How to Manage Money When You're Self-Employed
Going into business for yourself has never been easier. The ability to connect remotely and quickly deliver goods and services to customers across the globe makes going it alone a realistic option for many workers.
But managing your finances can be tricky if you decide to dive into the world of self employment. Short and long term success start with a solid plan for both your business and your personal finances.
6 Steps to Self-Employed Money Management
Whether working as a freelancer or opening a new business, don’t forget to balance your personal financial needs with the needs of your business. Unfortunately, statistics show that many home-based businesses fail often due to poor financial planning. When in doubt, consider these six tips for best managing your money while self-employed.
Prepare for self-employment expenses
From freelance journalist to aspiring real estate mogul, working for yourself is going to come with costs. To the best of your ability, you need to identify those costs and prepare accordingly.
Talk to others in the industry. Do your due diligence. And then consider the personal expenses that may be unique to your situation (child card, gas, licensing fees, dry cleaning, etc.). Ultimately, your new business income should be able to cover these expenses, but when you're starting up you may need to tap into savings while your business grows.
Learn how to keep track of self-employment income
Most self-employed workers have inconsistent income. Some months are good, and others may be lean. Unlike a salary position, or even an hourly job with steady hours, you can't plan on having the same amount to work with every month.
The best way to handle this kind of variance is to figure out a monthly average. Then, if you have a month where you earn more than average, put the extra amount into a savings fund to supplement less lucrative months.
The key to it all is consistent tracking and recordkeeping. If you're new to bookkeeping, you may want to invest in some software to help you keep track of who owes you what, when it was received, and where it went.
Understand the tax implications
One of the perks of having a job and letting someone else be the boss, is that half of your Social Security and Medicare taxes are typically covered by your employer. When you are your own boss, you need to pay those taxes in full, on your own.
There are plenty of other changes to consider when it comes to preparing and paying your taxes while self-employed. The biggest change may simply be that no one is automatically withholding your tax payment anymore, and now you're responsible to build those taxes into your budget and pay them on time, either quarterly or annually. The worst thing you can do is not prepare at all and find yourself with an enormous tax bill in the spring.
Keep accurate records
Organization makes a huge difference when running your own business, big or small. Make sure your paperwork is completed and filed as needed, particularly when billing clients or customers. Keep in mind that many companies can take several weeks to process invoices, so keeping a calendar of incoming and outgoing payments can helpful.
Be sure to keep copies of all receipts for tax time. And because you never know when a chance to network will arise, keep business cards handy and any customer spaces (both online and in real life) tidy, accessible, and up-to-date.
Get legal help when needed
Consider working with a lawyer who can help you with necessary, and sometimes complex, legal matters. You should also contact your insurance agent to make sure you have appropriate coverage when starting a business, scaling your business, or adding new services.
Avoid relying on credit cards
Borrowing from a credit card can quickly lead to costly trouble. If you need to use a credit card for business expenses, open an account specifically for that purpose. If you need money to launch your business, consider a small business loan instead.