9 Tips To Take the Stress Out of Finances When Self-Employed
Being self-employed is awesome. You get to set your own hours, take days off whenever you want and choose what you want to work on.
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But it can also be extremely stressful.
When you lose a high-paying client, run out of work or end up with a big tax bill, it can make you want to completely give up.
There are a few things you can do to put yourself in a great financial position to continue enjoying self-employment and avoid going back to a “real job.” Here are nine tips to help take the stress out of your finances when you’re self-employed.
Review Your Current Spending
If you’re freelancing or building a business, you need to know where you stand financially. That means taking an inventory of your current spending to figure out how much you actually need to make to pay the bills.
The best way to do this is to go through your spending for the past 90 days and figure out where every dollar went. This means categorizing all of your transactions to get a picture of your spending habits.
A shortcut to this is signing up for Mint.com and connecting your bank accounts and credit cards. It will automatically pull in your past spending and categorize it for you. Then check out the “Trends” section to see where you spend the most.
This exercise can give you a starting point for what you need, and help you quickly find wasteful spending that you can eliminate from your budget.
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Cut Expenses to the Bare Minimum (for Now)
If you were laid off or simply quit your job to work for yourself, you might be feeling the financial pinch of a lower income. If you haven’t built up a substantial business income just yet, you need to switch to “bare minimum” mode and focus your spending only toward essential items.
While everyone has their own version of “essential,” there are four main categories that are typically non-negotiable:
Food
Shelter
Utilities
Transportation
Outside of these categories, you might want to pause your spending until you have a solid income and a savings buffer in place.
Build a Two-Month Buffer (Minimum)
While some financial gurus say to save $1,000 as your emergency fund, when you work for yourself, you need a much larger pile of cash. Saving up two months’ expenses ensures that you can weather the ups and downs of entrepreneurial cash flow cycles without freaking out.
And while this pile of cash should be there before you quit your day job, if you were forced into freelance or self-employment, do everything in your power to build this buffer before paying off debt, investing or building your business further. This buffer will stop you from going into debt if you have a down month, and help lower your financial stress.
Use Good Accounting Software
As a self-employed individual, it’s now up to you to track all of your business finances. And while putting together a well-designed spreadsheet is one way to do it, there are much easier ways to handle your business accounting.
Software like Quickbooks can help you track your business income, expenses and tax obligations, keeping you on track and helping you plan ahead. And most good software can integrate with tax software as well, helping you stay current with the IRS.
Whatever software you choose, make sure it is compatible with your bank and credit cards, as transactions can be tracked automatically, making it much easier than manually inputting every business transaction.
Pay Yourself First
Paying yourself first is a great general personal finance rule, but even more important when you are running a business. There are so many ways to spend your business revenue on growth, but you need to make sure you have a steady income before investing in your business.
Ideally, you will use your business revenue to cover your expenses first, then taxes, then build an emergency fund. Then you can use any extras to invest in business growth or toward your personal financial goals.
Pay Your Taxes
As a self-employed business owner, you are 100% responsible for paying your taxes. You also have to pay more than at a traditional job, because employers typically pay for half of your Social Security and Medicare taxes — but now you own the entire amount!
If you’ve never paid the IRS directly before, it’s recommended to sit down with a licensed tax professional to help you get everything set up. The last thing you want is to get behind with the IRS.
If you are simply filing as a self-employed individual, you can pay estimated taxes on a quarterly basis, and when you file your return. If you become incorporated, you may need to file monthly or quarterly payroll taxes in addition to your quarterly federal estimated taxes.
Getting a solid system in place for taxes is a lifesaver!
Avoid Credit Cards
If you just jumped into full-time self-employment, you might be feeling a financial crunch. But tempting as it might be, you should avoid using credit cards to bridge the gap if possible. Credit cards have notoriously high interest rates, and compounded over time, it can turn into a debt cycle that is very hard to get out of.
Instead, focus on paring down your personal expenses and increasing your outreach to secure more client work, and avoid debt if at all possible. Once you start bringing in more steady income, you can re-introduce more spending to your budget, but stay lean when you are first getting started.
Apply For New Jobs Like It’s Your…Job
When you’re working for yourself, you are in charge of bringing in paying work. If you are a freelancer, it’s important to keep a steady flow of job leads coming in each month to help increase your cash flow and replace any current contracts that might run out of work for you.
Using sites like Fiverr and Upwork can help you find paying gigs very quickly. And networking on LinkedIn can help you connect with others in your niche to share leads as well. While business might be good right now, keep applying for new work to help secure your future and avoid drops in income.
Increase Your Rates
When you first start your own business, you might undercut your rates to secure a few paying clients. But as your portfolio of work grows and you increase in skill, it’s important to increase your rates along the way. This will help you increase your income for the same amount of work, and working with higher-paying clients tends to be easier (not always).
A good rule of thumb is to increase your rates slightly with each new client after you have established a solid portfolio of high-quality work. And as you onboard higher-paying clients, renegotiate with existing clients, or even drop the lowest-paying ones to focus on the highest-paying ones.
Bottom Line
Being self-employed can be an emotional rollercoaster. You might be feeling great when you land a big contract or take days off in the middle of the week, but then feel desperate when a big contract suddenly ends, or you don’t know where your next paycheck is coming from. But if you build in a good-sized savings, budget based on just your needs, and increase your rates, you can keep your financial stress low while growing the business at the same time.
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This article originally appeared on GOBankingRates.com: 9 Tips To Take the Stress Out of Finances When Self-Employed
