Taking the plunge into the world of self-employment is exciting. You’re finally gaining the independence you’ve been seeking, putting your expertise and skills to use exactly how you see best fit. But with this professional independence comes financial independence – a much less exciting endeavor when you’ve become accustomed to a steady salary and benefits under a corporate gig.
But financial independence doesn’t have to be daunting. Here are six tips to help you get off on the right fiscal footing.
1. Determine Your Salary
Many newly self-employed individuals fail to take the time to determine exactly how and when they’ll get paid. Sure, they’re receiving money for the services and products they’re providing to their customers. But not all of those monies will go directly into their personal banking accounts. Some will need to be reserved for bills and reinvestment in their business to help it grow.
When determining your paycheck amount, don’t be afraid to think outside the box. In the beginning months, you may not be able to afford to pay yourself your previous hourly rate. Instead, you may want to pay yourself a set percentage of your business’s monthly income. This is an especially smart idea if your venture will have seasonal influxes in income.
2. Create Two Budgets
Getting both your personal and professional monetary needs down on paper will help you set realistic financial expectations and plan ahead to avoid unnecessary mishaps.
If you have a seasonal business or are still getting your clientele established, your monthly budget will vary in terms of income and savings. One way to stay on track with your bills and still building up savings is to designate a specific percentage of your monthly income toward certain savings accounts that you have set up. For example, you could have separate funds for emergencies, retirement, and taxes.
The second budget, made up of your personal expenses, is much easier to create since most of your regular costs will remain fairly steady. This will give you a good snapshot of the personal income you’ll need to pull in on a monthly basis to meet your needs. If you find that you won’t consistently bring in this amount from your self-employment income alone, you may need to pick up a part-time job to make up the difference until your business is more established.
3. Plan Ahead for Taxes
Some of the biggest financial mistakes made by the newly self-employed are tax-related matters. The tax code can be complicated when it comes to self-employment tax and business write-offs, so the safest move is to meet with a tax professional. These advisers can educate you about quarterly estimated tax payments and help you approximate the total amount of taxes you’ll owe on an annual basis.
Once you have an annual tax estimate, you can break the amount down into a monthly figure so you can build it into your monthly budget. This step will help ensure you have the funds readily available when it comes time to pay your taxes.
4. Keep Business and Pleasure Separate
Many professionals make the mistake of using their personal credit cards to cover their business expenses. They do this with cash back and rewards points in mind, wanting to make the most out of their personal credit card perks (I honestly can’t blame you!). However, it’s best to keep business separate from pleasure where finances are concerned.
First, this will make accounting much easier —especially when it comes to itemizing your business deductions for tax purposes. Second, if something should happen to your business, you don’t want to ruin your personal credit history in the process.
And, just because you aren’t using your personal credit cards doesn’t mean that you have to lose out on rewards. There are actually some great credit cards available these days for small businesses that provide cash back and rewards perks. If you don’t already have a specific card in mind, take a moment to see a list of common business credit cards and research your choices.
5. Seek Free Help
Just because you don’t have room in your budget for expensive consultants or even part-time help doesn’t mean you have to go at your new venture alone. Be sure to take advantage of the free resources that are available for small business owners. Through mentor programs offered by organizations like SCORE, you’ll be able to pick the brain of a seasoned professional in your industry for free.
Also be sure to take some time to build a list of trustworthy websites you can turn to for supplemental information to help round out your knowledge. For example, CreditDonkey.com has an entire section devoted to providing financial tips to entrepreneurs and small business owners.
6. Protect Your Property and Assets
In your previous life as a salaried professional, you likely received a whole wealth of benefits like life and health insurance. It can be tempting to forgo this type of coverage when you step out on your own, but making the small monthly investment in insurance premiums can really save you big in the long run. At the very least, take some time to set up a consultation with an insurance professional to review the costs of the various policies that are available. Coverages that you will likely want to explore are: medical, eye, dental, life, and income protection insurance. If you plan on working out of your home, check whether your homeowners or renters insurance covers your business property and in the event of a break-in or other property loss.
Daniela Baker blogs at CreditDonkey — where entrepreneurs can compare small business credit offers to make an informed decision. When you visit CreditDonkey, you can read financial tips tailored for small business owners on their blog.Subscribe to the Podcast