speed internet and a phone. The best part about working on-line is that we’re both home all day with our sons. My husband is in his office (either in the basement or out in the office we built in our backyard) all day, but he can take breaks to come and hang out with us, and I get to be with our boys all day, taking breaks to fit in business-related work when I can. (I only work about 15 hours a week for our business these days).
9. My husband spent hundreds of hours in the early years of our business teaching himself the art of search engine optimization in the evenings, after a full day of work. This has paid off tremendously for us, but there were many late nights in front of the computer. If you’re going to be self-employed, you’re going to have to put a lot of time or money (or both!) into marketing. Being self-employed does not mean that you work whenever you feel like it. Especially early on, it pretty much means that you work all the time. But if you’re ok with that, the amazing thing about the world we live in today is that you can learn – online, from home – just about anything you put your mind to.
10. We didn’t seek out glamorous, cool jobs. There is nothing exciting about health insurance. Actually, we think it’s pretty interesting, and all the legislation surrounding it for the last few years has been fascinating to us. But when you’re at a party and tell someone you’re a health insurance broker, they tend to say “oh, that’s cool” and then change the subject. We are not astronauts. But that’s fine with us. My husband has always wanted to have his own business, and he loves the challenges that come with being his own boss. But in general, we do not find our primary fulfillment from our career. We look at our business as a way to earn money, and we seek fulfillment from the things we love (gardening, raising our boys, being outdoors, spending time with family, learning new things, etc.). I know that some people are very successful at making something they love doing into a career. But having the mindset that work has to be something you love can also be a big hurdle to clear if you’re looking at setting up your own business. Just food for thought. Whatever you do for a living, I would recommend doing it to the best of your ability. Don’t be a slacker. But don’t feel like you’re selling yourself short if you’re earning an honest living doing something that is “just a job”.
11. We’re honest. This is huge. Working for yourself means that nobody is looking over your shoulder on a daily basis, making sure you’re being ethical and honest. Some self-employed people get themselves into trouble because they start to feel like they can do whatever they want. They tell customers what they want to hear (or what needs to be said to make a sale, whether it’s true or not), they stretch the truth with the IRS, they fudge compliance paperwork… there are all sorts of traps that you can fall into if you let yourself start to deviate from the path of honest-and-ethical-all-the-time. In the insurance industry, there are some carriers that pay higher commissions than others, and there are always carriers that are running various bonus programs for agents who sell a high volume of their products. But our philosophy is that the best strategy is to sell each client the product that works best for that client, and that the money will take care of itself. We might not have always qualified for the best bonuses or the highest commissions, but we have lots of clients who have been with us for nearly a decade. Our BBB and insurance license records are complaint-free, and we rest easy at night knowing that all of our income has been reported to the IRS (yes, even the income that the payers didn’t report), all of our records are in order, and all of our clients have received honest advice.
12. We paid ourselves first. For about a year in 2003/04, we didn’t contribute any money to our retirement plans. That was our roughest year in terms of income, and we were barely able to pay our mortgage. But by the summer of 2004, we decided that we had to make retirement savings a priority again, even if it meant tightening our already-tight belts. So we started small, putting $100/month into each of our IRAs. As we earned more money, we increased the amounts we were contributing to retirement. We’ve kept our day-to-day living expenses about the same for the last five years or so (not as frugal as we were in 2003, but nothing extravagant either), which has allowed us to set up a SEP-IRA through our business, max out our HSA and IRAs each year, and also create an emergency fund. If we’re able to keep on earning a good living from our current business indefinitely, that’s great – we’ll just retire a bit earlier. But if not, it will be nice to have a bit of a cushion. Especially now that we have kids.
13. We stopped taking advance commissions very early on. The first couple of years that we were “self-employed” we were actually contract workers for a large insurance brokerage. We were self-employed, and only got paid if we made a sale, but many agencies will pay advance commissions to agents. Basically, when you make a sale, they pay you ten months of commissions up front. That makes for some nice paychecks, but it also means you’re in debt to the agency. If the client ends up cancelling, you have to pay the money back. If the client keeps the policy, the debt to the agency will be repaid in 10 months, but it becomes a never-ending cycle. Most of the other agents we talked to had quite a bit of advance commission debt, even though they were making big paychecks every month. We decided we’d rather live off of what we were actually earning, and switched to as-earned commissions. That was painful at first, but we slept easier at night. And it made it much easier to transition to setting up our own agency, since we were no longer relying on a larger agency to pay us advance commissions.
14. We worked hard to build solid relationships with the top insurance carriers. We avoided cut-rate carriers, even if they were offering sweet commissions and extra bonuses. We wanted to make sure that the products we were offering our clients were from solid, reputable carriers rather than some new carrier that had just entered the market and was offering trips to Hawaii for brokers who sold lots of their policies.
I hope this is helpful for those of you who are interested in setting up your own business. A lot of this stuff will apply to many industries and lines of work – not just insurance. The internet has given us more opportunities than ever to be our own bosses and work from home. Of course, it’s also created lots of scams and traps for the unwary. If something sounds too good to be true ($8000/month, working from home, no experience necessary, start tomorrow!), it probably is. Establishing a successful internet-based business isn’t easy, but if you make it work, the rewards are huge.