Overcoming Financial Insecurity When You Are Self-Employed

by admin on November 27, 2011

Being self-employed means running your own show, but at the same time, there is a degree of financial insecurity to it. Those who take salaried positions enjoy a variety of benefits, including retirement savings, steady income, sick leave, paid holidays, paid vacations, and more. These do not apply to self-employed persons.

According to Joseph D’Agnese and Denise Kiernan, authoring The Money Book for Freelancers, Part-Timers, and the Self-Employed, there are three types of accounts self-employed persons should have – one for retirement, another for taxes, and a third for emergencies. Called the Holy Trinity, this system is said to be paramount to growth and financial peace. The authors recommend starting small, setting aside just 3 percent a month into a ‘sunny day’ savings. Then this amount can increase to 5 percent, which, if you get a check of $1,500, is just $75 (less than a night partying with friends). However, it is enough to get going.

Many experts advise to open an emergency account and keep the equivalent of 3 to 6 months of living expenses. This is for persons who have salaried positions. If you are self-employed, part-timer, or freelancer, it is best to have at least 6, which makes for a secure cushion (The Globe and Mail).

You may also want to draft a plan every month, matching up expected expenses with your income (which fluctuates). This is helpful in encouraging you to be a mindful spender. Not only that, but you can see the real numbers, which may motivate you to try harder and earn more so that you can afford some luxuries after meeting the basics. In any case, try to hit a zero balance at a minimum. If you have an emergency fund and have unexpected expenses, that will be great. However, if something pops up, like a fridge repair or a forgotten birthday, and you don’t have savings, you should cut your spending somehow.

Persons who work salaried jobs know how much they earn, which makes it easier to develop a financial plan. Is it that simple if you are self-employed? To find out your baseline income per month, you should take your gross income over the last 5 years and divide by the number of months (60 in this case). If you have commissioned income, it is quite likely that you see considerable swings within this period of time. However, you will get a good idea of what to expect as a baseline income.  How to go about saving then? Say your monthly gross average is $3,600. If you have had $4,600 in one month, put the additional $1,300 into a money market interest bearing account. If you build an emergency income fund with a 12-month reserve, you will be prepared for periods when money is tight. There are many benefits to not working as a full-time salaried employee, but obviously, financial and income stability is not among them (Single Minded Women). Once you’ve built your emergency income fund, you can keep up putting money into your money market account. This is a good time to think of saving enough to invest. If you run your own company, you may consider investing in business-owned real estate, for example.

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