If you're a freelancer, home business owner, or running a side hustle, managing your finances can be a complex and daunting task.
Self-employed financial planning is more than balancing the books. It's about securing your financial future and making the most of your hard-earned money.
This guide will explore actionable strategies and solutions to help you master financial planning as a self-employed individual.
Setting Your Financial Goals
Financial planning starts with a destination in mind. Ask yourself, what do you want to achieve financially in the short term and long term?
Whether saving for a house, funding your child's education, or retiring comfortably, having clear goals is essential. Setting goals will also help with business expansion, with larger incomes often resulting from larger contracts or increasing your client base.
Differentiate Short-Term and Long-Term Goals
Short-term goals include monthly budgeting, paying off debt, or saving for a vacation. Long-term goals may involve retirement planning and wealth accumulation. Distinguishing between the two helps you allocate resources effectively.
Goal-setting not only gives your financial planning direction but also keeps you motivated. It provides a benchmark for measuring your financial progress and making necessary adjustments.
Budgeting for Your Unique Situation
Budgeting is the foundation of financial planning. It's the roadmap for managing your income and expenses. As a self-employed individual, this is your first defense against financial uncertainty.
There are tools out there, like accounting software, that help you keep track of your income and expenses accurately. You should separate personal and business expenses for a clearer financial picture. Keeping detailed records of your finances will also help when tax time rolls around.
Budgeting tools and apps like QuickBooks, FreshBooks, or Mint can help streamline the process and provide valuable insights into your specific financial situation.
Separate Personal and Business Finances
Mixing personal and business finances can lead to confusion, tax problems, and inefficiency. Therefore, opening a separate business bank account is crucial to maintaining clear financial boundaries.
Take full advantage of business expense deduction and document all business-related expenses, from office supplies to mileage, to maximize your tax benefits.
Tax Planning and Preparation
Tax planning is especially critical for the self-employed. It's essential to estimate your tax liability accurately, ensuring that you set aside enough money for tax payments. Remember, self-employed individuals can often deduct a lot from their taxes.
This includes business expenses, home office deductions, and self-employment taxes. The key to taking advantage of these deductions is keeping meticulous records.
Seek Professional Help for Tax Compliance
Don't hesitate to consult a tax professional. Tax laws and deductions can be complex, and a professional can help you remain tax-compliant and maximize your deductions.
A tax consultant can also give you all the advice you need to reduce your tax while remaining legally compliant.
Emergency Fund and Savings
Financial stability is key for those working for themselves or managing a side hustle. Life can be unpredictable, and having an emergency fund can be a financial lifesaver during challenging times.
Aim to save at least three to six months' worth of living expenses.
The best thing to do is to start small and consistently set aside a portion of your income. You can automate your savings to make it as effortless as possible, and eventually, you will start saving without even thinking.
As your income grows, you can increase your emergency fund contributions.
While it might be tempting to focus solely on the present, saving for retirement is vital for securing your financial future. As a self-employed individual, you won't have the luxury of employer-sponsored retirement plans, so you need to take charge of your retirement savings.
There are many schemes out there that may better suit you and your personal needs, but a good financial advisor will know about the current retirement scheme packages and will also be able to advise on the best portfolios for you to invest in.
Insurance and Risk Management
Self-employed individuals often lack the safety net of employer-provided insurance. It’s, therefore, wise to explore health insurance, disability insurance, and liability insurance to protect yourself and your business from unexpected events that could negatively impact your financial stability.
Let’s take a closer look at the types of insurance you should consider when you work for yourself.
- Health Insurance: This type of insurance allows you to Invest in comprehensive health coverage to safeguard your well-being and financial stability.
- Disability Insurance: This provides income protection if you're unable to work due to illness or injury.
- Liability Insurance: Protects your assets and business from potential lawsuits and liability claims against you from your clients.
In addition to getting the relevant insurance to cover you in a mishap, you should also take the time to identify and mitigate risks associated with your business.
This could include having a backup plan for lost clients, diversifying your income streams, and implementing robust security systems to protect your business from incidents like cyberattacks or even burglaries. This ultimately depends on the type of business you are running.
Carrying excessive debt can hinder your financial success. However, it is also a very normal thing for someone who is newly self-employed.
As a means of managing your debt successfully, you should start by prioritizing high-interest debts, such as credit card balances. You don’t need to pay this off all at once, but chipping away at these larger debts will help you to realize more financial security in the long run.
When to Take on Debt for Business Growth
While minimizing personal debt is crucial, sometimes taking on strategic business debt can be a wise decision. It can help finance business expansion, product development, or marketing efforts.
Before you decide to take on further debt, you must ensure that you have a solid repayment plan and that the creditor understands your financial position clearly.
Never accept a business repayment plan that is beyond your means of repayment. Always ensure that you can make monthly repayments without defaulting.
Regularly Review and Adjust Your Plan
Your financial situation and goals can change over time. It shows that you have a dynamic approach to the way you do business, which is important when you are looking to expand.
To ensure that you stay on top of everything, it’s best to review your financial plan regularly. Annual reviews are usually recommended to ensure that your overall financial plan remains relevant and effective.
To implement a good review system, set specific dates for reviewing your financial plan.
Major life events like marriage, children, or business growth should trigger a review, and having the flexibility to adjust your business goals in line with your personal goals comes from having a solid overview of your current position.
You should also consider making adjustments when tax laws change or when your income fluctuates.
While managing your finances independently is empowering, seeking professional assistance can be invaluable. A financial advisor or accountant can provide expert guidance on tax planning, investment strategies, and retirement planning and facilitate financial reviews.
Implementing Your Financial Plan
The responsibility of financial planning falls squarely on the freelancer, home business owner, or side hustler's shoulders. But the rewards can be substantial.
By following the actionable strategies and solutions outlined in this guide, you can navigate the often complex terrain of financial planning with confidence. Financial planning is an ongoing journey and a commitment to securing your financial future and ensuring you can enjoy the fruits of your labor.
Bradley Mcloughlin owns and runs a medium-sized accounting firm based in London. Over the last 12 years Bradley has been helping businesses get the most out of their finances, and helping to put plans in place to expand and grow businesses of all types.