Many people dream of being self-employed so they can work their own hours and be in charge of the direction of their business. But what about all the other aspects of running a business, such as managing your finances? Being self-employed means that you are also responsible for paying your taxes, insurance premiums, retirement contributions, and more. Doing all of these can be overwhelming if you’re not used to handling these on your own.
In this blog post, we will give five tips for managing your finances when you’re self-employed.
Set Up a Budget and Stick To It
Managing finances is one of the biggest challenges for self-employed individuals. You don’t have the luxury of having an employer set your income and expenses for you, so it’s up to you to keep track of everything. This can be made easier by setting up a budget, which tells you exactly where your money goes each month on things such as groceries, entertainment, travel costs, bills, rent, and more. Your budget should also include a plan for saving money, as well as an idea of how much debt you have and what to do about it.
Managing your income and spending with a budget makes it much easier to handle other financial challenges such as taxes and retirement planning. With a clear picture of where your money is going, you’ll have access to information that helps you make smarter decisions. By combining your budget with accurate record-keeping, you’ll have a complete financial picture of what’s happening in your life. Such records are also vital if you’re wondering how to prove income when self employed, which is often required for loans, mortgages, insurance, and taxation purposes.
Ensure Your Tax Deductions Are in Order
If you’re self-employed, the chances are good that almost all of your expenses can be written off as business deductions. The key is to have records for every deduction and keep them in a logical order, so they’ll be there when you need to submit them to the Internal Revenue Service (IRS). If you own a car or other vehicle for work purposes, make sure you have the name of your business recorded on your vehicle, so you can claim it as a business asset or expense.
The same thing applies if you are using a computer at home for work purposes. Make sure to place your business name or logo somewhere in plain view near the device. Keeping your tax deductions organized is one of the best things you can do to cut expenses because it can be used to lower your taxable income. Keep in mind that you can only write off the expenses that are directly related to your business.
Track Your Expenses So You Can Stay On Top of Them
Keep a simple spreadsheet to track your expenses for at least six months. This will help you see how much money is going toward specific categories and where it’s being spent, so you can reduce expenditures if necessary. You could also use an app like Mint, which links to all of your accounts and tracks spending on the go. Being self-employed, you’ll likely need to hire an accountant and/or bookkeeper at least once a year, so it’s best not to spend too much time trying to do this yourself.
When organizing your expenses, keep the following groups in mind: business expenses (your car, office space, or equipment if they’re used exclusively for business purposes), personal expenses (groceries, gas for your personal vehicle), and home expenses that might include a portion of your rent/mortgage or utilities. Depending on what you do for a living, you’ll need to keep track of different types of expenses. Look to see if there are any patterns in when or where your money is being spent so you can make changes if necessary.
Keep an Emergency Fund for Emergencies
It doesn’t matter whether you’re self-employed, employed full-time, or part-time. You should always have an emergency fund set aside if something happens and you need money for unexpected expenses like car repairs or medical bills. Start by establishing a savings plan. Try to save at least 20% of your income each month. If you can’t do that, try saving 15%. Once you’ve saved enough for an emergency fund and established a savings plan, then put money into your retirement plan and other investment opportunities such as stocks.
Create a Retirement Plan if You Don’t Have One Already
Finally, creating a retirement plan for yourself is crucial. Of course, you can’t do anything until your business starts making money. But even before then, it makes sense to be thinking about what your eventual exit strategy will look like (and how much of an investment you will make in the business itself). As soon as possible, start talking through your retirement plan with an accountant and a financial planner. After all, you’ll want to ensure that what you’re doing will work in the long term.
With these tips in mind, it’s possible to manage your finances with ease.
