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manage self employed income, how to manage your income when you re self employed

How to Manage Your Income When You’re Self-Employed

Managing your income when you’re self-employed does not come with a one-size-fits-all manual. Understanding the core principles will place you on the path to success. Entrepreneurs want to see their hard work reflected in their financial stability and growth.

In 1995 I was overwhelmed by a sense of failure, convinced the concept of business finance was beyond my grasp. I was an imposter who felt there was more month than money. Determined to change this internal narrative, I committed myself to acquiring a deeper understanding of business finances, thereby overcoming my fears.

In this blog post, we will unpack essential strategies for managing your income effectively. Creating a strong financial future involves setting up good accounting, saving for taxes, planning for retirement, and reinvesting in your business. Each step is important for your financial security.

By the end, you will know how to make smart decisions with your income. These decisions will match your financial goals and the specific challenges of being self-employed.

Budgeting Basics for the Self-Employed Entrepreneur

Personal Connection to Profit

Whenever my client, Nicole, and I would have a coaching call focused on her finances, I noticed a peculiar trend: she would develop a migraine. This involuntary reaction seemed almost like a form of self-sabotage, an avoidance of confronting an essential aspect of her business. I often say “Math is money, and money is fun,” underlining the empowering aspect of financial management when approached with the right tools.

In our program, “Bullet Train to Big Profits,” we share the very budgeting and forecasting templates and spreadsheets that have been instrumental in guiding us toward financial clarity and success.

Why is budgeting important? Budgeting is more than matching your goals with your business’s financial situation. Budgeting is a helpful tool that guides you toward financial success and gives you the power to manage your money. When you assign each dollar to a particular expense, savings, or investment, you’re making smart choices that set you up for a better future.

Budget benefits:

  • Help you spend wisely, focus on priorities, and save for significant milestones
  • Allow you to cut unnecessary expenses and provide clarity on financial flows
  • Track spending patterns, make adjustments, and seize opportunities for saving and investing
  • Effective financial management, empowerment, and security

Ensure a stable financial future by budgeting effectively, navigating uncertainties, and achieving set goals. Budgeting is essential for personal finances and plays a critical role in managing business income and expenses.

If you find yourself feeling uneasy about your finances, consider hiring an accountant or
scheduling a strategy session with me to help you craft a financial plan.

Raw Income vs. Real Money

One of the most crucial tasks for any self-employed individual is the ability to discern between income on paper and the actual cash that flows into your bank account. This was one of my biggest revelations: the distinction between raw income and sales does not necessarily equate to cash in hand.

Raw income refers to the total earnings before any deductions or expenses have been subtracted. This figure gives an optimistic view but doesn’t accurately represent the amount you can spend. Real money, on the other hand, reflects your actual cash flow — the net amount available after subtracting expenses like taxes, operational costs, and overheads. This is the money that you can genuinely use for savings, investment, or personal expenditures.

As self-employed business owners, we can better plan our finances by separating our income from expenses. This helps prevent overspending, which can cause financial insecurity and cash flow issues.

As an independent entrepreneur, take charge of your financial well-being not only in the present but also for the future. Consider setting up retirement accounts or exploring investment options that will provide for your golden years. By planning ahead, you can secure a comfortable and fulfilling retirement that rewards your hard work and dedication.

How to Manage Your Income When You're Self-Employed

Setting Aside for Taxes – Non-Negotiables

My client, Carol, approached me somewhat late in her financial journey. Despite achieving $1.2 million in sales, she had not put aside any tax funds. For self-employed individuals, the ability to anticipate and set aside money taxes, including estimated taxes, is critical to financial management. Delaying this critical step until the tax obligation arises, particularly as income escalates, is not advisable. Unfortunately, Carol faced a substantial fine, which took years to repay, significantly impacting her profits.

By properly planning for taxes, entrepreneurs can maintain financial stability and unlock growth opportunities. It’s a strategic approach that ensures survival and success in the dynamic landscape of entrepreneurship and fiscal responsibility.

