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4 Financial Steps To Prepare For Self-Employment

Freedom is perhaps one of the most wanted and essential things in life. For one, it allows you to make your own choices and express your thoughts. There are various types of freedom in general, including freedom in employment.

What Is Self-Employment?

In a nutshell, being self-employed means that you are your own boss. Self-employment is where you don’t work for anyone or any employer other than yourself. You can work for yourself by building your business. This can give you independence, allowing you to have control over your schedule and working hours. You can be flexible and work as little or as much as you want. It can also be rewarding as you can pursue your passion while earning profits.

There are several reasons and benefits why you might want to get into self-employment. For one, it can give you the autonomy to use your skills and creative freedom to try out your ideas without limitation. As previously mentioned, you can be your own boss, which means you can work anywhere and anytime and have a better work-life balance. Furthermore, self-employment can provide you with an opportunity to control your financial future.

However, as rosy as the idea of freedom sounds, self-employment also comes with its share of added responsibilities. For instance, as a freelancer, it would be your duty to process your tax. And as such, you may want to check out applications or resources offering tax calculator for self employed to help you, especially if it is your first time.

Other than taxes, you also need to put financial plans in place to facilitate a smooth transition into self-employment. Although you can never be prepared enough, planning your finances can increase the chances of your business surviving and eventually growing.

Importance Of Financial Plans

Generally, it’s unwise to randomly ditch your 9-5 job and venture into self-employment without a plan, especially a financial plan. A financial plan can help you set up a financial safety net and form suitable investments and savings. Moreover, you can use it to understand how to achieve your short and long-term goals.

To help you start, here are some financial steps you can consider as you prepare for self-employment:

Ensure You Have Another Dependable Source Of Income

Being self-employed can be challenging. In most cases, the income you earned in the first months will generally be used to compensate for the expenses and other investments when you started. This is especially true for self-employed individuals who launched a startup business.

Also, being self-employed can have some uncertainties too. For instance, you may not have projects to work on right away. And suppose you’re running your business. There’s the chance of not being able to get as many clients to keep you financially stable.

To avoid being in such a situation, ensure you have another source of income. For instance, you may consider sticking to your 9-5 full-time job until you have enough savings to last until your self-employment venture picks up.

Have Separate Business And Personal Accounts

Having separate bank accounts can be a smart approach when transitioning to self-employment. For one, it’ll allow you to track how much you are getting from your projects or business and how much you are taking out. It can help you follow the progress of your business or freelance income, improve your accounting efficiency, and protect your assets if faced with legal action. Moreover, as an owner of a startup business, separate accounts can help establish your company’s credibility and image, access business-only financial services, and maximize tax deductions and benefits.

Furthermore, you may also want to consider having business credit, as it can help you get the extra capital you need for a potential business expansion. It can also help cover your small company’s daily expenses and be used as a basis for your business’s creditworthiness.

Apply For The Best Insurance

While it can be liberating to have your own schedule, being self-employed could also mean that you wouldn’t receive the same compensation or benefits package as a regular employee. Among these perks include insurance coverage such as health plans. Therefore, it’s upon you to find the insurance that works best for you. Ideally, the insurance plan you choose is determined by several factors. These include your current age, gender, marital status, health condition, and family’s medical history.

Aside from health plans, you can also consider getting business insurance. This can help protect your business from product liability and property damage and may cover the costs of lawsuits. It can also be a necessity in some contracts, such as loan agreements, rent agreements, and client agreements.

Have An Emergency Fund

Uncertainties and unfortunate instances, no matter the industry you are in, are generally unavoidable. This is especially the case for self-employed individuals. Projects come and go. And in some cases, income may be seasonal. And if you’re running a small business, there are a few risks that you need to prepare for, such as fluctuation, recession, tight competition, and the economy.

In such instances, those that have emergency funds are likely to continue with their operations. On the other hand, businesses that aren’t as prepared for such an emergency may be forced to take a break or completely shut down.

With that in mind, it is crucial to set up an emergency fund, so you can continue operating during unfortunate times. Below are some tips worth noting when setting up an emergency fund:

  • Instead of having one big saving goal, consider having several small ones. For example, you can implement a monthly saving goal instead of having a six-month saving goal. Short-term goals can be relatively easier to achieve, and once you reach them, you may get the motivation to achieve other goals.
  • Set smaller amounts instead of large amounts for your emergency funds. Doing so can help prevent you from stressing over your cash flow.
  • Consider having an automated emergency fund whereby your contributions are automatically deposited to your account before you touch your income.

Financial Mistakes To Avoid In Self-Employment

Knowing what not to do is equally as important as knowing what to do. Here are some of the financial mistakes you may want to avoid when getting into self-employment:

  • Not having a retirement plan. Not having one might force you to work for the rest of your life.
  • Not choosing the best insurance for you and your business.
  • Failing to have good investment strategies.
  • Failing to use tax-saving tools that can be used to create financial reserves.

Wrapping It Up

Self-employment can offer several benefits that you can’t get when working for another person or entity. However, you have to put in the work to enjoy and maximize its advantages. For starters, it would require a concrete financial plan to help you prepare and transition to self-employment. If you’re thinking of freelancing, this article details five crucial financial plans you can consider.

Author Bio

John Oddo is an entrepreneur. He also conducts seminars and writes blogs to inspire and educate aspiring business people. In his free time, John loves to hike and camp with friends and family.