Being a solopreneur has its advantages and challenges. Many of us are solopreneurs for different reasons. Whether by choice or by accident, we all face our own set of unique challenges to our time, our businesses, and our finances.
If you’re the one handling the marketing, selling, IT, and customer service, and you are worried about where that next check is going to come from, here are seven essential things that I find solopreneurs often forget to do with their money.
1) Pay Your Taxes
When you are working for someone else, taxes are typically taken out of your paycheck automatically. You never see that money. But, I have seen more than one solopreneur come to me in the midst of major issues with the IRS.
Whether they had a lack of knowledge, poor advice before reaching me, or a different issue, they were not doing one basic thing—creating a separate account for their income tax payments.
Typically, I suggest my clients put one-third of their money in this account (in high tax New York). This practice should begin as soon as you start your business on your own. If you’re not doing this from the first check you receive from a client, you will have a large bill when April 15th comes the following year. And, if you don’t have the money when it is time to pay up, then you will begin the deep rabbit hole of tax payments, interest, and penalties.
2) Create an Emergency Fund
Everyone should have an emergency fund set aside, but it’s even more critical for solopreneurs to be diligent about putting money away. Although, in some ways we have more control over our income and often have greater upside potential than employees, the truth is we are also more financially vulnerable.
Even the savviest solopreneurs are susceptible to cash flow issues in their business and fluctuations in income. Plus, there’s a good chance you are not eligible to receive unemployment benefits. If you are a sole proprietor, not paying unemployment tax, you’re not eligible for those benefits. And, even if you are paying yourself a salary and paying unemployment tax, you would have to shut down your business completely and meet other criteria to possibly be covered by unemployment.
Don’t allow yourself to get blindsided by unexpected expenses or a financial shortfall. Having a personal cash reserve tucked away in your bank account that’s easy to access can help you meet short-term and emergency funding needs as they arise without having to panic or start mounting debt payments.
3) Start a SEP plan AND a Roth IRA
In addition to putting money away for taxes and emergencies, you also need to put money away for retirement in a Simplified Employee Pension (SEP) plan and a Roth IRA.
The SEP can help delay taxes and ramp up retirement savings rapidly as contribution limits are much higher than a traditional IRA, and fees, set up and maintenance costs, and bookkeeping can be a lot less than a solo 401k.
Like every type of retirement investment vehicle, there are some drawbacks, but you should work with a financial planner to figure out which are right for your situation.
4) Invest in Yourself
As solopreneurs many things are constantly competing for our money. Our business is one of them. Sometimes you will receive a much higher return on investment (ROI) from investing in yourself and your business by building a new product line, getting some continuing education, or increasing your marketing efforts.
As with all investment activities, this is high risk and it might be harder to figure out what the return could be, or when it might be coming. But, if you aren’t willing to take a risk, why are you in business?
Be sure to take a balanced approach. Just as in traditional investing, diversification is key to creating a higher likelihood of success.
5) Get Adequate Health Care Coverage
Most full-time employees have access to their employer’s health insurance and other medical-related benefits. But, if you’re a solopreneur, unless you are able to take advantage of your spouse’s employee health plan, you’re responsible for finding your own health insurance coverage.
Finding an affordable plan can be challenging, but it is possible and it is worth it. Far too many people who go into business for themselves put off searching for health coverage until it’s too late. Even if you are young and healthy, you never know when a health crisis can hit.
Do your research and select a plan that’s right for you. You can go through an insurance marketplace, a health insurance company, or a broker. When you buy a plan, consider choosing one that is compatible with a Health Savings Account (HSA), which is a pre-tax account that you can use to pay for medical expenses throughout the year and save on overall costs.
6) Buy Life Insurance and a Long-Term Disability Plan
You may not want to think about life insurance or long-term disability insurance, but your family’s financial future could depend on your initiative to buy adequate policies for yourself.
Many people rely on life insurance and LTD policies offered through their employee benefits package, but as a solopreneur, like with everything else, it’s up to you to find the right policies.
Without coverage, you might struggle to make ends meet if you become seriously ill or disabled and your family may struggle financially if you pass away unexpectedly. As a business owner, the risk may include covering your business liabilities as well, so it’s especially important for you to have coverage.
Do your homework and evaluate your needs, both personally and professionally. Figure in your business debts, household bills, financial goals, and everything you hope to be able to provide if you remain healthy and able to work. Then search for policies that would cover your family if you are unable to do what you have planned for your future.
7) Insure Your Business
You may think your business is too small to need insurance, but even solopreneurs could benefit from having protection against common business mishaps.
Look into getting general liability insurance to protect you against property damage or injury involving a third party, as well as libel, slander, trademark and copyright infringement. Even if you are working out of a spare room at home, it is still a good idea to get commercial property insurance. And if you offer professional services, you may also need to get professional liability insurance (also known as errors and omissions insurance) to cover legal expenses in case you are sued for a problem with your work.
Overall, being a solopreneur can be risky business, but also can be immensely rewarding as we are in greater control of our time and resources. But these seven tips above can help make your journey more financially successful and rewarding.
If you need help budgeting and investing for yourself as a solopreneur, make an appointment with us today.
Russell D. Rivera, CFA, CFP® is the Founder and President of Voice Wealth Management (Voice) in New York, NY. He also likes to think of himself as a Personal CFO and Financial “Therapist” for entrepreneurs, young professionals, and their families. He helps clients make prudent financial decisions regarding spending, saving, investing, and planning while giving a voice to the individual client's financial priorities and experiences.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Please keep in mind that insurance companies alone determine insurability and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices.