This Is How Much You Need to Have in Savings Before Launching a Business

Starting a business of your own can be a great way to earn a living, although it's not a sure thing. The Bureau of Labor Statistics data consistently shows that about one in five small businesses will fail within the first two years.

Because there are some risks involved, you'll want to be sure you're in a good financial position before you jump into becoming an entrepreneur. But what exactly does this mean? How much money should you have in savings before you launch a company?

Here's how to find out.

Make sure you have enough to cover your living costs

Depending on what kind of company you start, your business may not be profitable right away. In fact, it can take a few years before you start consistently earning money even if you are on the path to success. Of course, you will still need funds to live on during that time.

If you are planning to keep working at your current job while you grow your business, then you may not need any extra money set aside in your savings account to cover living expenses while you're getting your company off the ground. But having an emergency fund is a good idea whether you're trying to start a company of your own or not.

But, if you are planning on quitting work or cutting back your hours, you must make sure you have enough saved to pay the bills and float you until you can start bringing home a paycheck. Ideally, you should ensure you have sufficient savings to cover at least six months of expenses and probably closer to a year or longer so you don't have to rely on credit cards or otherwise fall into debt.

It can be hard to save enough to pay all your bills while working on a business that's not bringing in any income. That's why it's often a good idea to start your business on the side while continuing to bring in a paycheck if you can. As your company grows and begins producing money for you, you can cut back on your hours and give up your "day job" altogether.

Make sure you have enough to cover start-up and operating costs

You will also need to have money saved to get your business up and running and, likely, to fund operations until you start turning a profit. Remember, this could take a year or longer to happen.

The exact amount you are going to need depends on what kind of business you are starting. If you're starting a freelance writing business (which is what I did), you may not need any money beyond the cost of a laptop if you don't already have one. But if you are starting a restaurant, you may need tens of thousands of dollars to pay for rent and to buy equipment like dishes and a stove to cook on.

You should create a business plan that details what your upfront and ongoing operating costs will be, including expenses like equipment, business insurance, employee salaries, and inventory. Make sure you have enough money saved to carry the business for at least six months to a year so you don't have to close your doors right away if it takes time to get off the ground.

If you can keep your costs down without compromising on quality or service, it will be easier to amass enough money in savings. You can also look into getting investors to help you fund your initial costs if you're confident you've got a good business idea. By getting others to invest, you will have to agree to share the profits, but you also share the risk, so it's worth considering.

Whatever approach you take, just remember that the goal is for your business to improve your finances -- so take calculated risks with your money and try to keep costs down so you can preserve your savings and give your business time to grow.