Between 1997 and 2014, the number of women-owned businesses in the U.S. rose by 68 percent, twice the growth rate for men, according to an American Express analysis of U.S. Census Bureau figures. This is quite an accomplishment for women, but there is also a dark side to this trend. Very few women have their personal financial houses in order before they launch their businesses, and they are contributing to the pending retirement crisis among the self-employed. Here are the top three mistakes I often see a female entrepreneur make:
1) Cashes out her 401(k) to pay for her business’ start-up costs
2) Fails to open up and contribute to an individual retirement account (IRA) while she is self-employed
3) Defers her family’s investment and retirement planning or abdicates control to her husband because she is busy running her business
I hate to be a wet blanket, but not all businesses succeed, so it is imperative that you don’t raid your existing retirement account, no matter how small it is. You don’t want to be the woman with no income or money set aside and have to rely on just social security.
In my latest newsletter, I profiled a 62-year-old woman who, 25 years ago, left a job with $10,000 in her 401(k). Had she cashed it out she would have paid a 10 percent penalty plus federal and state income taxes leaving her with around $6,000. Instead, she rolled that 401(k) into an IRA, and, without ever adding new money to it, finds herself with a $140,000 balance today. So if you are tempted to cash out your 401(k), don’t do it. Find another way to get the cash you need. And if you can’t find the cash, you may not be ready to start your own business.
If you can stick it out for a few years working for someone else, here are a few tips from my book, Every Woman Should Know Her Options, to help you build a nest egg before you go off on your own:
- Educate yourself by reading about investing, the economy, and personal finance
- Spend less than you earn by living below your means
- Rent a small apartment you can afford rather than mortgage a home you cannot
- Max out on tax-deferred retirement vehicles such as a 401K and IRA
- Invest a portion of every paycheck or income source in a diversified portfolio of stocks or low-fee funds
- If you have even $5,000 sitting in a checking or savings account, click here to open up a brokerage account or IRA and start investing it
- If you are married, talk to your husband about money and investing and meet with a financial advisor together
If you follow these tips and take some action, you’ll be well-prepared to leave the corporate grind and start a business based on your passion. Know other women who want to launch a business? Please share this post with them.