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Key points
- The self-employed have lower aversion to risk.
- Matching the realities of your profession to your self-employment lifestyle improves expectations.
- Analyzing your entire financial picture as one cohesive unit reduces risk throughout your journey.
Exploring self-employment is often expressed in terms of goals. You might seek a certain lifestyle, like living abroad, by working for yourself. Or one might say they plan to take control of their career. But there’s also a subtle behavioral ripple underneath the decision: a comfort level with and willingness to take on risk.
Understanding where to take risks and where to not can ease the transition or improve the results of self-employment.
Studies have found that the self-employed embrace risk at higher rates than general employees. The self-employed have less risk aversion than the general population, according to 2018 research from Ariel University in Israel. They also took much riskier bets with other parts of their financial life, like their investments. In other research published in The Journal of Behavioral and Experimental Economics, researchers found that those self-employed believe they’re going to be much happier with their decision than the reality they experience five years after going solo.
This tendency toward overestimating the future can create damage, both mentally and financially, since the self-employed are more willing to take risks. It can derail the solo journey and destroy the mindset you had when you entered.
To prevent it, have a clear understanding of the lifestyle you hope to pursue while reducing risk in other parts of your life.
Match Your Expectations to Your Profession
Often, when individuals decide that they want to work for themselves, they believe they will travel when they want, work when they want, and not have to deal with the headaches of the work–life balance. But having a realistic expectation for what days will look like will help you develop the right mindset going in.
While you may or may not work 40 hours a week in self-employment (depending on your profession), you will have many stretches where you will work significant hours. In some cases, since you’re both the employee and employer, you may have stretches that go beyond an eight-hour workday. Are you OK with this?
Realizing this reality will help you determine whether or not your risk of going solo will be worth it to you.
For instance, for those who plan to travel, can you work non-US hours while traveling? If your clients require your presence during normal US business hours, then you still must work during US hours. Depending on where you travel, that may be difficult. Will that sour your experience? Or will it limit your plans?
Recognize the reality of your profession. If your dream of self-employment makes it impossible for you to function in your profession, right setting the dream to the realities of your profession will give you realistic expectations.
Reduce Risk Elsewhere
It’s important to recognize that by working for yourself, you have fewer backstops. There are benefits to it—you gain more of the profits when you have clients, you can have many clients, and you can work with many different types of clients (which might not be possible when you work in-house somewhere).
But, until you’ve reached a certain level of client retention and attainment, your profitability sits on a thin line of success. Reducing risk in other areas of life will improve the ability for you to succeed in your venture.
For instance, if you’re actively trading stocks or investing in only a few stocks, this is considered highly risky activity. You probably do not have the time or experience to achieve success—and even those that do have such experience or time rarely succeed over many years. Taking such a risky bet reduces your potential for gains in retirement accounts. This can reduce your wealth, even as you see signs of success in your business.
Instead, taking a hands-off approach, investing in more broad-based, low-cost index funds likely reduces the overall risk in your investments. It also reduces the overall risk you carry around in your life. And, as investments grow, it improves your ability to function in the risky aspect of self-employment.
Taking such a broad approach to your entire financial life can reduce the risk you face in any single activity—even if that activity is inherently risky, like self-employment.
It’s fine, as a solopreneur to embrace risk. You just want to make sure you’re not embracing risk in every activity, whether you have expertise in it or not.
