Regardless of your profession, there are no one-size-fits-all financial planning solutions. The fact is that the variables we consider when creating a financial plan vary quite a bit from one individual, family or business to another. With that said, what is unique about financial planning for self-employed persons?
The biggest difference between the self-employed person and an average financial planning client is the significant fluctuation in the self-employed person’s financial position. For example, if the self-employed person does contract work and their contract is up, it could be several months (or longer) before getting another contract. This means it is critical to have a solid cash cushion.
Tip #1: Build a savings cushion
The general financial planning rule is that you should save AT LEAST 10% of your income on an annual basis.
For the average financial planning client, I generally recommend 3-6 months of emergency cash savings. For the self-employed, that recommendation is generally higher and is based on a number of factors such as the nature of the work, the percentage of revenue that is recurring, and industry cyclicality.
How should you save for retirement?
Tip #2: Consistently invest in your retirement
Many companies automatically enroll their employees into 401(k) or pension plans. However, if you are self-employed this benefit is not available to you. That said, it is critical to consistently invest in your retirement if you do not want to work forever. There are several types of retirement account options available to the self-employed. If you are just starting out, you could choose to invest in a traditional IRA. However, a SEP IRA or individual 401(k) will allow you to invest significantly more dollars each year. You may even want to start your own personal pension plan.
Protecting yourself and your loved ones
Tip #3: Estate Planning
It is important to create wills, living wills, medical and financial power of attorney documents. These documents should be reviewed annually as your personal goals and estate laws change.
Tip #4: Business Insurance
As a business owner, it is important to own insurance that will allow your company to run if you are unable to actively participate in its daily operations. This insurance may be used to hire a person to substitute for you, or to replace income from your business if the company no longer exists.
Tip #5: Health Insurance
Health insurance is key to protecting yourself and your loved ones. If you don’t have it available to you through an employer, you still have lots of options. I recommend clients speak to an independent health insurance broker to get a sense of all of the different options. If you have solid emergency savings in place, you can choose options with higher deductibles but if you are still building up your savings, be cautious when it comes to high deductible plans.
Tip #6: Disability Insurance
Disability insurance is especially important for the self-employed because if you cannot work then you will not have any income. Statistically, you have a greater chance of premature disability than premature death. Therefore, it is very important to own adequate coverage to provide for you and your dependents if you are not able to work. Annually, you should review your policy for the type and amount of coverage.
Tip #7: Life Insurance
Various types of life insurance are available, including whole life, variable life, universal life, universal variable life and term policies. They provide a death benefit when the owner of the policy passes away. It is important to review your policies yearly to ensure the coverage is adequate to protect your loved ones. Also, financial situations may change, and you may no longer need the full amount or type of coverage you own.
Tip #8: Hire a CPA
Hire a CPA who is experienced working with self-employed persons. Don’t just hand them your taxes once a year. Meet with them to discuss how you can strategically lower your tax burden. Get clear on what expenses are deductible and track them carefully. There are some great apps out there to help you do this.
Tip #9: Plan for tax payments
Plan for quarterly tax payments. Set aside a fixed percentage of your revenue. Work with your accountant to determine what that percentage should be.
Prioritize Your Annual Financial Planning Review
Tip #10: Meet with your financial advisor at least annually
Self-employed persons often have more financial moving pieces than those who are employed by others. That means it’s critical to prioritize your annual financial planning review. Review your entire investment portfolio to ensure it is allocated to meet your current and future goals. As your goals and needs change, your portfolio allocation should be readjusted accordingly.
If you are self-employed, regular ongoing strategic financial planning is critical to reaching your financial goals. While I am based in Ohio, I maintain an active online presence and meet with clients virtually throughout the country. Schedule your free consultation today and learn how we can help you manage your money better.