There are numerous benefits to being self-employed. Even science has proven that switching to self-employment is good for the health, and why shouldn’t it be? You have the freedom to make your own decisions and choices. You are in control of how much money you ultimately make. You can set your own hours and never have to ask for days off to spend time with your family or friends on a holiday. You’re basically in control of your own life and your destiny.
However, while you enjoy being your own boss and reap the lifestyle rewards and personal satisfaction of self-employment, you also need to learn how to mind your business — literally. Without the security of a monthly salary or a regular wage, self-employment calls for careful money management.
Here are some effective financial tips for individuals that are self-employed.
Manage your cash flow
While your overall annual income may be strong, your cash flow isn’t always regular. For some self-employed workers, the period between paychecks can be weeks or even months.
Rather than treating all the cash you earn as money for personal expenditures, give yourself a weekly or a monthly wage. You should also have separate bank accounts for savings and for personal spending. If you own a business, transfer or deposit your business revenue into a high-interest savings account and only withdraw from this account to pay actual business expenses.
Additionally, don’t forget to plan for the holidays. As a self-employed individual, you won’t enjoy the benefit of paid holidays. Saving a little extra money on a regular basis will help you enjoy that well-deserved break minus the guilt.
If you want to work out where your money is going, ASIC’s Money Smart has a quick and easy tool for budget planning.
Set aside money for tax
Self-employed workers, including small business owners and freelancers, don’t have taxes withheld from their monthly salary. This means you’re in charge of figuring out how much you owe the Australian Taxation Office (ATO).
The amount and schedule of taxes may come as a surprise if it’s your first year of being self-employed; but don’t make a rookie mistake by not setting aside tax money. If you don’t meet your tax obligations, you could pay hefty penalties to the ATO. To estimate how much tax you’ll have to pay, use the ATO’s PAYG instalment calculator.
Don’t forget about retirement
If you plan on being self-employed for the long run, don’t ignore your retirement goals. Although your priorities may sometimes shift, experts in providing investment advice services, be it Perth or Melbourne, will tell you that you should never completely abandon your retirement funding.
While you want to make your small business or freelance work sustainable, you certainly want to retire eventually. Balance your priorities, invest in retirement plans and make informed decisions for your future so you can live your life to the fullest.
Being a self-employed individual can be a scary and exhilarating experience but it’s also a very fulfilling one. It provides you with the opportunity to work on your goals while making your own path. To set yourself up for financial success, follow the financial tips above. It may take a while for your finances to be in tiptop shape but the more you plan, the easier it will become.