8 Steps to Financial Planning for Entrepreneurs

When my business partner and I started our photography business in the early 90s, we had big dreams and no real plan for financial planning for entrepreneurs. At the time, I had been out of college for only a few years. I was struggling to make ends meet with rent, utilities, and groceries. Even so, we took out a $30,000 loan for equipment because we were convinced the business would pay for itself quickly. But it didn’t go as smoothly as we hoped.

The pressure hit me immediately. I was already juggling personal bills. Now I had the added stress of a massive loan for a business that wasn’t earning money yet. To stay afloat, I worked two extra jobs while every dollar the business earned went straight to repaying the loan. For months, I didn’t see a penny of income from the business. The stress of working 10- to 12-hour days while worrying about debt was overwhelming. Looking back, I realize how much smoother things could’ve gone if we’d taken the time to focus on financial planning for entrepreneurs before diving in.

And that’s the thing, hustling to build a business is critical, but so is preparation. By following the steps outlined below, you can avoid many of the mistakes I made. Whether you’re leaving your job to start an online business or just trying to get your financial house in order, these steps can give you the stability to succeed.

Step 1: Anticipate Upcoming Expenses

Start by looking ahead at what might go wrong. Is your car getting old? Are your appliances showing signs of wear? Planning for these predictable expenses can save you from scrambling later. For example, when I knew my car was nearing the end of its life, I started putting aside a little each month to prepare for repairs or even a replacement. Begin setting aside money for major costs like these before they become emergencies.

Step 2: Build an Escape Fund

Your escape fund is your financial safety net for making the leap from steady employment to entrepreneurship. Calculate how much you need to cover three to 12 months of living expenses, depending on how long you expect it to take for your business to become profitable. This should include essentials like rent, utilities, groceries, and health insurance. Open a dedicated savings account and treat contributing to it like paying a bill—it’s non-negotiable.

When I decided to leave my job and pursue an online business, I committed to saving 12 months’ worth of living expenses. That cushion gave me the freedom to focus on growing my business without constantly worrying about how to pay my bills. It was one of the smartest decisions I’ve ever made, and I encourage anyone transitioning to self-employment to aim for the same.

Step 3: Automate Your Savings

Saving money is easier when you don’t have to think about it. Set up automatic transfers from your paycheck or primary account to your escape fund. By automating the process, you’ll ensure consistent contributions and watch your savings grow effortlessly.

For example, I scheduled transfers to coincide with my paydays. Even a modest amount each paycheck—$50 or $100—can add up over time. Automating your savings takes the guesswork out of building your fund and helps you stay disciplined without the temptation to skip a month.

Step 4: Cut Non-Essential Spending

Take a hard look at your budget and identify areas where you can cut back temporarily. Skip takeout, cancel unnecessary subscriptions, or pause on splurging for now. When I was saving for my escape fund, I swapped Friday night pizza deliveries for homemade meals and found other small changes that made a big difference. Every dollar you save can go straight into your escape fund or help cover unexpected expenses when they arise. (Plus, cooking at home was a much healthier choice for me!)

Step 5: Revisit Your Budget Regularly

Your financial situation will change as you pay off debt, earn more income, or adjust your spending habits. Make it a habit to revisit your budget regularly to see where you can save more or redirect funds. For instance, if you finish paying off a credit card, funnel that payment amount into your escape fund instead of letting it absorb back into your spending. Revisiting your budget ensures your financial plan stays relevant and effective.

Step 6: Redirect Windfalls to Savings

Whenever you come into extra money—like a tax refund, bonus, or freelance income—don’t let it get absorbed into everyday spending. Instead, put it directly into your escape fund or use it to handle anticipated expenses. When I was saving, I made a rule to send any unexpected cash straight into my savings account. This is one of the fastest ways to grow your financial cushion and stay on track, and it made a huge difference in my saving plan.

Step 7: Plan for Replacing Job-Related Benefits

If you’re leaving a job that provides benefits like health insurance, life insurance, or retirement contributions, make a plan to replace those before your last day. Research private health insurance options or consider short-term plans to bridge the gap. Look into life and disability insurance to protect your income, and set up a retirement savings account to ensure your long-term financial goals stay on track.

Step 8: Invest for Long-Term Growth

Once your escape fund is fully funded, consider investing additional savings in higher-yield accounts or other financial vehicles. This step is especially important for entrepreneurs, as it helps grow your money and provides a cushion for slow business months or unexpected opportunities. Talk to a financial advisor about options like high-interest savings accounts, mutual funds, or retirement plans.

Staying Calm When Life Happens

Even with the best financial planning, unexpected expenses will still crop up. If they happen before your escape fund is fully built, don’t panic. Look for cost-effective solutions, like repairing instead of replacing, or delaying the expense until you’ve saved enough. If you have to use a credit card, make paying it off a top priority to avoid long-term debt.

Action Steps to Get Started

1. Anticipate Expenses: Write down predictable costs you may face in the near future.
2. Calculate Your Escape Fund: Figure out how much you need to cover 3–12 months of essential expenses.
3. Open a Savings Account: Keep your escape fund separate from your everyday money.
4. Automate Contributions: Set up automatic transfers to build your fund consistently.
5. Cut Back Temporarily: Reduce spending on luxuries like takeout or streaming services.
6. Redirect Windfalls: Put tax refunds, bonuses, or extra income into your escape fund.
7. Plan for Benefits: Research how to replace job-related benefits, like health insurance.
8. Invest Wisely: Grow additional savings in higher-yield accounts once your fund is complete.

Learn From My Mistake

When I think back to my photography business days, I see how much stress I could’ve avoided with better financial preparation. Transitioning from a steady paycheck to running your own business is a big step, but it doesn’t have to feel overwhelming. By focusing on financial planning for entrepreneurs and building an escape fund, you can set yourself up for success.

Whether you’re leaving your job, starting an online business, or just trying to prepare for life’s surprises, having your finances in order gives you the freedom to focus on what truly matters: growing your business and creating the life you want.

I’m Kim Nelson, a writer, entrepreneur, and small business owner with over 20 years of experience. My career began as a partner in a successful photography business before I transitioned to selling physical products on Amazon FBA, including my own creations. I’m also the founder and owner of two websites. Download my complimentary guide, “Bridging the Gap,” to help you navigate the financial transition from leaving a steady paycheck to becoming a profitable entrepreneur.

This article is the fourth in a series I’m writing about transitioning from a W-2 job to entrepreneurship.

• Confidence to Make the Leap from Employee to Entrepreneur
• Personal Finance Organization Tips
• Building Your Escape Fund
• 8 Steps to Financial Planning for Entrepreneurs