Many people dream of ditching their employer and becoming their own boss. Sadly, once they are actually self-employed, they realize that it’s a lot tougher than it seems. Most of the challenges they face are financially related.
Here are some of the financial issues self-employed people must deal with:
- Not knowing whether your business model is viable over the long-term
- Having to pay higher taxes, since you’re responsible for both the employer and employee share of FICA
- Dealing with living on an irregular income
Being talented isn’t enough to make it when you’re self-employed. You must also be good at managing your money and living frugally. Here are some important tips self-employed people should follow to live within their means and build equity.
Invest In The Future
Don’t be timid about spending money on things that will save you over the long-term. Many people will be very lavish about spending money on useless things, but then suddenly become penny pinchers when they have a chance to invest in something that will save them money over the long term.
You don’t want to make this mistake. If you plan on owning your commercial building for the rest of your life, you can save $50 a month by purchasing a 3kW solar panel system. Or, invest in a point of sale system that will bring in sales revenue quickly. These are long term investments that pay off in the future.
Lower Your Premiums
Be responsible to cut car insurance premiums. Car insurance premiums are almost entirely determined by personal choices. If you make poor decisions, you can be stuck paying out the nose. You may not mind over paying $50 a month or so when you are earning good money from your business. However, when you have a couple of bad months, you are going to be wishing that you had that money back.
One of my self-employed friends in California relate a story to me. He didn’t switch his driver’s license over from Minnesota for three years after moving, even though he knew he was supposed to. He was eventually stopped for a headlight violation and cited for driving without a license, since his Michigan license wasn’t valid in California as a citizen.
This caused his insurance premiums to rise from $73 a month to $110. It was hard enough while he was making $5000 a month. It was a lot harder a couple of months later when he lost a couple of key clients and was trying to make do on that.
No matter how good things are going right now for your business, you can’t afford to be a bad driver. You also can’t afford to choose the wrong insurance policy. Drive smart and compare car insurance policies.
Limit Business Expenses
Treat business expenses as seriously as personal financial expenditures. One of my friends is a self-employed veterinary nurse. She recently made a very interesting observation about her personal finances.
She said that she is usually very careful about what she spends her money on for personal things. However, she realized she has been far too leisurely about spending money on business expenses that she doesn’t need. She invested several hundred dollars on a couple of software applications that she never even used.
It’s important to treat business expenditures as seriously as your own money. Monitor how they impact your ROI and cut spending on anything that doesn’t contribute to it.
Cut Down On Small Costs
Limit trips from your home to save on gas and other expenses. Many self-employed professionals choose to work at their local Starbucks or have an office downtown. While it can feel nice to get out of your house, you should consider working at home as much as possible to save money. You’re going to be paying more on gas, car insurance and Frappuccinos if you are always working away from the house when you don’t need to.
Hire A Good Accountant
It’s easy to try saving money by doing all of your own taxes. Unfortunately, few people understand the nuances of the tax code. You should hire someone that does to help you save every possible penny. One of my friends saved $2000 in taxes by paying $138 to a professional for tax service fees.
Average Your Budget Out Over the Long-term
It’s easy to get overly confident when you have a couple of good months at your business. This is a problem many business owners have faced, who are now deeply in debt. Keep in mind that things can always turn south. You want to look at your revenue over the course of a year and budget accordingly.
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