Self-Employment-Managing Your Money: Tips for Living with a Fluctuating Cash Flow (Part Two)
Continued from Part One:
Self-Employment-Managing your Money
...
The way you manage your money is one of the first
things you'll change when you move from employment
to self-employment.
You are moving from an environment where
you received income in equal amounts at set intervals
to one where your income fluctuates.
Managing money in such circumstances
is both unfamiliar and uncomfortable for most of us.
These are some tips I developed from
my experience of 10+ years of self-employment.
THOSE PESKY ESTIMATED TAXES
Enter the land of self-employment and
you enter the land of quarterly estimated taxes.
You pay estimated income taxes because
the Government says you must. Since you no longer
have an employer to withhold income taxes, the tax
authorities want to make sure that you pay up.
One way to make sure you have money
in-hand at the appointed time is to mimic what your
employer used to do for you. Take a portion of money
you receive and put it away. My solution is to put
it into a separate savings account.
By keeping the money separate, you are
less tempted to spend it. Then at tax, time, simply
transfer it into your checking account and write the
check.
It is less painful this way.
Having a method to manage tax payments
is most important around April 15 when annual taxes
from the previous year and first quarter estimates
for the new year come due on the same day.
GETTING PAID
Banks charge interest when they lend
money. Very small businesses and self-employed people
generally dont. And if they do, they
rarely collect. It is hard to lay down the law to
slow-pay clients much larger than you and clients
who give you a lot of business.
In fact some businesses make it a policy
to pay their creditors slowly. They use your
money, interest free, at your expense.
Slow-pay and no-pay clients cost you
money and mess up your cash flow.
The subject of collections is worthy
of a separate article or book, in itself. But here
are a couple of pointers.
Ask to be paid up front when possible.
Its done all of the time. Contractors get deposits
and lawyers get retainers.
One piece of conventional wisdom is
to have a policy to handle late payments. Set up a
system to diary your outstanding invoices. Then follow
up at scheduled intervals as needed. Keep a paper
trail in case you have to take things further.
Stay on top of overdue billings and
keep lines of communication open with the client.
The longer a debt remains outstanding, the less likely
youll get paid.
The squeaky wheel gets the grease. Be
squeaky.
CREDIT CARDS
Credit card debt can be a killer. Calling
the interest rate levels charged on many cards usury
is not an overstatement. If you have credit card debt,
pay it off as quickly as possible.
Nonetheless, credit cards are a necessity
in this day and age. When you are on the right side
of the credit card companies, credit cards can be
a benefit.
You can track expenses by putting it
on your card. That can be a real help when you have
a lot of petty tax deductible expenses that add up
over the course of a year.
If you use your card for this purpose,
be sure you pay off your balance every month.
BUILD A FINANCIAL CUSHION
For self-employed people, having a financial
cushion is essential. It is a lifesaver when unexpected
expenses come up, or expected income is slow to materialize.
In addition, you may want to sock away funds for expected
large expenses such as estimated tax payments.
If you cant swing it in the beginning,
build your cushion gradually. Put away money when
times are good. Live lightly when times are not.
Youll find managing your money while
being self-employed will get easier over time. You
will get to know your cash flow patterns and adjust
accordingly. As your business grows it will bring
in more money, which itself, does a lot to make you
more comfortable.
Ellen Zucker has been successfully self-employed
for over 10 years.
Self-Employment 101: It's about making
a living and creating a life! ... Observations, information
and resources for those of us who are self employed
or just thinking about it. http://www
.selfemployment101.com
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