Questions to ask before you put savings into a business

Some of the most dramatic FIRE stories involve a business: a company that sold, a practice that grew, a shop that took off. Those stories are real. So are the quieter ones about savings that went into a business and didn't come back. You hear far fewer of those.

If you're thinking about putting your own money into a startup or small business, this checklist is meant to slow you down just enough to decide with clear eyes. It doesn't tell you whether to do it.

This is general education, not advice. It doesn't recommend any business, investment or funding method. Please talk with an accountant, an attorney and, where it applies, a fee-only financial planner before you commit money.

Question 1: How much could I lose and still be OK?

This is the most important question, and the one that's easiest to skip in the excitement.

Pick a number: the amount you could lose completely without derailing your family's life or your long-term plan. Write it down before you start. Many founders find they need more money than they expected, and a number set in advance makes it easier to stop before "just a bit more" becomes everything.

Question 2: What happens to the rest of my plan?

A business can take years to pay its owner. While it ramps up, think about:

• Living expenses. How many months can your household cover with no business income?
• Health insurance. If you leave a job, what replaces your coverage? See Health insurance before Medicare.
• Retirement saving. Will you keep saving anything? Even small amounts keep compounding.
• A partner's income. Is a second income carrying the household, and is that person on board?

Question 3: Am I personally guaranteeing anything?

Many small-business loans and leases ask the owner to personally guarantee them. If the business can't pay, the lender can come after your personal assets. That can turn a business failure into a personal financial crisis.

Matt W, uFIRE's founder, knows how this feels. He bought his orthodontic practice in 2008 and borrowed working capital on top, bringing him to about a million dollars in debt with student loans. Six months in, during the financial crisis, he was out of money, the bank wouldn't lend him more, and he thought he might go bankrupt in his first year. He made it by working six days a week for years. His story.

Have an attorney read any guarantee before you sign.

Question 4: Should I use retirement money?

Some promoters market ways to use 401(k) or IRA savings to fund a new business. One common setup is called a rollover as business start-up (ROBS).

The IRS studied these arrangements and reported that most ROBS businesses either failed or were on the road to failure, with high rates of bankruptcy, liens and corporate dissolutions, and that some people lost both their retirement savings and their business. It also found many owners didn't understand the plan's ongoing filing requirements (IRS).

Simply withdrawing from retirement accounts has its own costs: income tax, and often a 10% additional tax before age 59½ (IRS). Retirement money is hard to rebuild. Get independent advice from someone who isn't selling the arrangement.

Question 5: Have real customers said yes?

Before investing heavily, many founders try to get proof that people will pay:

• pre-orders or deposits,
• a few paying clients from side work,
• a small test in one location or one market.

Friends saying "great idea" isn't the same as strangers paying money.

Question 6: Start, buy, or join?

There's more than one way in:

• Starting from scratch gives full control, and the most uncertainty.
• Buying an existing business comes with customers and cash flow, and with the seller's problems. An accountant should review the books and an attorney the contract.
• Joining an early-stage company as an employee can mean equity and less personal financial risk, but a lower salary and options that may be worth nothing.

Question 7: Whose money, and what do I give up?

Bootstrapping (your own money and the business's revenue) keeps you in control but limits growth to what you can afford. Outside investors can fund faster growth, but you give up part of the ownership and often some control. Loans keep ownership but add fixed payments and, often, personal guarantees.

The SBA's plan your business guide walks through writing a business plan and the main ways to fund a business.

Question 8: What's my exit if it doesn't work?

Nobody likes this question at the start. Answering it early helps:

• At what point (money spent, months passed, results missed) would I stop or change course?
• Could I go back to my old field?
• What would I sell, and what would I still owe?

Question 9: What does this mean for FIRE?

A business can be a powerful path to financial independence. It can raise your income, create something you can sell, and let you step back while it keeps running. It can also add debt, risk and years. Paths to FIRE describes both sides.

Many people who reach FIRE through business build savings outside the business too, so their freedom doesn't depend on one company.

Watch for red flags

Be cautious with any opportunity that:

• promises high returns with little risk,
• pressures you to decide quickly,
• asks for upfront fees for "coaching" or "systems,"
• or depends on recruiting others.

The FTC explains common money-making opportunity scams, and our FIRE Danger page covers more warning signs and where to get help.

Next step

Before you invest in a business, see where your plan stands today, and how a few years of lower income would move your date.

Try the Freedom Date calculator →