In August 2021, the number of self-employed Americans reached 10.253 million. Working for yourself has many advantages, but one drawback is having to manage your business’ finances on your own.
It’s scary to manage finances by yourself when you’re self-employed, especially if accounting isn’t your area of expertise, but it pays to stay on top of your financial situation. The eight tips below can help you manage your finances and set you up for personal and professional success.
You may not want to pay another person if your business is just getting off the ground, but hiring an accountant is money well spent. Working with a seasoned professional can help alleviate the stress of money management, allowing you to focus on growing your business.
Keeping your personal and business finances separate allows you to easily see how much money is flowing in and out of your business. There will also be less confusion since the money you spend on meals and entertainment for yourself or your family won’t get mixed up with the money you spend on your business.
If you’re self-employed, your monthly income may not be consistent. It’s easier to prioritize your finances by thinking in terms of percentages rather than specific dollar amounts.
Decide what percentage of your income you want to divide into various funds. Stick to those percentages each month, regardless of whether you make $15,000 or $100.
When you’re self-employed, taxes don’t get taken out of your paychecks. An accountant can help you determine how much money to set aside, but 25-30 percent of your monthly income is a good starting point.
Self-employed individuals should also file quarterly taxes. By doing so, you won’t get stuck with a huge tax bill each year, and you’ll avoid penalties and fees.
Make it your goal to save at least six to eight months’ worth of funds in case you run into an emergency. You never know when sales will go down or, in extreme cases, your business will get hit with a lawsuit. You’ll have an easier time dealing with a financial crisis if you have extra funds to tap into.
If you previously had a full-time job, you probably had a portion of each paycheck withdrawn and put into a retirement fund. But when you’re self-employed, you have to set aside that money yourself.
Self-employed individuals should consider setting up one of the below retirement plans:
- Roth IRA
- Solo 401(k)
- Simplified Employee Pension Plan (SEP)
- Defined Benefit Plan
How much money you should set aside for retirement is a personal decision, but it’s good to start with 5-10 percent of your monthly income. Just keep in mind that some retirement plans have limits on how much you can contribute each year.
As you’re dividing your monthly income into various funds, make sure you’re paying yourself a salary. It helps control your business’ cash flow and ensures that you have a way to pay for your personal expenses each month.
When you have multiple banking accounts for your personal and business finances, you need to keep them secure. Identity theft protection from LifeLock safeguards your sensitive information. With one of their affordable monthly plans, you’ll have peace of mind when managing your finances online.
When you’re self-employed, it’s important to prepare yourself for anything. No matter what stage you’re at with your new career, following the steps above will help you manage your finances and give you peace of mind for the future.