Becoming a Money-Wise Online Entrepreneur

So you work for yourself.  You set your own hours.  You call your own shots.  You make good money on your own terms from your own office.  But how are you doing when it comes to managing your money?  These days if we are silly enough to listen to the daily news we are constantly barraged with bad news beginning with gas prices and ending with a full blown recession by the end of the ten o’clock news.

All self-employed people know that while working for yourself affords many freedoms, it also presents unique financial challenges.  Cash flow, for example can be erratic when you first begin your business.  Saving for a rainy day for business expansion offers new hurdles as well.  Corporate employees enjoy automatic payroll deductions for savings and retirement plans, but the self-employed entrepreneur must rely on old fashioned self discipline when it comes to funding savings accounts and retirement investments. And don’t forget about taxes.

Independent contractors accounted for 7.4 percent of total employment in February 2005, up from 6.4 percent in February 2001, according to the Bureau of Labor Statistics of the U.S. Department of Labor. That would be us.  If you are an independent contractor in today’s work force, or just considering making the leap from employee to entrepreneur, here are five quick tips to help you secure your financial future in these uncertain times.

Manage Your Cash Flow

 What do online entrepreneurs, freelance writers, real estate agents, virtual assistants, and plumbers all have in common?  We face periods of uneven cash flow.  To ensure that you always have money reserves, be sure to develop a budget that allows for swings in your income.  Begin by determining an average of how much revenue you know you can count on each month and use that as a base for monthly expenses.  During months that you earn more than this base, resist the urge to spend beyond your budget and make sure that this money gets safely transferred to an interest earning savings account or money market account.  It is also a good idea to begin your budget by paying yourself a set salary each month, if possible.  Many banks these days offer free checking so be sure to keep your personal and business cash in separate accounts.  You have no idea how this will simplify your life at tax time.

Pay Your Taxes

As an employee, you receive a Form W-2 detailing your income and the amounts your employer paid out for federal, state, Social Security, and Medicare taxes.  As an independent contractor, you will receive a Form 1099-MISC from every organization that pays you $600 or more during the tax years.  Since no taxes were withheld, it falls to you to calculate the amount that you will owe and make sure that this money is safely stashed away in a savings account.  This is a good time to invest in a good tax software program such as TurboTax.  Don’t overlook the fact that you will also have to pay your own Social Security and Medicare taxes.  Use Tax Form Schedule SE to calculate these amounts.  I strongly advise that you hire a personal tax advisor to help you determine what your business deductions are and how to contribute to retirement plans.

Prioritize Insurance Planning

As a self employed entrepreneur, or contractor, it is up to you to provide your own health, disability and life insurance.  It is a sad fact that many self-employed people forego this important financial safety net, fearing that they simply can’t afford it.  Do not make this mistake! At the very least, you should have enough coverage to protect yourself against potential loss of income due to illness or disability.  You may also need to consider boosting your home insurance coverage or purchase liability insurance if your office is home based.  Again, speak with your licensed financial advisor, accountant, or insurance representative to determine how much insurance coverage you really need.

Invest in Your Future

The government affords the self-employed many generous advantages and it is never too early or too late to begin saving for retirement.  Again, take the time to sit down with your financial advisor.  Ask about retirement accounts for business owners, including the traditional IRA, Roth Ira, Keogh plan, and Simple-Ira among others.

Working for yourself can be one of the most exciting and rewarding things that you will ever do.  It can also appear overwhelming and challenging if you don’t have your finances set up properly from the beginning.  By creating a comprehensive game plan you will ensure many years of economic security and business success.