Dear Money & Crisis Reader,
Being self-employed during a financial crisis can be both a blessing and a curse.
As your own boss, you won’t fall victim to the sweeping layoffs that go hand in hand with a crisis.
And although you’ll probably see a drop in business, you have the freedom to diversify and pivot to other income streams to make up for the shortfall.
On the flip side, self-employed folks tend to be less prepared for financial hardship than others. And there are a number of reasons for this.
On average, people who are self-employed save less because they are spending more on bills and taxes. But in the end it comes down to one major factor.
When you become self-employed, you assume 100% responsibility of your money.
When you’re banking a monthly paycheck, your employer will automatically deduct your tax… your 401(k)… your health insurance… and any savings programs you’re enrolled in.
And that’s only the tip of the iceberg. You don’t even see all the money that goes back into your boss’s business to keep it alive.
But when you become self-employed, it’s your job to allocate every single penny that comes into the business.
You have to take care of your business expenses, taxes, your insurance, and all your regular bills and expenses on top of that.
When you’re forking over all that cash, it’s easy to see how some folks could forgo some expenses in order to have an extra few hundred dollars in their account every month.
In fact, experts have shown that there’s an actual mental discomfort that goes along with spending money. So even if you’re drawing down the exact same take-home pay every month, it can feel more painful because you’re seeing every penny come in… and every penny go out.
Sometimes this means going without home insurance… investing… or saving entirely.
Yesterday, we discussed some of the most common financial mistakes folks make in their first year of self-employment.
Avoiding these pitfalls is the first step to success and self-employment. But to protect yourself against a financial crisis, you’ll need to be more proactive.
Take these extra steps to reinforce your finances and don’t get caught with your pants down when the next financial crisis comes.
Separate Your Finances
When you make the move to self-employment, the lines between your personal and business lives can start to blur — especially if you’re working from a home office to save on expenses.
It’s easy to see all the money simply as cash coming in and cash going out. And some folks will create an enormous Frankenstein budget with business expenses listed right on top of gym fees and groceries.
The real danger of operating this way is that it tends to work for a while… just long enough to get yourself into financial trouble. Then to get any sort of clear picture of your finances, you have to untangle this unholy mess.
Keep two separate budgets, one for business life and one for personal expenses.
Protect Your Property and Assets
It can be tempting to overlook insurance when you strike out on your own.
But making the monthly investment in insurance premiums can save you big in the long run.
As always, this is totally up to you. But you should at the very least consider medical, eye, dental, life and income protection insurance.
If you plan on working out of your home, check whether your homeowners or renter’s insurance covers your business property in the event of a break-in.
Lock in Your Take-Home Pay
It’s tempting to pay yourself with whatever’s left over after you settle all your expenses. But this is the wrong way to think about your pay, especially in the early days of self-employment.
An alternative strategy is to pay yourself a fixed percentage of your business’s monthly income. This makes sure you won’t overpay yourself during months where your business doesn’t perform as well.
Obviously, this will leave you with a smaller paycheck on those tough months. But you can counteract that by deciding on a hard figure for your “take-home pay.”
When your percentage income exceeds this number, bank it. When it’s lower than that number, make it up with the funds you’ve already banked.
Either way, you’ll have a fixed income to take home and pay the bills every month.
Likewise, you’ll want to designate a percentage of your income to be allocated to your savings accounts.
What about you? Have you plans to strike out on your own? Or maybe you’ve done it in the past. If so, I’d love to hear what you learned. You can email me with your plans, stories and ideas right here.
All the best,
Editor, Money & Crisis
Editor’s note: James Altucher is the self-employment king. He’s started over 20 businesses, several of which he sold for millions of dollars. And he even self-published three books that went on to be best-sellers.
Today, James is giving away FREE hardback copies of his book The Choose Yourself Guide to Wealth. Claim yours now and find out how James turned a $2,000 investment into a $10 million windfall in just nine months…