Vocabulary
expense | /ikˈspens/ n. the cost required for something; the money spent on something: |
debt | /det/ n. money owed or due:
Ex: Prepare to pay your debts. |
tax | /taks/ n. a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions: |
penalty | /ˈpenltē/ n. a punishment imposed for breaking a law, rule, or contract: |
asset | /ˈaˌset/ n. a useful or valuable thing, person, or quality; things that you own: |
leverage | /ˈlev(ə)rij/ v. use (something) to maximum advantage: |
Comprehension Questions
What type of expenses do you need to account for?
What is the disability insurance for?
What are the side gigs that can augment your income?
What is the 12 months’ worth of expenses for?
What are the key areas for paycheck allocation?
Article
Entrepreneurs. Freelancers. Gig workers. Consultants. Salespeople.
Account for all your expenses
Know your actual expenses, which you need to cover using your earnings. Break this down to the essential fixed and variable expenses in your life -- housing, food, gas, utilities, debt payments, etc.
Your business needs the same profit and loss analysis. In making your calculations, don't forget to include taxes, especially since you may need to pay estimated taxes periodically, so you should have money set aside to do that to avoid penalties.
Besides income taxes, you also will be subject to self-employment taxes to fund Social Security and Medicare, and if you have hired employees, you'll need to provide the employer portion of those taxes for them, too.
To be able to take full advantage of any tax deductions that may be available to you, keep very good records of receipts for payments and purchases you make.
And don't forget about buying and paying for disability insurance. "You are your asset. And if you can't work, you have no income," said certified financial planner Lazetta Braxton, co-CEO of 2050 Wealth Partners.
Be realistic about your earning potential
Your chosen field, the seasonal ebbs, flows in your line of work, and what differentiates you from your competition will influence how much revenue you can generate in a year.
Project a realistic range of how much money you can bring in, and base your financial strategies around the lower end of that range if you want to be safe, said certified financial planner Kerry O'Brien, who founded BeingFIT Financial.
Braxton also recommends, especially if you're just starting a business, that you have a related side gig to augment your income. That might include teaching an e-course, doing paid speaking engagements, or using UpWork to find an occasional project.
"Use your human capital. Leverage it in ways that are not overconsuming," she said.
Keep cash reserves for lean months and surprise bills
Try to set aside six to 12 months' worth of expenses for those months when you're not bringing in much income.
If you have a spouse making a steady income who is supporting your household, you may not need more than six months set aside, O'Brien said. The same may be true if you have very low overhead costs, which means you are less likely to face unexpected repairs, hikes in rent, or inflationary prices on supplies.
Be systematic in how you manage paydays
Whether you get a check for $500 or $50,000, certified financial planner and CPA Ashlee de Steiger, who founded Gunder Wealth Management, recommends systematically allocating it in the same way across your pre-determined financial needs.
Based on your expenses and financial goals, she recommends deciding how much of every paycheck should be allocated to key areas: X% for essentials, like housing and food, X% for taxes, and X% for savings goals, like traveling, buying a home, or retirement.
Strategize retirement savings
Ideally, you should set aside at least 10% to 20% of every paycheck for retirement, de Steiger said.
While that may be difficult to do when you're just launching a new venture, Braxton urges clients not to let more than a year or two go by without making any retirement savings contributions.
"Two years is the max," she said, noting that if you can't afford to set aside some money for retirement after that, you need to find a way to make more money.
Seek outside help
Even if you're not (yet) making a lot of money in your independent venture or crushing it with your commissions, it may pay to periodically consult with a fee-only tax and planning professional. They can help you figure out a money management strategy that stabilizes your finances despite having an unpredictable income.
By Jeanne Sahadi, CNN Business, updated 1604 GMT (0004 HKT) February 4, 2022, https://edition.cnn.com/2022/02/04/success/unpredictable-income-money-management-feseries/index.html