This guide outlines personal finance management strategies when you work for yourself.
As a self-employed business owner, you must juggle your personal and company finances, even if you’re a sole proprietor. Working for yourself has its benefits, but finances are often a challenge. You have to prepare for the unexpected by managing your personal finance attentively.
Personal finance management strategies
As a freelancer, you don’t receive employer-paid benefits or a steady paycheck. You also can’t supplement your income with unemployment, so you need to save and carefully follow personal finance management strategies for your funds.
1. Separate Your Personal and Business Finances
Regardless of how much they make, all self-employed individuals must separate their business and personal finances. This allows them to easily track their expenses and income and makes year-end tax time a breeze. By separating your accounts, you can keep a detailed record.
You can use your financial records to make a profit/loss statement, which is necessary when you want to take out a loan. Plus, you’ll have a bird’s-eye view of your deductions.
2. Pay Yourself First (With a Owner’s Draw)
Freelancers can pay themselves a salary with an “owner’s draw,” which describes the process of a business owner taking out funds from the company as a wage. If you pay yourself first, you’ll reduce stress related to your personal finance management and prevent potential financial consequences.
It’s common for business owners to forget about their own needs, but with an owner’s draw, you can ensure that all your bills are paid, and you’re building up enough savings for the future.
3. Know What’s Going Out and What’s Coming In
It can be easy to overspend when you aren’t watching where your money is going. Budget tracking apps, like SoFi, can give you a clear picture of how much you’re spending and what you’re spending on. Plus, SoFi can provide weekly credit reports that don’t affect your score.
If you set notifications on your phone, these personal finance management apps will tell you if you’re spending over budget, if you’re contributing less to your savings account and whether your habits are hurting your credit.
4. Create and Follow a Weekly and Monthly Budget
Freelancers have inconsistent income. Some months, you may make $3000, other months, you’ll barely make $1,000. For this reason, you have to diligently track your income and expenses by creating a flexible, realistic budget as part of your personal finance management. This ensures you don’t miss your bills.
To calculate your average expenses per month, add what you spend on necessities. Include what you spend on wants. Keep this number in your head to avoid overspending each month.
5. Don’t Forget to Buy Business/Health Insurance
Independent contractors won’t usually have access to employer-sponsored insurance plans, so it’s their responsibility to insure themselves. Freelancers need health, car, life, business, and home insurance if they want to receive the proper coverage and minimize financial risks.
It’s a bad idea to assume you’ll never get sick or a person won’t hurt themselves in your business. Protecting your physical, mental, and financial health should be a personal finance management priority.
6. Pay Off Debts Quickly, Especially on Credit Products
Business owners need credit, but if they miss a utility bill or don’t pay down their credit cards, it could severely affect their credit score, which has a knock-on effect for personal finance management. It’s vital to keep paying down your debt, so you can decrease your interest payments, have more cash flow, and continue to raise your credit score.
Keep in mind that your bank will look at your personal credit to approve any loan you may need. They’ll eventually switch to business credit, but you need a solid personal credit score first.
7. Have Money Saved In Case of an Emergency
Life comes at you fast. At any moment, you could lose a contract, have difficulties finding work, or receive a bill you can’t afford. By building up an emergency fund, you won’t have to worry so much about unexpected expenses. Try to save enough to cover six months’ worth of expenses.
Besides contributing to your emergency fund, make sure you also open a few savings accounts for a rainy day and “fun money.” This gives you a personal finance budget for entertainment and hobbies.
8. Save Up For Retirement (Solo 401(k) or IRA)
Some self-employed individuals may forget to save for retirement. After all, they already take on enough financial risk, so putting money in an untouchable account isn’t ideal. However, when you put money in a solo 401(k) or IRA, you reduce your tax burden and solidify your retirement.
Think about it this way: the more you contribute now as part of your personal finance management, the more interest you’ll incur by the time you actually retire. Even adding $100 a month can set you up for a great retirement.
9. Put at Least 25%-30% Aside for Taxes
Unless you pay quarterly taxes, freelancers must pay their taxes by April 18th. Unfortunately, you’ll have to file as self-employed, which has a 15.3% tax rate. Combined with income tax, you could pay 25%+ in taxes per year, so you’ll need to set aside some of your earnings to pay it.
Every time you receive a paid invoice, take 40% out of your primary checking account. While it seems like personal finance management overkill, this ensures that you’ll have enough wiggle room to pay your taxes.
10. Have Confidence in Yourself and Your Finances
Whether you’re a business owner, freelancer, or employee, nothing is guaranteed. Job loss, fluctuating funds, and market changes affect Americans daily, but you can prevent the fallout by making wise money moves. Building wealth is possible if you’re confident in your finances.
It’s hard to focus on the future when you’re so concerned with making your business work, but staying on top of your personal finance management is a good way to prevent your company from potential failure.
Conclusion
Keeping track of your personal finance management is hard enough as it is when you’re only handling your personal accounts. When you add your business expenses, bookkeeping becomes more complicated. With our tips, you should have an easier time managing all of your financial commitments.
