Perhaps you’ve recently considered leaving your full-time job to undertake a new challenge in your career. From freelancing, or even turning your side hustle into a full-time gig, there are various reasons so many people have recently decided to permanently quit the workforce.
While self-employment offers better flexibility in your schedule, the ability to be your boss, and having the relaxation to work from home, it’s no wonder more than four million people were seen quitting their jobs during January 2020.
Times have been changing since the advent of the pandemic, and extended lockdowns have shown people that starting their own business can be financially beneficial if done right, and not having to answer to anyone else can help improve innovation and productivity.
Yes, being self-employed has its perks, and it’s becoming undeniable that working from home, and being your own boss is a lot more attractive than being stuck in an office or having to work for a company that doesn’t have the same moral stance as you.
Starting a business, whether it’s in your hometown, or perhaps somewhere else also brings financial constraints, even if it looks like the grass is greener on the other side. There are a lot one first needs to consider before making any drastic changes.
So whether you may be currently caught in the middle of leaving your job, or maybe you’ve already quit, it’s time to start talking about the financial mistakes you may endure in your time as a self-employed individual.
From budgeting, time management, work-life balance, and saving properly – there are a number of mistakes freelancers and the self-employed are making, and this article will help you avoid those mistakes.
Not Budgeting Properly
Right from the start, it’s time to get your finances sorted. Now that you’ve left a steady job, and a full-time salary, you need to start budgeting a lot better. Counting every dime and nickel you spend, and cutting back on unnecessary expenses.
There’s a simple equation that works, and it’s one you can apply to either when you’re freelancing, or when you still receive a monthly paycheck.
Split your earnings as follow:
- 50% Needs: These will be important bills such as utilities, mortgage, rent, and groceries.
- 30% Wants: This can be for things you want at a certain time, such as luxuries, or eating out now and again but aren’t truly a necessity.
- 20% Savings: It is advised that you put at least 20% of your earnings in savings, an emergency fund or perhaps return that money into the business.
If you’re operating a small business from home, or online, you will have to make cutbacks on your wants, as this will help you save a lot more, and you can use any excess cash to support the business.
Inadequate Use of Time
Perhaps one of the reasons you decided to work for yourself or start your own business is because it gives you the ability to spend more time with your family and do what you enjoy. While this may be the case, a lot of entrepreneurs, freelancers, and self-employed people still do not understand the value of time.
Now that you have more time to do a lot of different things, it should be second nature to prioritize certain tasks and projects. Consider work that’s a high priority, and get that out of the way first.
Have a diary or tabletop calendar where you can write down important tasks that need attention. Focus on the important things first, before you go on to complete other projects.
Yes, having balance as a freelancer or self-employed person isn’t easy, working from home and maybe still having a family, but consider how every minute or hour you’re spending doing something unimportant, you could be using that time to learn a new skill, grow your network, look for new clients, or finalize a certain project.
Time is money, and it’s a standing fact you need to grasp right from the very start.
Unable to Separate Business and Personal Expenses
So perhaps you might have an idea on how to budget now, but you’re still not seeing any money come in and being put back into your business or entrepreneurial ventures.
Separating personal and business expenses is one of the main reasons a lot of small businesses, or freelancers can struggle to make money.
Although your new self-employment may only start taking off, you need to consider the money that’s coming in, and how it’s being divided.
For personal expenses, use your checking account, as money comes into the business, pay yourself a small salary, if possible. That account and money can now be used for personal purchases.
Any business-related purchases should be captured in a spreadsheet for tax-related purchases, and to ensure you don’t overspend on the business side.
As the business grows, or you start getting more jobs, you can start thinking of setting up a business account. Just remember, once you set up a business bank account, there can be tax-related expenses and filing you will need to adhere to, so be sure your business is on a level of income before opening a business bank account.
Not Tracking Expenses and Revenue
This goes hand-in-hand with separating personal and business-related expenses, and you must consider what you’re spending, over how much you’re getting in.
Some business owners tend to overspend, purchasing new stock, or goods when it’s not needed, or perhaps even when there’s not even cash flow to make a large purchase that isn’t needed right now.
It’s vital to the success of your business or freelance career that you keep track of how much is being spent, over the amount you’re making. If you’re a freelancer that works from home, purchasing expensive office equipment you might not require right now can make a dent in your budget.
The same goes for an entrepreneur making large business purchases when there’s not enough cash flow to sustain it.
Make sure that expenses are not more than your revenue or income, if you start seeing red on your books and in the budget, then it’s time to start paying closer attention to your budget.
Savings. Savings. Savings.
So perhaps you already had a healthy-looking savings account before you quit your job. By now, you started using some of that savings to either get your business off the ground, making necessary payments until actual money starts coming in, or you paid off some outstanding credit card debt.
Whatever you spent your savings on, it’s important that you now look to put back what you have taken out. It might not be possible immediately, but over time as you start generating a substantial income, you can place a portion of your revenue or income into your savings.
Your savings is your lifeline when you reach a point when sales were lower than you anticipated, or perhaps you haven’t received as many contracts as you’d hoped for.
Keep track of how much money you’re setting aside as an emergency fund, as you’re now completely in control of your money, expenses, and the income you make, you have to consider the seriousness of your savings.
Before anything else, make sure you set aside at least 20% to 30% of your income into a savings account. You can also be smart about it, and place it in an account that receives a decent percentage of interest every month, or in a mutual fund.
Be sure to do proper research before you start looking at various ways you can make your savings grow, as you can run the risk of losing it as well.
No Efficient Tax Planning
Taxes are different for self-employed workers or working as a freelancer, and the sooner you get on top of it, the better.
For self-employed people, you will generally report your income and withhold your own taxes. There could be a possibility that you will need to pay a self-employment tax as well, and if you operate a small business, there could be business-related taxes that need to be filed as well.
Freelancers would also need to learn the rules of what to file, withhold and report, especially if you work from home.
It’s good that you plan for taxes as you start your new career ventures, as it’ll help you see how much money you need to set aside for taxes.
There are also different categories for business tax and freelance taxes, which can range from business expenses and purchases to personal expenses that can be filed as a business purchase. It’s a tricky and complicated system that if not properly understood, can cost you quite the amount of effort and money.
A Final Thought
Now that you’re self-employed, and being your own boss, it’s time that you start taking better care of your finances. Not having that hefty paycheck each month, and having to make your own money comes with a lot of responsibility.
The better you understand how to work with money, and how to budget and save up for an emergency, the more comfortable you’ll become with business and personal finances.
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