Saving money is hard when you’re self employed; no employer is withholding taxes for you, or funneling matching money to a 401k from your employee paycheck—it’s all up to you, the entrepreneur. (Some call it the dark side of self-employment). And when cash flow is less than ideal, sometimes it’s hard to have the discipline to direct money to taxes and savings.
Organization Is Key For Self Employed
Ideally, all of us self-employed people all be making roughly 40% over what we need for our living expenses (wouldn’t that be convenient???). Ten percent would go to business expenses, another ten percent to savings and finally twenty percent to taxes. This is just an example, other have their own budgeting ideas for the self employed. Or maybe you just need to charge more!
Side Note: I could get into a whole tax explanation, but suffice it to say that if you’re producing self employment income that puts you in the 25% or 28% tax bracket, your ACTUAL taxes after self-employment expenses and deductions will probably be closer to 20%. Please keep in mind this is just a starting point that you can adjust with your own data. The IRS site has a handy withholding calculator than can help you figure out what you owe.
If you’re making good money, you can automatically set the 40% away without thinking about it—you can probably even automate it because you have extra slush in your account. However, if cash flow is tight—as it has been for MANY self-employed business owners the past 3-5 years—it’s difficult to get out of that hand-to-mouth mentality and you really don’t want to automate ANYTHING for fear of overdraft.
Getting Back On Track
If you’ve been spending everything you make just to live, then you probably are not setting aside enough for taxes, or meeting your savings goals. That’s okay. Just start wherever you’re at. Decide on a percentage to save from each invoice and stick to it.
Above all, you need to be consistent, even if you start small. Maybe you can’t save 40%. That’s fine, just save what you can. The key is, AS SOON AS you are paid, to shoot a portion of that self-employment income somewhere away from your checking account.
Let me be clear: you literally take your deposit receipt, log onto your online savings and set up your percentages to be pulled (before you start thinking of that money in your checking account as “free.”). Marry this habit with another you do consistently at your computer, and soon, it will be automatic. Nowadays, you can even write a check to savings and deposit it via smart phone!
I like CapitalOne360 online savings, as I have mentioned before, because you can label your different accounts—my percentages are separated into different accounts for taxes, savings and reserves. And travel. And car fund.
This is the way to “pay yourself first” when you have to keep a close eye on cash flow, because even though you might not be saving the ideal amount yet, you’re building the HABIT that works in good times and in bad. And when you raise your rates, you can start to funnel that extra into savings and taxes more easily.
When you’re living hand to mouth, it’s hard to focus on your responsibility for things like taxes and savings that are important but not urgent or immediate. But the sooner you make the commitment, the sooner you’re going to feel peace of mind.
Actions This Week
- Open an online savings account. You can google “online high-yield savings accounts” and see which one will fit your life best.
- Decide on a percentage to save. You might be invoicing, or simply collecting payment, but however you work, you have to decide a percentage to set aside per transaction.
- Document your system. However you’re going to do this, schedule a reminder, put a post-it on your computer, or use another reminder system so that you don’t fall out of the new habit.
P.S. You might like my free workbook on Profit Clarity, which helps entrepreneurs get started with all of this in the right way – you can download that free workbook here.