Managing even our personal finances is actually different when we’re self-employed vs. living as a traditional employee. This is a critical realization and can often make the difference in whether, if we’re starting or operating with modest capital, we actually remain self-employed. When I first went out on my own, I made a handful of changes that have helped sustain me ever since:
Put two “pay days” per month on your calendar, with recurring reminders. This is important for several reasons.
- If you’re structuring your business soundly, it should actually pay you routinely, because you’re keeping your personal and business finances entirely separate). Having separate accounts, separate accounting, and a specific documented act of transferring payment from the company to you personally, even if you’re the sole proprietor, can not only keep you out of tax hot water, it can reduce personal liability for the company. I use Google Calendar and have reminders set for two specific days of the month selected because, between the two, all my various recurring bill due dates are covered.
- When you were an employee, paydays were when you got money to pay bills. This is something it’s even more important to recognize and stick to when you’re self employed. It’s easy to just sort of check your accounts when the bills are due, and pay as you go, but effectively operating a business is partly about financial planning. The first and most important reality is time. Debts or bills always have a due date associated with them.
- This lets you monitor how much money you’ll need by each pay date in order to pay your various expenses (both business and personal), and then up your rate of work and/or growth strategy and marketing activities accordingly. It’s easy to treat “off” time the way we did when we were employees – as time to play video games. Likewise, you worked on a model of putting in time (e.g. 9-5). But when you’re self-employed, a good chunk of time spent growing and maintaining the business (marketing and account) and, if the work needs doing faster or there’s more of it, you’re not simply off the clock – the company’s needs are now your needs. You are the primary investor, and if the company doesn’t bring in enough money, often enough, it’s back to employment for you.
Be smart about credit. Personally, I maintain a personal and business rewards Visa or Mastercard (works in more places) which could float me for a few days (not a few weeks – that’s not acceptable) if it ever makes the difference between being able to act smartly or take a loss. If you maintain cards for that purpose, strive never to have to use them that way. Treat credit cards as debit cards that you include in your payday bills almost like deposits instead of payoffs. Always cover the full balance all the time.
- Cautious use of credit can help keep you independent. Incautious use can enslave you, or send you back to employment lines to pay off the corporate loan sharks. Your primary activity is bringing in income. That means a) marketing for new clients or repeat business, and b) completing projects. Focus on that stuff, and credit will be available but not necessary.
- You’ll be going out and shopping less and doing more purchases of both business and personal kinds *from home*. So having separate business and personal cards (whether debit or credit) helps make it easy to cover expenses when you’re busy and need to make a purchase fast, and avoid “fudging” when it comes to commingling of business and personal funds. Personally, I also use Amazon Prime, too, so I can get what I need with 2-day free shipping and no minimums. That further reduces the need to “shop” which is the least productive activity on earth.
- Since you’re paying your bills semi-monthly, pay card balances in full *both* times, so you never hit the 25-30 days before there’s a finance charge on the months with 28-31 days (i.e. all the months in the year). The banks know what they’re doing, you know.
- Rewards cards either put money back in your pocket (it’s equivalent to a stackable discount of 1-2% that lets you still use coupon codes, etc), or let you eventually fly for taxes and fees without base airfare (although you have to turn over enough points to make that worthwhile, because the cards that pay the most points have annual fees), or give you points you can use in places you do business (like Amazon, if you use Discover).
Do really good accounting. There are three things you have to consider every bit as much a part of your core work now, besides the “work itself”. 1. The legal formalities. You absolutely have to make sure you use proper contracts, non-disclosures, a proper legal entity for your company, even if it’s just you, and proper reporting and filing with any relevant government or private agencies or associations. 2. The marketing. A company that isn’t growing is dying – it’s just a matter of time. So you have to have a plan for growing your company when you’re not actively working on a project, or even when you are. Letting your marketing die has a cumulative negative effect – it’s harder to start it back up later, like a car that’s been sitting all Winter. Always carve out time for growth. 3. The accounting. If you aren’t tracking expenses and income, you can’t get a picture of your profit and loss, or provide one should you need to. You can’t make healthy business decisions on where to invest (e.g. marketing) or what to purchase, or even what you have to charge. But you’re also extremely vulnerable from a legal and taxation standpoint. Make sure you do it right.
