Managing Money for the Self Employed
If you are self employed, budgeting and money management can be especially challenging. You may have variable income, be at the whims of clients and the marketplace, and feel somewhat financially insecure. Taxes, insurance and retirement savings are also concerns for anyone who doesn't have a traditional employer. Smart money management can ease some of these worries and help you know that you will have enough to pay your bills each month, and hopefully enough to cover future needs as well.
Just like everyone else, you should make a budget. Unlike most people, you may not be able to count on a reliable paycheck. Note down all your bills and expenses, as well as all regular income. This might be a spouse's income or even consistent self employment income. If these amounts will cover your critical expenses, budgeting will be somewhat easier. If you have no regular or set income, the ideal is to use the previous month's income for this month's bills. This way, you consistently know how much you have to spend on a given month and will not be counting on money that might not arrive in a timely manner.
You also, even more than most people, need a substantial emergency fund in case of issues with clients or customers paying, illness or unexpected costs. Be conscientious of billing policies to reduce problems with payments. Depending upon the nature of your work, it may make more sense to keep business money separate from personal money and pay yourself a salary. This is less true if the skills you use in your business are service oriented as opposed to goods oriented.
Most self employed people will need to pay self employment taxes on a quarterly basis. While an accountant can certainly help you with this, it is less difficult than you might expect. A money management program for small business may be a useful tool. Be certain to pay your estimated taxes when due to avoid both penalties and an unpleasant surprise in April. Your self employment tax is not income tax, but rather social security and Medicare taxes. Do remember to take all relevant deductions for business costs to reduce the total self employment taxes owed.
Another benefit forfeited by the self employed is the 401K. Be sure to establish and contribute to IRAs for your retirement, or invest your savings appropriately. While you will not have matching funds from an employer, an IRA will allow you to defer the taxes on your contributions until retirement. A good financial counselor can be a helpful ally in your team when making plans for your financial future.
The one thing you should never forfeit, even when working for yourself is health insurance. While individual or family plans for health insurance can be expensive, do keep at least catastrophic care coverage on your and your family. If you can purchase health insurance through a spouse's employer, this is ideal; however, you may also find that some professional organizations will allow you to buy a group policy. You should also look into liability coverage if relevant for your business and disability insurance in case you are unable to work. These additional forms of insurance can provide you with valuable financial safety should the unlikely happen.