Self employment is an increasingly popular option as opportunities for being your own boss become more accessible. The internet has opened the door for people in web design, writing, e-products and numerous other industries to work remotely.
Taking the plunge brings many advantages (work where you want and when you want) however on top of such a big life adjustment comes a new dimension of financial planning. When you first become self employed you want a start off by establishing a cash reserve of around six months. A financial plan is essential so you don’t spend all your cash, a common mistake that leads many people to fail there first attempt at self employment.
The sense of security and financial stability that comes with a regular pay check doesn’t exist, and you’ll quickly discover this when you start off down the self-employed path. Some months your rolling in cash, others you’ll frantically search for change behind the couch as two repo men load your flat screen into the back of a van. You need to factor dry months into your financial plans so you don’t run out of cash.
You also must remember to keep your personal and business finances separate. Have a financial plan for your business life and one for your personal life. Having a distinct financial plan for your business keeps things much simpler and helps to stop your personal life affecting your business one.
Another good idea is to treat yourself as an employee and give yourself a regular pay check. This helps stop over spending and allows your business to grow spare capital which can be used to buy supplies, cover future work expenses, hire more help, or any other business expansion.
Being your own boss means no employee benefits so, like every other aspect of the self employed life style, you need to deal with them yourself. Things like pensions and insurance all need to be factored into your financial plan to ensure financial security when you’re old and frail.
You also need to consider taxes. You can save a lot of cash by making tax claims on business expenses. However, you need to keep receipts and be able to prove it’s business related, trying to explain the family trip to Barbados as a business trip probably won’t go down well.
If you’re living in the US then you also need to pay self employment tax which covers your social security and Medicare. Also you can’t have a 401K plan, however there are alternatives available you can consider.
Finally, if all this is starting to make your head swim, there is always the option of outsourcing the financial side of your business. This is when you pay someone to deal with the finances. Although it costs money, it means it’s done by a professional and you can put the extra time to working towards growing your new business.
Whatever you decide, remember that being self-employed is a fun and rewarding (and often challenging) endeavor that many take on but in which few find success. By avoiding some of these potential financial blunders, you’ll be able to avoid many of the common traps that entrepreneurs fall into when it comes to their finances.