Are You Your Own Boss? Here Are 5 Money Tips to Remember

What we’ll cover:

• Track your cash flow
• Set up a self-employment budget
• Hire a professional tax preparer
• Continue to save for retirement
• Maintain an emergency cash reserve

Being your own boss usually means you tend to have more flexibility in terms of where, when and how you work.

But working for yourself can have its own set of challenges as well. When you work for a company, a lot of details are usually taken care of for you, like schedules, payroll, business expenses, insurance and retirement savings.

However, being your own boss typically means that you’ll have to pick up these responsibilities yourself. In other words, you may have a lot more “stuff” to keep track of besides just getting the client work done.

But striking out on your own to do what you love doesn’t necessarily have to create headaches – especially on the money management front. As with other areas in life, staying organized and planning ahead are keys to success.

Whether you’re new to the self-employment world or a veteran, we want to share a few tips that could help you manage your money effectively and keep you moving towards your financial goals, like a boss.

To help get a handle on your self-employment income, it’s important to track your cash flow. Knowing how much is coming in each month can not only help you maintain your business budget (more on this later), but it also allows you to see how your income fluctuates throughout the year.

For instance, are some months busier than others? This could help you plan for the year ahead

One way to get a clear picture of your self-employment cash flow is to have a separate bank account(s) for your business work. That way, your business income and expenses aren’t mixed in with your personal expenses.

Having a bank account dedicated to your freelance work may also be helpful when tax season rolls around and you need to report details like your income and business expenses.

2. Set up a self-employment budget 

Knowing what kind of expenses you may have to account for while you’re self-employed can help you put together a budget that provides a comprehensive look at your total monthly income and expenses. And having a self-employment budget can help you better understand the cost of doing business and determine how much to charge your clients to cover that cost.

As we mentioned, when you work for a company, the human resources department typically takes care of your benefits and payroll. You generally don’t have to worry about setting up your own retirement and health care insurance plans, and the money to cover those expenses is usually automatically deducted from your paychecks. Your employer also typically withholds income taxes from your pay and sends the tax payments to the IRS for you.

When you work for yourself, however, you have to manage these expenses in your self–employment budget. For example, how much would it cost to buy your own health care insurance? How much do you want to contribute to your retirement plan? These are the costs you’re likely going to have to consider and allocate for each month.

Also, when you receive payments for your client work, you’ll want to get into the habit of setting aside a portion of your pay for quarterly estimated tax payments because remember, you no longer have an employer withholding and paying taxes for you.

Paying estimated taxes takes a little more work, but don’t worry, we’ve unpacked some of the basics for you here.

Bottom line: Having a self-employment budget can give you a better sense of how much income you’d need to bring in each month to cover your bills – plus how much you could set aside for any financial goals you may have.

3. Consider getting a professional to help with your taxes

Taxes can be a complicated matter when you’re your own boss. There are a lot of self-employment tax rules to be aware of regarding what you can and cannot do. (Not to mention all the forms!)

Given that self-employment can come with some new tax considerations, it may be worthwhile to hire a tax professional to help you with your taxes, especially if you’ve just started working for yourself. There are a lot of details to navigate – like estimated tax payments and which self-employment deductions you’re eligible to claim.

4. Continue to save for retirement

If you participated in your company’s workplace retirement plan (e.g., 401(k)), it was probably a pretty straightforward process. Typically, during each pay period your employer would deduct a certain amount, specified by you, from your paycheck and put it into your 401(k) account.

Even though you may not be able to contribute to your workplace 401(k) once you leave the company, you can still save for retirement by opening up your own retirement account(s).

An IRA is a common example of a personal retirement account that you could sock away money in for your golden years.

Other retirement plan options for self-employed people that you may also want to consider include:

• Simplified Employee Pension or SEP Plan 
• SIMPLE IRA Plan
• Solo 401(k)

5. Plan for ups and downs by building an emergency cash reserve

People who have been in the self-employment business for a while know that the availability of work can fluctuate. On top of this, even if you do have enough business for a set period, you may still have to contend with late payments or non-payments from your client(s).

In short, your flow of income can be quite unpredictable. That’s why in addition to tracking your income, it’s important to plan for these ups and downs by building an emergency cash reserve.

Having emergency cash on hand can help you cover essential expenses if you find yourself in a slower work period.

Even though the general rule of thumb suggests saving enough to cover three to six months of your essential expenses, you may want to consider stashing away a little more given the unpredictable nature of self-employment work. Having a bigger reserve may also help you feel more financially secure.

For those who have been self-employed for a while, consider reviewing your flow of income and expenses from previous years. This historical perspective could help you settle on a savings target for your emergency fund.