- I use Quickbooks Online, which is the standard for a corporation or LLC – there are other excellent Web 2.0 alternatives as well. If you’re a sole proprietor, and aren’t planning to form a corporation or LLC any time in the near future, or else you are willing to use a second tool (like Google Spreadsheets) to do some of the tracking, you can use Outright, which is a superb tool for freelancers.
- If you can’t afford software, or feel more comfortable with spreadsheets, Google Spreadsheets is very good. I use it for personal finances, because I absolutely can’t stand Mint and the various Mint clones, and I need features they don’t have, which I’ve constructed myself in a spreadsheet environment. Spreadsheets have the advantage of letting you custom formulas to see various data in various ways. They have the weakness of containing no canned reports, such as a company balance sheet or Profit and Loss statement. You can, of course, make sheets in your workbook to serve those functions.
- Again, keep personal and business account separate. Of course each one will have a corresponding entry, when you pay yourself, but that’s about it.
- Be militant about entering receipts for your expenses and paid invoices for your gross income. Every ten dollars you let fall off the truck in business expenses is $3.30 in extra income taxes you’re going to pay. That’s expensive. It’s already outrageous to have to pay a third of everything you make to pad the coffers of government and government’s friends, not to mention paying it several times over on every dollar, but paying it on money that’s a business expense is insane if you don’t have to. You can bet the big corporations are documenting all their expenses. Also, you don’t want to be in the same bind if the IRS asks you about income, because one of your clients is audited, and you didn’t account for the money they paid you.
- Get good tax advice, pay attention to quarterly filing laws (which *do* apply even to employees, though most don’t realize it), and make sound decisions on what you expense, how much you expense, and your tax strategy as a business. It’s not only not illegal to have a tax strategy, you can bet any business of size has one. That’s partly why the IRS asks you about your accounting methods, your accounting year, and your main income type, when you file. Nothing we say here is “good” tax or accounting advice; you’ve got to go looking for the real deal.
- You totally can go paperless when it comes to receipts. The laws have been updated. Receipts need to be stored in a way that’s reasonably searchable (get specifics via Google). Services like Shoeboxed make it definitely possible. I personally use a Fujitsu Scansnap and a cloud backup service, but there are lots of ways to go about it.
Plan Your Health & Finances. Now that you’re not a traditional employee, there’s no one else ‘doing the laundry’ so to speak. You’ve got to take care of the whole enchilada, or else see that it’s done.
- Maintain a financial plan. I use David Ramsey’s steps. They’ve helped tremendously over the years. If I’m dogmatic about much, it’s probably that. The plan is designed to be useful regardless of where you are financially. Your place on the steps might be ready for a Roth IRA or might not be. The goal is to implement rationality as a principle into our finances.
- Maintain a health plan. I use an HSA with a high deductible plan, and then cover the deductible gap with gap insurance. There are other ways to go about it, but I’m looking for sustainability in the long term, and my health plan includes insurance as one component, but also constant work toward healthy lifestyle. The goal should be a combination of health-driven activity and laying up against health-related exigency. Keep in mind that, while there are some totalities in health that can’t always be controlled, your wellbeing, comfort, and longevity may depend utterly on financial considerations at some point. If you live in one of the few advanced nations to have rejected universal healthcare (basically, just the United States), this concern is of such agonizing and deadly seriousness that it simply can’t be overstated.
Self-employed people simply have to reconsider their finances when leaving traditional employment, at least in the details, but potentially overall. It really depends on what you were doing before. Jobhacking is really a form of lifehacking, and it begins with hacking your finances – that is, breaking them down into components and restructuring them for sustainability as an independent.