How To Manage Your Finances When Self-Employed

Being self-employed is a dream for many. Those that have made this dream a reality enjoy flexible schedules, uncapped income potential, and space to pursue multiple passions. Self-employed individuals also experience the challenges that come along with the lifestyle.    

One of the most apparent challenges in self-employment is managing your finances. You can’t depend on a steady paycheck, automatic tax deductions, or automated retirement contributions. That is, you can’t rely on your self-employed finances unless you set them up, manage, and maintain them.

Although managing your finances when you’re self-employed requires a higher level of intention and attention, it can be done as long as you’re responsible and careful. As a self-employed worker, you not only have to worry about how your financial management might affect your personal life but also your business as well. If you’re self-employed or thinking of becoming self-employed, you must ensure you’re managing your money effectively to consistently grow your business.

Ineffective money management could mean hefty tax penalties, income loss, slow growth, or a complete shutdown because you wind up running out of money. Successfully managing your finances when self-employed can be done by implementing the following tips:

Keep business and personal finances separate

It may seem easier to keep all of your money in one account, but this can be highly unproductive when managing your finances. Keeping all of your money in one account makes it difficult to account for expenses, income sources, and keep track of what money goes where.   

When you’re self-employed, you’re responsible for ensuring your personal and business finances are in order. Keeping personal and business finances separate ensures you’re effectively organizing what comes with this dual responsibility.

Open a personal checking and savings account and a business checking and savings account. Keep your business income separate from your salary. Pay your own bills from your personal account and your business expenses from your business account. Set aside savings in each respective savings account to ensure your saving up for the future of your business and personal goals.

Create a savings method

Creating a savings method so you can utilize your savings account, both for your personal and business use, is equally important as well. It’s tempting to use all of your business income as you please, especially when profit starts mounting, but many self-employed individuals make the mistake of not having a specific method for saving. You should be saving for personal and business reasons — and doing it consistently.

As much as you love being self-employed, you likely want to retire someday still. Adequately plan for retirement by first choosing the right plan for your future lifestyle. Understand your retirement plan’s details, like what it takes to set it up, any withdrawal penalties that may be involved with a 401(k), and the options if you need to add additional accounts.

In addition to setting up a retirement savings account, you should also be setting up a general savings account with enough money to cover 3-6 months of basic business expenses. If you’re saving for specific things, you can open a separate saving account for these goals to keep track of progress. A good way to achieve any of these goals is to establish a particular method for saving. This could be setting aside a specific percentage each time you get paid, saving a certain amount per month, or achieving a weekly goal.   

Organize invoices and other financial documentation

Unfortunately, you cannot achieve these goals unless you prioritize organization. When you’re self-employed, documents pile up. One good practice to start is to keep and personally file everything, especially financial documentation. When starting a new business endeavor, you want to ensure that you keep everything and do it in an organized fashion.  

Many self-employed individuals rely on resources like business credit cards, business lines of credit, term loans, venture capital, and cash flow loans in order to finance their businesses. All of these are accompanied by loads of essential paperwork you’ll need to keep track of. This paperwork needs to be managed and thoroughly understood.  

Use excel spreadsheets, financial apps, or an extensive hand-written method to organize invoices, loan documents, grant and donation information, and other financial documentation. If you’re physically filing copies of these docs, follow this method with a digital storage option for dual security. 

Understand taxes and set aside money for it 

One of the most significant differences in managing your finances as an employee versus being self-employed is that the employer automatically withholds taxes in every paycheck. You don’t have this luxury when you’re self-employed, so you must be diligent about withholding them on your own.

You also want to ensure you understand taxes as they pertain to self-employment. Become familiar with tax breaks, how to file taxes when you’re self-employed, what counts as a deduction or write-off, why it’s crucial to set aside money for taxes, and so forth. A lack of tax knowledge while you’re self-employed can result in thousands of dollars of back taxes and late fees.

Find out what’s involved with handling your taxes when self-employed. At the least, you want to know the percentage you should be taking out of what you make and setting it aside in a savings account to ensure it’s there if you need it comes to tax time.

Explore investment opportunities

By following any of these tips and managing your finances while you’re self-employed, you’ll start to see growth in your company. This growth presents an opportunity for you to explore investment opportunities that can multiply your business income.

Investment opportunities should pertain to your personal and professional growth. When you begin to make a consistent profit, you should be reinvesting that profit into your business to ensure you scale that growth. You can invest in expanding locations, implementing new equipment, bringing on new team members, taking your business online, and so forth. 

When you’ve learned how to stay consistent with the salary you pay yourself and manage to grow it, invest in personal growth. For example, maybe it’s time to buy a bigger home for your family or add some value to your current home with new fences, bathroom fixtures, or modern upgrades. You could also invest in additional business education, mentorships, or networking opportunities. 

Prepare your mind

The most overlooked part of managing your finances when self-employed is preparing your mindset for the financial shift. Self-employment income can be inconsistent, unreliable, and a completely dry well at times. If you’re coming from a steady paycheck every two weeks, it can be pretty overwhelming transitioning to a turbulent pay schedule. 

Educate yourself on the financial implications of being self-employed. There are times when you won’t make any money at all, and there are times when you’ll make more money than you know what to do with. In both situations, you need to know how to maintain and sustain the money you do earn.

Network with other self-employed individuals. Chat about how they’ve overcome any financial struggles, how they maintained any increase in profits, and how they continue to shift their mindsets from employee to business owner. Read literature on managing your finances and investing income properly. By exploring more and networking, you can also gain connections you may utilize later for your business. With this mental shift, your finances won’t seem so scary anymore. If anything, you may even start to think of your finances in a positive light.

There are plenty of benefits to being self-employed. You get to be your own boss, create your own schedule, and focus on your passions. Don’t let the fear around finances stop you from enjoying these benefits. Although your finances can seem headache-inducing at first, they can be easily managed if you have a little bit of foresight.