When compared to salaried employees, managing personal finances can be much more complex for independent professionals. Independent professionals—consultants, freelancers, and entrepreneurs—are responsible for managing their own taxes, as well as their personal savings and business expenses. Therefore, it is necessary for independent professionals to develop smart money strategies that allow them to maximize their earnings, save for their futures, and maintain financial stability throughout the year.
Separate Business and Personal Finances
For independent professionals, one smart money strategy is to set up a separate business checking account. As an independent professional, separating your business and personal finances will assist in tracking your business income and expenses more clearly; make tax preparation simpler; and present a more professional image.
To set up a separate business checking account:
Open a dedicated business checking account to handle all of your business income and expenses.
Use accounting software to track both your income and expenses and avoid mixing your personal and business finances.
Consider obtaining a business credit card for your business-related purchases and take advantage of the rewards or cash back provided by the card.
Maintaining this separation of finances will enable you to continue to manage your finances in an organized manner and reduce the likelihood of missing out on deductible expenses.
Create a Solid Emergency Fund
Another smart money strategy for independent professionals is to create a solid emergency fund. As an independent professional, you may experience fluctuations in your income, which could cause you to experience uncertainty and anxiety when unforeseen expenses arise. An emergency fund is critical to providing you with the funds to pay for unexpected expenses without causing you undue stress.
As an independent professional:
Consider creating an emergency fund that contains 3 – 6 months’ worth of your expenses.
Create a consistent savings routine by setting aside a certain percent of your earnings every month, regardless of whether you are experiencing a busy period.
Keep your emergency fund readily available by placing it into a high-yield savings account so you can access it quickly.
Having an emergency fund creates financial security and peace of mind for you during unpredictable periods.
Prepare for Taxes Throughout the Year
Another smart money strategy is to prepare for taxes throughout the year. Since independent professionals are required to manage their own taxes, setting aside money for taxes and taking advantage of deductibles can help minimize the shock experienced when filing taxes.
As an independent professional:
Set aside 25-30% of your income for taxes based upon your tax bracket and business expenses.
Document and track your deductible business expenses including home office costs, business travel, and equipment.
Hire a tax professional to assist with tax planning and to confirm you are maximizing your deductible expenses.
Preparing for taxes will ensure you are prepared when the time comes to file and will allow you to retain a greater portion of your hard earned income.
Save for Retirement Using Tax-Advantageous Accounts
Finally, another smart money strategy is to save for retirement using tax-advantageous retirement accounts. Since independent professionals do not have access to employer-sponsored retirement plans, they should explore other options to save for retirement while minimizing taxes.
Consider:
Opening a SEP (Simplified Employee Pension) IRA or a Solo 401(k) to contribute to your retirement savings on a tax-deferred basis.
If you anticipate being in a higher tax bracket in the future, consider opening a Roth IRA as it will allow for tax free withdrawals in retirement.
Regularly contributing to your retirement accounts will also allow you to grow your wealth through compound interest and achieve long-term savings.
Saving for retirement as soon as possible will ensure you will have financial security when you choose to retire, and will not be dependent upon Social Security or other external resources to support you.
Conclusion
Smart money strategies are fundamental to the long-term financial success of independent professionals. Implementing the smart money strategies outlined above—
separating your business and personal finances;
establishing an emergency fund;
preparing for taxes; and
saving for retirement
will give you the confidence to build a successful business while maintaining a secure financial future.