Set aside a portion of your income for taxes on a monthly or quarterly basis. This will help you avoid any financial strain when tax season comes around. By saving regularly, you can ensure you have enough funds to cover your tax obligations.

Start by determining your effective tax rate and allocate funds into separate accounts or utilize automated systems. Staying organized and following a routine can make tax season easier. This will give you more time to focus on your business and financial goals.

Harnessing the Power of a Rainy Day Fund

Having some extra money saved up can help when business is slow or unexpected expenses arise. It can turn potential disasters into minor setbacks, providing a feeling of security and peace of mind.

Self-employed individuals can feel more secure and confident in their business endeavors with this safety net. Although such discipline may be challenging, the long-term benefits are invaluable. It offers a foundation to help them navigate challenges and uncertainties. This safety net can give self-employed people peace of mind and reassurance as they pursue their entrepreneurial goals.

Having an emergency fund is no longer just an optional insurance policy. Your emergency fund is a safety net that provides peace of mind and empowers you to face unexpected twists and turns.

Aim to set aside 10% of your monthly revenue as an emergency fund.

Making small contributions now shows you are taking control of your finances and building a strong foundation for your future. So, don’t hesitate to take that first step and start building your emergency fund today! Your future self will thank you for it.

Efficient Invoicing: Get Paid On Time, Every Time

Efficient invoicing means keeping track of money coming in regularly to maintain a stable income flow. Late payments can disrupt this delicate balance and jeopardize the financial health of a business. It’s important to use good invoicing practices to keep money flowing smoothly and ensure your business stays successful.

The topic of payment can be an awkward one, especially when a client falls behind on their invoices. To address this, I’ve prepared a series of emails in advance, allowing my team to efficiently follow up and collect payment. Ensure your systems have straightforward processes to take care of late payments.

Invoicing is more than just paperwork; it’s a vital part of good business communication. Make sure your invoices are clear and short so your clients understand what they owe and when to pay. Being consistent in how you invoice helps build trust, which makes it easier for clients to pay on time.

To make things smoother and keep cash flowing steadily, think about using automated invoicing systems. This reduces mistakes and delays. With automation, you can focus on growing your business and giving great service to your clients.

how to manage your income when you're selfe-employed

Exploring Retirement Savings Options for the Independent Worker

As a self-employed individual, the responsibility of securing your retirement falls on your shoulders. Start saving early and regularly in a savings account to build a strong financial foundation for a more secure future.

As a solo-preneur, you have a few retirement options to choose from, such as the SEP-IRA or Solo 401(k). While the rules may differ, the ultimate goal remains the same: securing your future.

With these retirement plans, you can save on taxes and contribute in a way that fits your business strategies. And, of course, don’t forget to account for personal expenses in your planning process.

Insurance: Protecting Yourself and Your Business

Insurance isn’t the most glamorous topic, but its importance cannot be overstated. For small business owners, insurance safeguards their personal and professional lives against unforeseen risks and business expenses.

I have been sued three times in business and thank god I had insurance. It’s part of what happens when you are growing an enterprise.

Insurance policies like health and liability insurance protect self-employed individuals from illness, injury, and legal claims. They act as safety nets, allowing entrepreneurs to work without worrying about potential risks.

Insurance helps self-employed individuals and their teams avoid big financial losses from illness, accidents, or legal issues. Having good insurance is a vital part of smart financial planning for any business owner.

Conclusion: Manage Your Self-Employed Income

You are more than just your income; you are the steward of your financial future. Employ these strategies not just to survive the storms but to flourish under the open skies of self-employment. By mastering your finances, you are not just building a business — you’re crafting an empire.

Embrace “Math is Money and Money is fun!” and “Wealth is YOUR birthright!” Don’t hesitate to reach out if you need guidance in creating your financial plan and fostering growth. We are here to serve! 

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manage self employed income, how to manage your income when you re self employed

How to Manage Your Income When You’re Self-Employed

Learn how to manage your income when you're self-employed. Dr. Susie shares insights from herself and her clients.