Financial Strategies for the Self-Employed
Self-employment is a very interesting mix of freedom and responsibility. You decide how you work and what you work on, but, conversely, you manage your finances without the backing of some big company. This is the precise reason why a person who is self-employed needs to be just that much more cautious about financial planning for the sake of subsequent stability and long-term success. It requires an individual to develop sound plans in terms of finances regarding the irregular income, taxes, and also on savings and investments. Below is a list of effective financial strategies for the self-employed.
The first and probably most important step would be to create a trustworthy budgeting system. Most self-employed people gain irregular income, as opposed to salaried employees, so this step can prove to be the hardest. The trick here is to account for all your income and expenditure in a meticulous manner. Part one: Calculate average monthly income with conservative estimates that can allow for fluctuations. Make a list of both fixed and variable expenses, the latter encompassing the core things like rent or mortgage, utilities, and edibles. Set some money aside in high-earning months; this will alleviate the leaner periods.
Budgeting involves giving a central part to an emergency fund. Self-employment provides periods of low or no income, and being ready with a financial safety net is paramount. You should set aside enough to cover at least three to six months of living expenses. Having this fund will give you peace of mind to help ride out the bumps in your business or meet some other emergency expense without being thrown off your income stream or into debt.
A key financial strategy for the self-employed is to be diligent about taxes. Unlike traditional employees, self-employed individuals must pay their income taxes directly to the government. It's important to set aside money for taxes throughout the year to avoid a large bill during tax season. Think of saving 25 to 30 percent of your income for taxes. You may want to consider making quarterly estimated tax payments so you are on top of your obligations and will have no penalties. Be sure to work with a tax professional who can help along the way in taking advantage of all possible deductions to reduce your taxable income, such as home office expenses.
Another area where a self-employed person needs to be proactive is on the topic of retirement planning. Because you aren't going to have an employer-sponsored retirement plan like a 401(k), you have to set up your retirement plans and manage them yourself. The SEP Solo 401(k) are the two primary options, and both are tailored to a self-employed person with fairly high contribution limits. Putting aside a regular amount for retirement, no matter how small, will help ensure that you are building up some sort of nest egg for when the time comes. Also, it will be prudent to diversify your retirement investments to manage risk and maximize the potential for returns.
Besides retirement, other long-term financial goals self-employed persons must consider are house purchase, education, and further investment in business. Knowing exactly how you will achieve the goals, complete with the timeframes, and the money you will need to save, is a guide on resources utilization. You may want to consult a financial advisor who can give you personalized advice and help you come up with a comprehensive plan on your finances.
The other point to keep in mind is your health insurance management. You will probably be maintaining and funding health benefits on your own, outside employer-provided benefits. Research available health care options in the marketplace under the Affordable Care Act and choose one that best fits your budget and needs. Also, remember that disability insurance may replace your lost income if due to illness or injury you are unable to work. You may also want to consider life insurance, especially if you have dependents who rely on your income.
Last but not least, the self-employed should ensure that the financial plan is reviewed and updated as necessary. Over time, your income, expenses, and goals are likely to change—if so, your financial plan should as well. A regular review will hold your track set for your target and give you the chance to make smart decisions that will assist your long-term success.