When it comes to managing personal finances, those who are self-employed have a special set of considerations to take into account. Many self-employed people work from their homes, have incomes that vary from month to month, are responsible for compensating employees, and/or do their own bookkeeping. Therefore, they must plan for the differences these circumstances can make in their financial planning. If you are self-employed, then you can benefit from following these five financial tips:
Income tax planning. Make sure you set aside some money each month for your income tax bill at the end of the year. Keep it in a separate bank account that is specifically designated for this expense. Forty percent of your income is advisable. If that sounds like a lot, consider how much it will feel like when tax time comes and you haven’t saved anything.
Separate accounts. Don’t make the mistake of combining your business and personal funds into one bank account. Keeping separate bank accounts is a necessity if you want to avoid bookkeeping mistakes, and can save you from a lot of unnecessary time and effort spent on sorting out records for tax purposes.
Bookkeeping software. Invest in a reputable computer program like Quickbooks for all of your bookkeeping needs. This enables you to track everything from invoicing to tax accounting with just a few keystrokes, and you can even write company checks using such software.
Retirement planning. When you don’t have an employer to withhold and match retirement funds for your future, you must do it yourself. The best way to do this is to consult with a financial planner in order to find the best fit for you. Depending on your individual circumstances, you may have several options when it comes to planning for your retirement, and you owe it to yourself to seriously consider the different investment vehicles available to you.
Reserves. No matter what business you are in, it is a good idea to have three to six months of living expense reserves in the bank account. Self-employed are especially susceptible to monthly fluctuations in income, so it is important to set enough money aside each month to account for the likelihood of slow months.
Those who choose to be self-employed do so for a reason. After all, not everyone can say that they set their own schedules and that they don’t have bosses to answer to. However, there is a tradeoff for being self-employed. The responsibility of managing both personal and business finances can be daunting and, if not approached with seriousness, can also be potential downfall. Avoid the financial pitfalls of self-employment by following these tips.
About the Author: Holly is a full-time freelancer with a passion for personal finance. She also enjoys writing about education and careers in health care and is a regular contributor at aboutmedicalbillingandcoding.org.
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