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One of the best things about being self-employed is that you typically have a lot of flexibility. Need to pick up the kids after school? Prefer to work on the weekends and have a day off during the week? When you have no boss, it’s much easier to swing it. But with that freedom comes a significant drawback – in comparison to working a normal day job with a steady paycheque, your personal finances will likely be more complicated to navigate when you’re self-employed. Those who have been self-employed for a while know the drill: clients often pay invoices late, it can be difficult to keep track of the taxes you owe, and just paying your bills on time can become complex since you’re not paid on a regular basis. It can be stressful to manage on your own, which can lead to procrastination and debt. But there are ways to overcome these challenges and enjoy the benefits of being your own boss. Here are six suggestions to tame your finances when working for yourself.

1. Have an emergency fund

Having an emergency fund is important for those who work a day job, but for the self-employed, it’s outright critical. If a major client doesn’t pay you for a few months, you’ll need cash on hand to pay your bills. Or if you get injured or sick, that can immediately impact your ability to earn money. There are no employee benefits to fall back on. It’s recommended that most people have three to six months' worth of income saved in an emergency fund – separate from your savings. But if you’re self-employed, it’s best to double that. It may sound overwhelming if you currently don’t have anything saved but just take baby steps. Start today by putting 10 to 20% of your income into your fund each month.

2. Make a budget

When you are self-employed, money can come in sporadically from various clients, and the amount you make is likely different every month. That being said, “regular purchases” may become infrequent or clustered into one big shopping trip at times when more money is coming in (for example, you need to buy some new clothes or make that big stock-up trip to Costco). As a result, those who are self-employed need to be more diligent in budgeting than those who make the same paycheque bi-weekly. A budget for someone who is self-employed needs to be adjusted from month-to-month to accommodate varying income levels and to manage expenses accordingly. One month, you might make $5,000 and budget to pay for an annual gym membership and make a contribution to your retirement account whereas another month you might make just $3,000 and only have enough to pay for necessities like rent, food and other bills. At the end of the day, the goal is to still pay for as much as possible using your monthly income and reduce the expenses you need to put on your credit card. Your needs, however, will likely have to be re-evaluated every month.

3. Don’t forget your taxes

When you get a big paycheque, it can be easy to forget that you owe taxes. Especially when the dog needs to go to the vet, your kids need new shoes, and your car has been making a funny noise for the past two weeks. Life can get in the way, but nevertheless, tax day will come and you need to be prepared for it. Open a separate account and set aside money to pay your income taxes and any other imposed taxes like PST or HST. Keeping tabs on your taxes can also become overwhelming. So if you’re not familiar with the tax world and you don’t know how much you’ll owe, it’s best to work with an accountant.

4. Eliminate debt ASAP

Debt can often feel like a side effect of being self-employed – especially during lean months when your only choice is to use credit to keep that steady stream of Pop Tarts in your toaster. But carrying credit card debt or other types of debt for long only makes your life more difficult, whether you’re self-employed or employed by someone else. Ideally, anyone making purchases with credit should anticipate paying it off before interest can accumulate. For those who are self-employed, this is where having an emergency fund can be helpful. During times when you’re strapped for cash, you can rely on your emergency fund to pay down as much of the principal debt as possible – as long as you are adamant about replenishing it quickly so you still have at least one to two months’ worth of income on hand. Focus on debts with the highest interest rate first to become debt-free faster. Also, consider refinancing your debt at a lower interest rate with a line of credit or a credit card that offers an introductory 0% interest rate. Stay away from using high-interest credit vehicles like cash advances to pay off your debt. Cash advances can be tempting to help make ends meet when you’re in a jam, but they typically come with astronomical interest rates.

5. Get insurance

If you suddenly became unable to work for a long period of time, what would you do? Or if you died today, how would your family survive without your income? No one wants to think about these things, but it is necessary to consider. If you’re self-employed, you don’t get paid sick days, medical leave, or disability benefits – so you owe it to yourself to get insurance. Protect yourself with a life insurance policy that will replace your income and cover your family in case you die, or a disability plan in case you’re injured and can no longer work. Want to protect your business as well? There are policies like key person insurance that protects those who are crucial to a business, or disability overhead insurance that covers your fixed and business expenses in case you get sick.

6. Don’t forget about retirement

When working for yourself, you also don’t have a pension or an employer contributing towards your retirement savings, which means you need to be diligent in saving towards your own retirement dream. Put away at least 10 to 20 per cent of your income and work with a financial planner to help you craft a retirement plan that takes advantage of registered accounts like RRSPs and TFSAs. For the self-employed, saving for retirement might be sporadic since you may not be able to schedule regular automatic contributions. But there may be months when you can afford to put aside 30 to 40% of your income towards retirement. Just set an annual goal and make sure it balances out by the end of the year! - Planning for your finances when self-employed may seem complicated, but a little pre-planning can go a long way. Debt is stressful, taxes are not evadable, and emergencies can happen to anyone. Attain financial peace of mind, and go to sleep at night like someone who doesn’t have to get up early for the “9 to 5 grind.”

Amanda Reaume

Amanda is a freelance writer and the creator of the blog Millennial Personal Finance. After graduating from university with no debt, and $40,000 in savings, Amanda wrote the book The Complete Guide to a Debt-Free Education. She is also the author of a personal finance book aimed at Millennials called Money Is Everything.

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