Are you self-employed? Are you your boss? As a self-employed worker, your salary income will be irregular than if you have been a salaried employee. You will have to manage everything yourself. To avoid headaches and stress while managing your finances, here are some best financial tips:
Make a budget
Budgeting is the best tool to plan your income and expenses. With a budget, it will be much easier to understand how much you are getting and where your money is going. Budgeting will give a reality check.
Build an emergency fund
With an emergency fund, you can able to handle any unexpected financial emergency with ease. This will give you a cushion that you may face through a dry spell of three to six months. Apply for a bank line of credit if you don’t have liquidity.
Consult a financial planner
Don’t hesitate to take advance from a financial planner who can help you manage your business and personal finances. They can even help in calculating the amount of taxes you owe, plan for retirement, investment plan, etc.
Pay your tax in installments
Whenever you receive payment from a client, it is considered a gross amount. It is not wise to forget to pay income tax on that amount. Talk to your accountant and calculate your provincial and federal taxes and make installment payments every three months. By doing that you can control spending money that is not yours.
Keep funds for sales tax payments aside
Remember that a portion of your income that you earn includes sales tax that you need to repay to the government. You will have to deduct the amount owing from your payments and set the difference aside. This would allow you to pay it to the government when required.
Ups and downs are part and parcel of any working structure. Therefore, it becomes easy for you to forget about saving money. To always remember to save money, just set up an automatic savings mechanism that will force you to set aside some funds for emergency and retirement.
Plan your retirement
Retirement planning plays a very important role in the life of self-employed people as they cannot count on a pension plan from their employer. Take help from your financial planner and advisor to ensure that you save enough to secure your future.
Maximize your RRSP and TFSA contributions
You must contribute the maximum amounts allowable to your registered retirement savings plan and tax-free savings account as you won’t be able to access a company pension plan. This will help your tax situation and facilitate your retirement.
Avoid claiming for unnecessary deductions
It is likely possible that you would like to deduct as many expenses as possible to lower down your taxable income and pay as little income as possible. But it may further reduce your ability to convince financial institutions of your ability to repay loans. To avoid that, don’t overdo it when it comes to deducting your expenses.
Separate your business finances from personal ones
If you chose to register your business as a sole proprietorship, there is no difference between your personal and business finances. Therefore, it is best to keep them separated as it will simplify things to help you manage your finances.
Take out an insurance plan
If you were to suffer a critical illness or disability, this may result in serious financial trouble. Therefore you must take out disability and critical illness insurance.
Get an accountant
Don’t make it too long to get an accountant. An accountant helps you to keep close track of your expenses and do almost everything you are doing in your business and an accountant will be there to help you understand the nuances of taxes and finances. You need to understand that every single dollar in and out of your business needs to be tracked and categorized to be able to file for taxes properly.
Track your expenses
When you are self-employed it becomes even more important for you to track your expenses. There are several tools available that can help you do this. You can use spreadsheets or can download some apps to track all your expenses. Doesn’t matter how you do it, what matters is that you understand where your money is going and you must be able to account for it.
Think in percentages
The most challenging part of being self-employed is the variability of your income as some months you might be taking in a good amount of cash, and the next month all your clients are on vacation and you are not getting much. To keep an account of these ups and downs, it is important to think about your savings, salary, and investments in terms of percentage. When outing some money aside for savings, for vacation, for investment, for business proposal, and more, think in terms of percentage of income, and not in fixed amounts.
Make goals and pay yourself
You need to pay yourself and set goals. It is a good idea to have a timeline for when you aim to be profitable and start saving regularly. Just keep in mind to never start investing money until you have an emergency fund. Make sure your business has a bank account meant for business income only. Next, pay yourself out of that business into your personal savings account.
You should be having short-term, mid-term, and long-term financial goals to achieve and you should be investing money in accomplishing those goals like expanding your business, having a kid, investing in a child’s higher education, and more.
Many self-employed, especially those in creative work, forget they run a business and they have to think about their profit first rather than letting others take advantage of them. Thus, you need to educate yourself in all matters, so that you can keep growing your business and take it to a higher level. The more time you invest in your business and implement new things, the more you will make money. Upgrade your skills, keep learning and keep gaining knowledge.
Budgeting for the self-employed
A budget for a self-employed is a little different from a traditional budget. This is most likely because a self-employed won’t make the same amount each month. It is quite challenging to budget every month appropriately when your income fluctuates. For that, you first need to prioritize your bills like what you need to pay first. Secondly, you should make a bare-bones budget where you can have an idea of your non-discretionary expenses. This is what you will rely on during slow months. Thirdly, you should separate your expenses. This will make your life much easier, particularly at tax time.
Use windfalls for stability
Just remember to not spend all your extra cash on lavish items when you have amazing months business-wise. You can treat yourself a little bit, but not much as it is important to have some financial stability in slow months or unforeseen times. During better months, take out what you need for taxes, emergencies and put the rest in an account.
Calculate your net worth
Once you collect all the financial records, calculate your net worth. By calculating your net worth, you can easily figure out what you own and what you need. If your assets such as your house, investment, bank account, etc. surpass the liabilities like a mortgage, loan, credit card debts, etc. then your net worth is positive. On the other hand, if your liabilities are more than your assets then your net worth is negative. Calculating your net worth is the best way to analyze your financial status.