Self-Employed: Financial Considerations
Being self-employed can be a rewarding way to make a living. You’re your own boss. You create your own schedule and work environment, choose the people you work with, and get the satisfaction of starting something from scratch.
Working for yourself and building a successful business takes persistence, dedication and resourcefulness. You also must consider important financial aspects. Learn more about the fiscal realities of an independent professional life.
Start building an emergency fund now
When you run your own business, you won’t always have the same amount of cash coming in each month. To protect against the dry spells, create an emergency fund that provides a safety net for when something goes wrong.
Most experts recommend an emergency fund large enough to pay three to six months of expenses. However, yours might need to be a little larger to provide enough cash to continue running your business, too. Ideally, it should be in place before you go out on your own. Start by deciding how much money to set aside in case you make no income one month. Once you have that number, you can begin to look for ways to save.
Keep your personal and business finances separate
If you’re getting into business for yourself, establish separate personal and business bank accounts. Beyond making it easier to manage your money, it’s a necessary step for developing your business credit. It also helps you obtain small-business loans and other types of financing when you need it, as well as better terms from suppliers and vendors.
Follow these steps from the Small Business Administration to establish business credit for the first time:
- Structure your business as a separate legal entity.
- Obtain an employer identification number (EIN), also known as a tax identification number.
- Establish a business-specific address and phone number. If you operate from home, maybe rent a virtual office.
- Apply for a business credit card.
- Use your line of credit consistently and responsibly. Always pay promptly. This way, you build trust and credibility with customers and suppliers, and gradually increase your credit limit.
Protect yourself and the business
You may lose your company-provided life insurance if you leave your current position and venture out on your own. If other people depend on you financially, whether family or a business partner, it’s vital to have life insurance coverage in place for the unexpected.
When you’re self-employed, insurance specifically designed to protect your equipment and professional liabilities is essential. Generally, if you make money doing something, your activities are considered a business − even if you run it from home. You can’t rely on your standard homeowners/condo/renters policy because it may exclude business-related items or events, or provide limited coverage.
While your needs will vary based on the nature of your work, most business owners invest in property, liability, commercial auto and workers compensation coverage. Consult a qualified insurance expert to make sure you get all of the protection you need.