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Working for yourself is a wonderful thing. You get to call the shots, set your own hours and run things the way you want to. With hard work, focus and dedication, self-employment is a phenomenal way to achieve the good life. It’s no wonder 16 million Americans work for themselves!
However, there is a downside to self-employment too. Of all the small businesses in the United States, nearly 20 percent fail after the first year, according to data from the Bureau of Labor Statistics. By year five, nearly half have gone under. There are several reasons for this, but much of it comes down to poor financial management. Without proper savings strategies in place, many business owners have no reserves to tap into when times get tough. Meanwhile, others pour every last dollar into their business and never take care of themselves. Neither approach is sustainable in the long term.
In order to build a strong, long-lasting business that will keep you and your organization financially resilient now and into the future, you need to implement both a personal and professional rock-solid savings plan. Try using the following strategies.
Build a working budget
According to recent research, 65 percent of Americans have no idea how much they spent in the last month. Not keeping track of your budget like this is very risky, especially if you’re also running a business. To stay on top of your spending habits, you must create a plan for your business and for yourself. Start by writing down and taking stock of all your current costs, such as payroll, overheads and insurance. Remember to include savings. Then, calculate the total, factor in your own pay and make any necessary adjustments to ensure that income is always greater than expenditure.
Prioritize your expenses
Once you know exactly what you’re spending — and on what — you need to prioritize in three distinct categories:
Fixed expenses. These are costs that must always be paid, such as utilities or your mortgage.
Irregular expenses. These are costs that can be reduced, such as cable TV and groceries.
Discretionary expenses. These are costs that can be cut if necessary, such as recreation, eating out and travel.
Prioritizing in this way will help you to spend money more wisely, as you’ll know where you can scale back. To help your money go even further, apply this strategy to both your personal and business life.
Separate your accounts
It’s very easy for a self-employed person to mix business and personal spending, but the two must always be kept separate. Give your business a standalone bank account and credit card, and use them for professional expenses only. You could even consider opening a third account to put money away for taxes, so there are no unwelcome surprises. Everything is clearer and far more efficient when you have separate accounts.
Pay yourself a salary
Your salary provides the steady cash flow that’s required to maintain financial security in your personal and business life, so you must always pay yourself first. Set your salary according to your budget and factor it in as a monthly or bi-weekly expense. Pay yourself what you deserve, but don’t ever get greedy. After all, you have other bills and commitments to consider too.
Give yourself a bonus
If you do extra well one month and the profits roll in, you can pay yourself a bonus. Bonuses can even become a regular feature depending on your earnings — you could award yourself one every quarter or twice a year, for example. Make sure to use your bonus strategically, though. Invest in your retirement, purchase stocks or put it toward any outstanding debt or business reserves.
Make saving for retirement automatic
If you want to continue to live the good life into your golden years, you can’t forget about retirement! When you work for yourself, it’s vital to set up a retirement account as early as possible. A traditional or Roth IRA is the most common option, but you may also choose a SEP IRA or a Solo 401(k) if you don’t have employees. You can work with a financial adviser or you can do your own research and independently invest. Just make sure that your money is growing somewhere. A great rule of thumb is to contribute at least 15 percent of each paycheck to your retirement. If you need to do less one month, make sure you increase it again when you’re ready.
Fund your reserves
Every business owner needs a rainy-day fund to cope with any unforeseen difficulties or challenges that might occur. Aim to have at least three months’ reserves set aside for both yourself and your business. To achieve this, set up auto-savings to consistently contribute and maximize your funds. Bear in mind that the account you create for this purpose should be a safe savings vehicle, not one that could potentially drop in value. In tough times, this money will be vital to your business’s survival. With the savings you accrue, you’ll be able to pay your staff and overhead costs for a set period.
Finances are a serious matter, especially when you’re running a business. Now is the time to conduct a financial overhaul of your situation and get your business on track to success. Get it right and not only will you outlast your competition, but you’ll also have the funds to do what you want while you live the good life.