Our Top Finance Tips for the Self-Employed
- September 9, 2020 at 8:01 pm #9176adminKeymaster
A growing number of Millennials are self-employed, and self-employment across all industries is on the rise. And this is especially true for HENRYs™. HENRYs™ [High Earners, Not Rich Yet] choose to be self-employed for various reasons: flexibility of hours and work-location, variety of interests and skill sets, and desire to make more money. That’s right! Some HENRYs™ quit their jobs because they want to see just how much money they can make.
When you are a salaried employee, unless your company issues bonuses based on performance, there is a cap on how much you can make. However, when you are running your own show, the only limit to how much you can earn is your ambition and market demand. Because of this, we have many clients who are chasing their financial goals and closing in on them quickly.
When you are self-employed, there are certain financial factors that aren’t at play when a corporation or individual is paying you a salary and providing you with benefits. So we’ve rounded up our top tips for any of you HENRYs™ rocking the self-employed life, and for all of you who might be considering making the leap. Here. We. Go.
1. Get an Accountant
Most people who are self-employed wait too long to get an accountant. Make it easy on yourself. You will still need to keep close track of your expenses and do almost everything you have been doing if you’ve been doing your own taxes, but a CPA can help you understand the nuances you may miss. Trust us, it’s #worthit.
The better you get at running the business side of your business, the more time you have to work and make money!
Not all accountants will do your taxes, so as your small business scales, it’s important to have both a bookkeeper and a tax account. Both are essential for a successful small business. Every single dollar in and out of your business needs to be tracked and categorized to be able to file taxes properly. It’s too easy to get wishy-washy with this, but messy books are really bad news when you’re self-employed.
A bookkeeper helps with this, but may not necessarily file your taxes for you. Bench is a great bookkeeper for a small business. They’re affordable with amazing software so that come tax time, it’s as easy as downloading a few files and emailing them over to your CPA. They’ve recently launched a new tax filing service as well! Which makes them one of our favs.
Bonus: And speaking of taxes, it is important to understand how much you owe and plan for quarterly taxes when you’re self-employed. If you already have an accountant, ask them how much you paid last year, if you don’t, look up how much you paid last year. Take that number and divide it by 12. Aim to set aside that amount every month so you aren’t scrambling when the time comes to pay up. A good general rule is to set aside 20% of any and all income that comes in, and to do it at least once a month. Set a calendar reminder and make sure not to skip this step!
2. Track Your Expenses
When you are self-employed it is essential that you keep track of your expenses. Thankfully, there are endless tech-tools to help you do this. From the old standby Quickbooks (which has a cheaper, Self-Employed version) to Harvest, Wave, Evernote, or even Mint, try out a few and figure out which feels the most intuitive to you.
Or set aside a day each month to sit down with your credit card and bank statements and track it all the old-fashioned way in a spreadsheet. Whatever works for you. Doesn’t matter how you do it, what matters is that you understand where your money is going and can account for it.
This is an aspect of your business where it might pay off to pay for a system that makes things easier. It can be helpful to track how much time you’re spending managing your finances. That time is time you are not spending doing the work of your business, whatever that business may be. Make your time count.
3. Think In Percentages
One of the most challenging parts of being self-employed is the variability of your income. Some months you might be raking in the cash, and the next month all your clients are on vacation and you are eating rice and beans for the third night in a row. We’ve been there. Stash’s founders lived on Trader Joes’ burritos for years when they were getting this company off the ground.
To help account for these ups and downs, it is helpful to think about your savings, salary, and investments in terms of percentages. Rather than setting aside a certain dollar amount of your income toward each category, think of setting aside a percentage. This doesn’t mean you disregard your fixed expenses. Rent is rent, after all. But when looking at the money you are putting aside for savings, your vacation fund, and funds to reinvest in business improvements like new tech or extra advertising, think in terms of percentage of income, not fixed amounts.
4. Make Goals and Pay Yourself
This may seem super obvious, but we have to say it. Because here’s the real truth: so many people forget this when they run their own business. You need to pay yourself and you need to set goals. It’s okay if you can’t pay yourself regularly and easily at first, but it’s a good idea to have a timeline for when you aim to be profitable by. It’s not uncommon for it to take years for a business to start making real money.
Don’t start investing until you have an emergency fund.
However, paying yourself can actually be simpler than it seems. First, make sure you have a business bank account that is for business income only. Next, pay yourself out of that business account and into your personal account. Yep, it’s that easy. Remember that accountant we talked about? They can ensure that the money you pay yourself gets classified as “salary.” A great book to add to your finance library that goes into this in detail is Profit First.
Saving, on the other hand, can be incredibly hard. But it is so important. Tracking your expenses is a great place to start having a better understanding of how much you may be able to save. Then it is imperative that you set clear goals and make a plan to reach them. This may mean passing up weekends out with friends to avoid the Monday Morning Money Hangover. It also may mean getting super honest with yourself (and potentially your partner) about when it is worth it to compromise.
BONUS: Automate that sh*t.
Saving is so much easier when you make clear goals and automate. This can be trickier if you don’t have a regular paycheck. However, it’s worth discovering what the maximum amount you might be able to automate into a savings account. It might be more than you think.
It’s important to remember that investing money back into your business is a valid method of saving. Assuming your business is an asset that grows, a lot of your future savings will come directly from your business. That said, 50% of small businesses fail in the first five years of business, and that’s why it’s extra important to be building a cushion both personally and for the business. Your business needs an emergency fund.
5. Invest, and Not Just In A Retirement Fund
Your retirement account and your contributions toward it are in your hands when you’re self-employed. Don’t forget to prioritize this. Retirement may seem like a long way off, but we know that no matter where you are on your work journey, you’re probably already dreaming of retirement, and it may be closer than you think. Too many HENRYs™ say they are going to start investing for retirement “someday.” Cut the bull, start soon. You’ll thank yourself later.
And retirement isn’t the only goal you should be investing toward. Other mid and long-term goals like having a kid and sending that kid to college can be aided by an investment account. There is just one caveat here: don’t start investing until you have an emergency fund.
Yes. You definitely need an emergency fund. But just how much should be in it? That depends. We just broke down how much cash you should have in the bank, and you should definitely check that out. But the key thing to understand is that until you have three months of expenses saved up and stashed in a high yield savings account, investing can probably wait.
6. Educate Yourself
By reading this blog you’re already taking a step in this direction. Kudos!
Many self-employed HENRYs™, particularly those that work in creative fields, forget that they run a business. Most cities have amazing opportunities for small business owners to educate themselves, take advantage of them! There are also online courses through platforms like Udemy and Coursera. The better you get at running the business side of your business, the more time you have to work and make money!
Check your local library and freelancers unions, Google if there are any classes sponsored by your city or town. There is no shame in leveling up your skills.
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