June 16, 2021
7 min reading
Opinions expressed by Entrepreneur the authors are alone.
Working for yourself is a wonderful thing. You can call the shots, set your own opening hours and run things the way you want. With hard work, focus and dedication, self-employment is a phenomenal way to achieve a good life. No wonder 16 million Americans work for themselves!
However, there is a downside to self-employment as well. According to the Hungarian association, almost 20 percent fail after the first year Bureau of Labor Statistics. By the age of five, almost half had failed. There are several reasons for this, but much of it comes down to poor financial management. Without proper savings strategies in place, many work the owners have no reserve to take advantage of when the age becomes difficult. Meanwhile, others pour every last dollar into their business and never take care of themselves. None of the approaches is sustainable in the long run.
To build a strong, long-lasting business that will keep you and your organization financially resilient now and in the future, you need to implement both a personal and professional solid savings plan. Try using the following strategies.
Build a working budget
According to recent research, 65 percent of Americans I have no idea how much they have spent in the last month. Not keeping track of your budget like this is very risky, especially if you also run a business. To stay on top of your consumer habits, you need to create a plan for your business and for yourself. Start by writing down and reviewing all of your current expenses, such as payroll, overheads, and insurance. Remember to include savings. Then calculate the total factor, include your own salary, and make any necessary adjustments to ensure that income is always greater than expenditure.
Give priority to your costs
Once you know exactly how much you are spending – and on what – you need to set priorities in three different categories:
Fixed costs. These are expenses you always have to pay, like an overhead or a mortgage.
Irregular costs. These are costs that can be reduced, such as cable TV and groceries.
Discretionary costs. These are costs that can be reduced as needed, such as recreation, food and travel.
Giving priority this way will help you spend money wiser, because you will know where you can cut yourself. To help your money go even further, apply this strategy to both your personal and business life.
Separate your accounts
It is very easy for a self-employed person to combine business and personal consumption, but the two must always be separated. Give your business a stand-alone bank account and credit card and use them only for professional expenses. You can even consider opening a third account to save tax money, so there are no unwanted surprises. Everything is clearer and far more efficient when you have separate accounts.
Pay yourself a salary
Your salary provides the steady cash flow needed to maintain financial security in your personal and business life, so you always have to pay yourself first. Set your salary to your budget and include it in your monthly or biweekly expenses. Pay yourself what you deserve, but never be greedy. After all, you need to consider other bills and obligations as well.
Give yourself a bonus
If you do well for a month and your earnings increase, you can pay yourself a bonus. Bonuses it can even become a regular feature, depending on your earnings – for example, you can allocate one quarter or twice a year. However, make sure you use your bonus strategically. Invest in your own pension, buy shares or put in any outstanding debt or business reserves.
Let retirement savings be automatic
If you want to continue living a good life in your golden years, you can’t forget about retirement! When working for yourself, it is vital to open a retirement account as early as possible. Traditional or Roth IRA is the most common option, but you can also choose SEP IRA or Solo 401 (k) if you do not have employees. You can work with a financial advisor or you can do research and invest on your own. Just make sure your money grows somewhere. An excellent rule of thumb is to pay at least 15 percent of each salary into retirement. If you need to work for less than a month, make sure to increase it again when you are ready.
Finance your reserves
Every business owner needs a rainy day fund to deal with any unforeseen difficulties or challenges that might occur. Strive for reserves of at least three months to be set aside for both you and your business. To achieve this, set up automatic savings to constantly contribute and maximize your funds. Keep in mind that the account you create for this purpose should be a secure means of saving, not one that could potentially fall in value. In difficult times, this money will be crucial for the survival of your business. With the savings you collect, you will be able to pay staff and overheads over a period of time.
Finances are a serious matter, especially when you run a business. Now is the time to do a financial audit of your situation and start your business on the road to success. Understand well and not only will you outperform the competition, but you will also have the means to do what you want while living a good life.