Job security is not what it used to be. Downsizing is commonplace and fewer and fewer companies are offering pension plans, medical insurance, and other employee benefits. Moreover, according to recent industry projections, people entering the job market today are likely to have several different careers with as many as ten different companies over their lifetime. Company loyalty seems to be a thing of the past.
Given this, more and more workers are striking out on their own. They are leaving their corporate jobs and forgoing their steady paychecks – either by choice or as a result of downsizing.
In fact, over the past several years the numbers of self-employed workers has continue to increase at an average rate of 8% per year. There are now over 12.2 million self-employed workers, according to a recent US Bureau of Labor Statistics report.
According to the same report, the self-employment rate among minority groups has grown even more – 33% for women, 37% among African Americans, and 15% among Hispanics.
And while owning your own business can be lucrative, exciting and less demanding in some respects, it also presents some unique financial challenges. Whether you are currently self-employed or considering it, make sure you understand how to manage your finances in basic areas.
1. Managing Cash Flow
Regardless of the type of company you own – whether you’re a dance instructor, pastry chef, retailer, or service professional – you’ll probably face periods of uneven cash flow due to the normal peaks and valleys inherent in all businesses. Therefore, you should develop a budget and a financial plan that allows for swings in your income.
The best way to go about this is to determine how much revenue, on average, you can reasonably count on each month. Use this amount as a baseline for your monthly expenses.
During the times you earn more, deposit that extra cash in an interest bearing savings or money market account. Then use that money as necessary during the lean times. Better yet, get in the habit of paying yourself a set salary – and be sure to keep your business and personal expenses separate.
2. Managing Credit Cards
Watch out for credit card debt! Many entrepreneurs find the credit cards are lifesavers when purchasing necessities – particularly while their businesses are just getting started. However, managing your credit card payments is an integral part of your cash flow management so it’s important to use them wisely. That’s why it’s a good idea to carry interest-free, or low-interest, cards. Additionally, you should pay the balance in full each month if possible (or at least pay more than the minimum due) and remit your payments on time.
3. Managing Taxes
Most employees are used to having their state, local and federal and Social Security taxes taken out of their paychecks. Once self-employed, however, you will be responsible for paying your own. As a result, you should put aside a portion of the revenues you receive in order to file your quarterly and / or annual returns. If not, you may find that you lack the funds necessary to pay your taxes… a position you not want to risk.
But there is some good news. Self-employed workers are eligible for tax deductions associated with retirement plans, traveling and car expenses, office supplies, and more. And make sure to keep all of your receipts in case the IRS asks for backup.
4. Managing Insurance
Once you’re self-employed, you’ll also have to buy your own medical, life, and disability insurances. If not, you’ll risk jeopardizing yours and your family’s financial security.
Unfortunately, however, many small business owners – daunted by onerous costs – choose not to purchase insurance. According to a recent study conducted by the Kaiser Family Foundation, twenty percent of self-employed workers are not covered by health insurance.
If you can’t get health insurance through a working spouse, consider the new medical health savings account (HSA). An HSA allows you to purchase your own insurance and receive a tax deduction, which will help you offset some of the costs.