SALT LAKE CITY — Perhaps one of the most liberating feelings on earth is the moment you decide to take your work to a strictly self-employed format.
Gone are the days of getting to the office at 9 and staying until 5, carefully counting out your vacation days, and answering to a boss with your performance results at the end of the month. You now set your own schedule and work to achieve your own goals. The problem is, with this newfound freedom comes a whole new set of potential issues you must find solutions to.
Without your employer, you’ll need to set your own hourly rate, budget for potential dips in your workflow, and manage your own insurance, savings, and financial books. If you’ve made the decision to switch to a self-employed situation, you’ve probably considered these things already, but on the same note could probably still use a little extra help finding effective solutions.
Here are five tips to cover some of the most common financial predicaments self-employed professionals face.
1. Setting your rates
Now that you’re self-employed, your hourly rate will need to be a bit higher to make up for potential inconsistency in your work flow. Although your hourly rate at your previous employer might seem high enough, working as a contracted employee means you can charge your clients directly and ultimately make what your employer was making off of clients for your time — not what you were making off of your employer for your time.
For example, as a copywriter, you might have been making about $50 an hour off of your work while your employer was billing clients $100 an hour for your work. Doesn’t that extra $50 an hour sound pretty appealing? I think so!
If you’re not sure where to start in determining your hourly rate, Forbes offers an excellent guide to help contract workers put a monetary value on their work.
When your income depends on the number and individual value of the projects you bring in on your own, budgeting can get a bit tricky. As you become more experienced, you’ll get a feel for how much you can expect to bring in each month, but identifying this number can be a bit tricky at the beginning. This is where a budgeting app like Level Money can help.
Level Money connects to your bank account to track the money coming in and going out of your account. Over time, the app identifies patterns to determine how much your monthly expenses set you back and how much you’re bringing in to your account. From here, the app creates a budget for you to show you how much money you actually have left once you’ve paid your utilities, rent, etc.
3. Building a retirement savings
Setting up a solid retirement savings account is absolutely essential. The earlier you start and the more you save, the better off you’ll be in the future when it comes time to retire out of the workforce. The process of setting up a 401(k) with your employer is simple enough, but it can get a bit tricky when you leave your job for self-employment.
Although it will take a little more work to set up your retirement fund on your own, it’s not only possible but absolutely essential.
It would also be beneficial to look into a few unconventional ways to boost your retirement savings like considering a reverse mortgage on your next home, investing in low index funds, and refinancing debt when you can. These things will help you boost your retirement savings and potentially make up for a lack of employer 401(k) matching.
4. Establishing insurance
Like a retirement savings plan, an insurance plan is something most employers take for granted until they move to a self-employed role. Although the process of setting up your own insurance can get a bit confusing and maybe even pricey, it will be well worth it should you run into health or business liability issues in the future.
Time magazine offers a solid guide for self-employed health insurance if you’re a bit lost on where to start in finding the right provider and plan. Insurance pros also recommend that self-employed workers look into business insurance to cover your home as homeowner’s insurance cannot cover accidents that occurred while conducting business in the home.
5. Managing accounting and taxes
As a self-employed professional, you enjoy a whole lot of freedom when it comes to picking and choosing the projects you work on and deciding how much you make for those projects, but with that freedom comes the responsibility of keeping track of how much you earn and putting away extra money for taxes at the end of the year. Unless you just happen to be an accountant, this part of being self-employed can become a bit confusing and frustrating.
QuickBooks provides a guide to help self-employed customers manage their own accounting throughout the year. I recommend checking out this guide as you set your strategy for keeping your financial books straight.
Managing your finances when you’re self-employed is a bit trickier than managing them as an employee of a company, but the benefits of your newfound freedom will be well worth the initial work it takes to get your finances in order.
If you have a question or perhaps a tip you’d like to share, comment below!