Have you ever had a lemonade stand when you were little? Maybe you babysit for extra money? Or shoveled the snowy sidewalks of the neighbor? My future 13 year old daughter is quite an entrepreneur. Lately he has been doing some gardening work in the neighborhood. It’s fun to use those experiences to teach him how to eventually own his own business one day.
There are some advantages to being self-employed: you can choose your own hours, you don’t have to count â€œvacation daysâ€, and you never have to worry about downsizing. On the other hand, you are really on your own – there is no employer sponsored pension plan or benefits. So if you’ve recently started a business or become a â€œperforming worker,â€ perhaps due to the COVID-19 pandemic, what can you do to get down the road to financial security?
There are several steps you can take, including the following:
â€¢ Set a budget. When you are self-employed, and especially when you are just starting out, you need to keep strict control over where your money is going. So set a budget and stick to it.
â€¢ Open a pension plan. As a self-employed person, you can choose a retirement plan, such as a SEP-IRA, a SINGLE-IRA, or a 401 (k) “owner only”. When your income is limited, you can contribute small amounts to one of these plans, but when your income increases, you can increase your contributions. While these pension plans have some things in common, including growth in tax-deferred income, they differ in other areas, such as contribution limits, and one plan may be better for you than another, depending on whether you. have or not have employees. You may want to consult a financial advisor to determine which plan is best for your needs.
â€¢ Build an emergency fund. When you work for a business or other organization, your income is predictable, but that is usually not the case when you are self-employed. And when your income is uneven, you can be vulnerable to financial stress when you face an unforeseen expense. To help protect yourself from these threats, try gradually building up an emergency fund that contains a few months of living expenses, with the money being kept in a low-risk liquid account.
â€¢ Pay off your debts. Some debt, like loans to help your business, can be inevitable and even productive. But other debts, especially those that can’t be deducted from your taxes and carry a high interest rate, are much less useful, so you might want to set up a repayment plan. Along with your other expenses, you may not be able to reduce those debts as quickly as you would like, but over time your efforts may pay off.
â€¢ Set aside money for taxes. Since no employer takes taxes from your paychecks, you will likely need to make estimated quarterly payments. Plus, you are responsible for all of your Social Security taxes, which, if you worked for someone else, would be shared between you and your employer. To make sure that you have enough money to pay your taxes, you can create a special account, one that will not be used for any other purpose.
â€¢ Obtain appropriate insurance. Depending on the nature of your job, you may or may not need some type of business insurance, but if you have a family, you should definitely consider the need for life insurance, and you may also want to consider disability insurance.
Self-employment can be very rewarding – and you’ll find it even more rewarding when you make the right financial choices.
PJ Musilli is financial advisor for Edward Jones, 5575 Tech Center Drive, Suite 216. Contact PJ at 896-4387 or [email protected].