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Financial Mastery Will Help You Decide Whether You’re a Hobbyist or an Entrepreneur

Throughout our lives, we all discover new interests. This allows us to turn them into skills. And learning a variety of skills can help advance your career in unexpected ways.

Sometimes, though, this process can also open the door to more lucrative ways of making money. If you have a skill you’re particularly good at and enjoy applying your efforts in that area, you can use it to start a business. This can be an excellent chance to escape the confines of employment and be your own boss.

However, before you ditch your 9-to-5, you have to assess your skills in the realm of financial management. Sure, entrepreneurs can hire a CPA to help keep the books in order. But an accountant is there to advise only. You’re calling the shots; do you have financial discipline and vision to steer your business into profitability?

Dealing with tight funding

In the aftermath of a global pandemic, many countries experienced a recession. The US was no exception. And though we quickly started trending up, a lot of that was due to the reopening of businesses. Overall, indicators show that the road to recovery will be long and the pace slow.

In the meantime, our economic climate will remain uncertain. And that means potential funding for new ventures will be scarce. Even if you have a great business idea, it doesn’t exist in a vacuum. The modern context can effectively force you to bootstrap or borrow money from friends and family.

People tend to trust individuals with a good track record of financial management. Even those closest to you aren’t going to loan a significant amount if it doesn’t seem likely that they will eventually get their money back. What is your current financial outlook?

You might be carrying a lot of debt from student loans or mortgage payments. But if you have a system in place, you’re probably allocating your disposable income towards paying your bills on time and steadily climbing out of the negative.

Even if you’ve never started a business before, demonstrating that you have good financial habits in your personal life can convince others to lend you money. And it will help you operate on a shoestring budget if you’re bootstrapping.

Taking a serious turn

There’s a fine line between having a hobby and running a business. Maybe you love nothing more than working on landscape improvements all day. But when you buy one of those road-marking machines for sale to apply weather-resistant thermoplastic paint along your driveway, things need to get serious. The investment needs to be recouped somehow.

You don’t casually start learning a skill or craft and lavish money on professional-grade equipment. Instead, you begin with entry-level gear. An interest in photography begins with the camera on your smartphone. Over time, you progress to DSLR or mirrorless bodies, build up a collection of different lenses, and consider setting up your own studio.

Maybe you’re making some money along the way, but not a significant amount. Depending on where you live, you can avoid taxes by continuing to operate as a hobbyist. But you could also claim substantial deductions for business expenses and losses.

At some point, you have to decide whether you’re running a business or making money on the side from a hobby. It gets harder to justify continued investment, in terms of time, effort, and money, without returns. And local tax authorities are going to scrutinize your profits as they grow.

Avoid freelancing in disguise

working from home

These decisions must be grounded in your financial data. You need to know if a hobby is really paying for itself, and by how much. Will profitability increase if you upgrade further? Are your personal finances secure, so that you can raise capital in a pinch if needed?

One other facet you need to consider is the ability to scale. Because you’re building a business based on something you love, it’s easy to get caught up in doing the work itself. But are your profits directly tied to the amount of time you spend at work?

Businesses offer greater earning potential because your profits aren’t proportional to your time. You design products, but employ others to do the labor. As an entrepreneur, you need to create a revenue-generating system.

Otherwise, you’re just a freelancer in disguise. You’re taking on the many responsibilities of a business owner, but you still get paid only when you invest time in the work. It can be hard to avoid when the skill involved is something you enjoy. But finding that balance will determine whether you’re a hobbyist or an entrepreneur.

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