Being your own boss is great, but it can also leave you open to some costly mistakes. Many of the most common ones fall into the areas below. Knowing about them ahead of time can help you avoid them.
As an employee, your employer may sometimes send you to seminars or conferences for continuing education. As a self-employed person, you also need to take steps to ensure that you remain informed about the trends and changes in your field. If you are thinking of starting a business but feel you don’t have the necessary knowledge, you might want to take a few classes. In some cases, you might want to go back to school and pursue a bachelor’s degree in business or another field. Even if you already have a degree, in some consultancy areas, you may need a master’s to be competitive. You can use private student loans to pay for your tuition if necessary. You should research your options so that you know what your borrowing limits are for these loans.
Many employers offer retirement benefits that include their own contributions to your savings. You still need to save toward retirement even if you are self-employed. There are actually a number of different plans available for you, including several types of IRAs. Many people do not realize you can also have a one-participant 401(k). Another possibility is a Keogh plan. You may want to talk to a financial professional to discuss which is right for you.
It can be easy to become overwhelmed by taxes as a self-employed person and fall behind on your filing or payment. As an employee, a portion of your social security contributions are paid by your employer. That you have to pay this entire amount yourself often comes as a shock to the self-employed. You also may need to estimate and pay your tax quarterly in addition to an annual return. There are a number of deductions you may be entitled to take, and while you should not avoid any legitimate deductions for fear of an audit, you should make sure you have the documentation for any deductions you take.
You may need several types of insurance depending on the nature of your business, including general liability insurance. Errors and omissions insurance or professional liability insurance may protect you if you make an error in your dealings with a client. Commercial property insurance can cover damage to your business property. You may also want to consider insurance that can help you maintain your income if you have to shut down for a while due to certain losses, such as theft or fire damage.
Everyone should have an emergency fund, but it can be particularly important for the self-employed since you may not have unemployment to fall back on if work dries up. Around six months of living expenses is not unreasonable for a freelancer although how much you have in savings is ultimately up to your own risk tolerance. This money can get you through slow periods. Remember that if you draw on your emergency fund at any time, you need to replenish it.