NFIB

Two Allocations Every Self-Employed Person Should Make
04/ 02/ 2002

If you're self-employed, chances are that each time you receive a check from a client, you need to allocate money for everything from business overhead to general household expenditures. Most financial experts agree that personal savings and estimated taxes should be two of the most important items on your allocations list, but far too often self-employed business owners neglect them altogether. Contributor Jeffrey Moses addresses this issue in today’s Workshop.

Funding Your Future Retirement

There is only one way for a self-employed individual to make sure that bills, sudden expenses and family emergencies don't eat up all your income: pay yourself first every time you receive a check.

Company employees usually have the opportunity to put money away for retirement through 401(k) plans, which frequently are automatically deducted from wages. But as a self-employed person, you must take the responsibility to regularly put aside retirement funds, unless you want to count on Social Security funding your retirement years.

To start saving now, write yourself a personal check for 10 percent of every business deposit you make. Write this check first, before you do anything else with the money you've just received. Put the check into a personal savings account that is designated as your retirement account. Don't think of it as back-up money if things get tight down the road.

You could also start your retirement fund by establishing an automatic monthly withdrawal from your business or personal checking account that's sent directly to a money market fund or a mutual fund (stocks, bonds or a combination of both). Speak with your accountant or tax advisor to determine which companies and types of funds are best for you.

Estimated Taxes

Another important thing you need to do when you receive payment from a customer is to allocate funds to your upcoming estimated taxes. Use Federal Form 1040-ES to determine the amount of your estimated taxes and the dates of payment.

To avoid scrambling at the last minute to gather money for your estimated taxes, put aside an adequate amount from each check you receive. By April 15 you'll know what you owed for the previous year, so you'll be able to determine what percentage of your total gross income was owed as tax. Take this percentage from each check and put it in a special tax savings account so it will be there when you need it.

Creating a Habit

It's always tempting to immediately start spending money when you get a check. But by cultivating the habit of setting aside funds for these areas, you’ll experience the satisfaction of watching your retirement savings grow and the ease of having your payment ready and waiting when tax time arrives.

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