If you’ve responded to the call of self-employment, congratulations! Self-employment is exciting, but it also comes with its fair share of financial challenges. Here’s how you can thrive financially as your own boss.
1. Master Budgeting for the Self-Employed
An important thing to know is that a budget for a self-employed person is different than a traditional budget. This is because you most likely won’t make the same amount each month.
It can be difficult to budget appropriately when your income fluctuates. Here are some tips to make it easier:
- Prioritize your bills: While your goal is to cover all your bills each month, sometimes that doesn’t happen. You should prioritize what needs to be paid first, such as your mortgage loan or car payment before your TV bill.
- Make a bare-bones budget: You should have an idea of your non-discretionary expenses. This is what you’ll rely on during slow months.
- Separate your expenses: If you’re self-employed, the line between your personal and business expenses will start to get grey if you’re not careful. This will make your life much easier, particularly at tax time.
Organizing your finances while self-employed may be a little complex at first, but follow these guidelines and you’ll get the hang of it.
2. Pay Uncle Sam First
One of the most crucial financial tips for the self-employed is setting aside enough money for taxes. Forget about “paying yourself first”-taxes take precedent for the self-employed. While paycheck earners get their taxes withheld automatically, you must set aside your taxes all on your own.
You’ll need to make quarterly estimated tax payments. If you make late payments, you’ll end up paying penalties and interest.
Make sure you have enough cash set aside each quarter by stashing away approximately 30 percent of all of your earnings. Your deductions might cause your bill to be lower, but at least you’ll have peace of mind.
3. Track Your Mileage
Going for a drive? You may be able to get a mileage deduction if it has something to do with your business. Your trip may be business-related if it involves:
- Picking up supplies
- Meeting clients
- Going between offices.
If you’re going to log your mileage to take advantage of deductions, you’ll need to be scrupulous. Assuming you remember to log the details of every drive, you’ll need to record the destination, date, and miles traveled. This can take up a lot of your time and you may even forget about it.
4. Build an Emergency Fund
Everyone should have an emergency fund. However, it is even more important for self-employed people. You may find yourself dipping into your emergency fund more often because of your income fluctuations.
A slow month may require you to use your emergency savings to pay for a home repair, mortgage, or even your groceries. You should work on creating an emergency fund to cover six months. At the very least, you should set aside ten percent each month for emergencies.
5. Make Windfalls for Stability
There will be some months where you’ll do a lot better than your average. If you have some amazing months, don’t spend all your extra cash on lavish items. While it doesn’t hurt to treat yourself a little bit, it’s important to have some financial stability.
During these better months, take out what you need for taxes, emergencies, and your salary, then put the rest in an overhead account. This will provide you with enhanced financial security.
6. Focus on Percentages Instead of Dollars
A crucial way to properly manage money while self-employed is thinking in percentages when setting money aside. If you rely on depositing a specific dollar amount into your savings, you could end up saving too little when you have high-income months. Allot percentages of your income to put toward your taxes, emergency savings, and other funds.
7. Don’t Forget About Retirement
You may put your retirement savings on hold as you get your business started. While this may be necessary at first, don’t ignore your retirement goals for long. Although your priorities may shift sometimes, you should never make the mistake of completely abandoning your retirement funding.
While you want to make your business sustainable, you certainly want to eventually retire. Balance your priorities so you can reach your goals and make informed decisions.
Being self-employed is an exhilarating, scary, and fulfilling experience all in one. It gives you the opportunity to follow your dreams and make your own path. Follow these self-employed financial tips and you’ll set yourself up for success.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.