More than 14.6 million citizens in the country are self-employed. These people often find it an arduous task to manage money – both in their personal and professional life. They have to work extra hard for planning and creating an effective budget with their unsteady income. In addition to that, there are no employers to deduct a certain portion of their paycheck for boosting the nest-egg. The bottom line is, self-employed people face a lot of problems in managing their financial life perfectly.
Self-employed people need to stay focused and determined to manage their money efficiently. They need to make a fine balance between the financial demands of their professional and personal life. Read along to get acquainted with 5 tips which can help the self-employed people to lead a good financial life.
How self-employed people can manage money efficiently
Check out the 5 tips which can help the self-employed citizens of the country to have a smooth financial journey.
1. Calculate and save money for paying the taxes
Self-employed people need to calculate their tax payments in advance. They need to repeat the procedure in every quarter and save accordingly. The self-employed people should know how much they have to pay to Uncle Sam well in advance. The worst financial mistake would be to learn that they have to pay $15,000 in tax and there is only $5400 in their savings account.
Late tax payments will prove to be extra costly for the self-employed people. This is because Uncle Sam will demand high penalties and fees. To avoid this predicament, the tax payers should save at least 40% of their income for the payments on tax.
2. Allocate a certain percentage of your income to 3 areas
The income of the self-employed person is erratic. In some months, they make a lot of money. In other months, they are unable to hit the jackpot. These people have to be extra careful while allocating money to the 3 main areas – tax, retirement plan and emergency savings. They need to allocate a specific percentage of their income to these 3 areas. This will help them to spend a higher amount of money for securing their financial future in the high income months. Alternatively, they'll be spending less during the months when their income is low. Financial experts say that self-employed people should contribute around 10% of their income to their retirement funds.
3. Calculate the basic expenses and create a budget
Self-employed people are not astrologers. It is not possible for them to know how much they'll earn in the subsequent months. However, they can easily estimate their living expenses by carefully studying their spending behavior and pattern. They need to save a specific amount in a savings account to meet their basic expenses. They can transfer money from their business checking account to personal savings account if required.
4. Save money in the over head account to build financial stability
There are a couple of months when the self-employed people will make a lot of money. They'll be earning more than the others. They should use a certain percentage of the money for building their nest-egg and emergency savings. They will use a specific amount to pay tax and draw salary for themselves. The rest of the money should be kept in an overhead account which they would use specifically for themselves. They would use the money saved in the over head account to bear the living expenses in the subsequent months.
5. Earn dollars on the money saved for tax payments
While it is true that self-employed people should save a specific amount for their tax payments, yet they should not lose any opportunity to earn dollars on the saved amount. It is best to keep the money (which will be used to pay the tax) in an interest yielding savings account. They can also invest the money in the short term CDs. They can buy a 3 month CD with the money. They can withdraw their money after the maturity date of the CD easily.
There is one big disadvantage of the CDs though. Self employed people can't liquidate the CDs before the arrival of the maturity date. If they try to liquidate their CDs early, then they'll have to pay heavy penalty. Moreover, they will lost a percentage of the interest and the principal amount.