Eight Money Management Tips for the Newly Self-Employed

By Staff Reporter - 26 April 2018

Expert Voices

If you’re newly self-employed, you may be struggling to find ways to manage your income and balance the books. Financial planning can be a little tricky when you work for yourself, but failure to come up with a plan and budget responsibly could mean your business runs out of money, or else you end up owing thousands in taxes that you can’t afford. Being in charge of your own income means it’s more crucial than ever to stick to a budget, pay your taxes, and start saving for emergencies and retirement. From working out your living expenses to paying yourself a salary, here are eight money management tips for the newly self-employed.  Create a Personal Budget It can be harder to budget when you don’t make the same amount of money on a regular basis, but having a solid financial plan is more important than ever when you’re self-employed. You may not be able to legislate for how well your business performs each month, especially in the early days, but you can work out how much you need to live on and work around that. To create a personal budget, figure out how much money you spend each month on utilities, bills, housing, credit cards and other expenses, then transfer this to your personalaccount each month.  Separate Business and Personal Finances When you’re self-employed, it’s tempting to think of yourself as “the business” and therefore keep your personal and professional finances inthe same account. However, this could lead you to spend money on personal expenses that you need for your business and vice versa. Always set aside cash for personal emergencies, but keep this money separate from your business funds; the easiest way to do this is by opening a business bank account. Pay the Taxman The self-employed don’t have the luxury of having their taxes worked out for them by an employer –instead,they have to set aside taxes on their own. Thiscan be daunting for some, leading them to put off thinking about taxes until the end of the financial year, but this is one of the biggest mistakes a self-employed individual can make. To make sure you have enough set-aside, stash away 30-40% of everything your business earns so you’ll always have more than you need. Taxes for the self-employed aren’t usually this high, so you’ll have a little leftover for a bonus at the end of the year. Don’t Exceed Your “Salary” It’s hard to get past the idea that self-employed earnings are yours for the taking, but if you have this attitude,then your business will never grow. Work out how much you need to live on comfortably each month, then pay yourself that amount as a set salary. However tempting it may be, don’t fall into the trap of giving yourself more to spend when you've had a good month. Instead, leave the surplus in your business account to compensate for months that aren’t quite so fruitful. It may be difficult to limit your salary in the beginning, especially if you’re only earning enough to get by on. However, even leaving a small percentage of your earnings in a business account will get you into the habit of feeding cash back into your company. Have a Plan for Emergencies As any seasoned entrepreneur will tell you, having a plan for financial emergencies is essential when you’re self-employed. Ideally, the money in an emergency fund should be enough to tide you and your family over for 3-6 months, just in case the work runs dry, or a health problem means you have to stop earning. You should think of this money as a safety net, only to be usedas a last resort. Having money in a savings account could also save your business from going under in the event of a lawsuit or period of no sales, so it’s a necessity. In the beginning, you may find it difficult to find money for emergencies, but you should still make a start. If you find yourself needing to finance something and you don’t have the resources, you can always get a loan from the bank or find a payday loans broker online. Just make sure you read the terms and conditions carefully, and that you only borrow money you can afford to pay back. Prioritise Debts Once you have three to six good months up your sleeve, it’s tempting to start focusing on other financial goals, like growing your business or outsourcing your services. Before you do this, you need to pay off any substantial debts and get your business (and yourself) on a more even keel. After that, you can start thinking about the best ways to use your extra cash flow. If you’re consistently making more money than you need, you should also think about increasing the percentage you pay into your savings and retirement fund. Think Percentages, Not Pounds Rather than paying a set amount into your savings account each month, allot a monthly percentage to retirement and emergency savings funds. That way, you’ll avoid saving too much money during low-income months and too little during high-income months, helping you to meet your financial goals faster and more responsibly. Pay Into Your Pension When you’re self-employed, saving for retirement can be a more difficult habit to develop than when you’ve got someone organising your pension scheme for you; but no matter your age, if you’re not doing this yet,then you need to make a start. It may seem like a daunting task, but there is plenty of advice out there for business owners saving for retirement, and you can always talk to a professional if you don't know where to start. If you’re self-employed, you’ll be entitled to a basic state pension like everyone else, but this is unlikely to provide you with an income you can live off. Therefore, it’s crucial that you have a plan and some savings set aside so you can continue to enjoy a comfortable way of life.

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