If you’re anything like me, the end of the year typically brings a lot of reflection.
Many times this period comfortably wedges itself between Christmas and New Year’s Eve, just as you are able to take a breath from holiday parties. But by this point, it can be difficult to make major life changes quickly—especially when it comes to your career.
So why not start preparing your finances now?
Do you dream about ditching your commute for location independence?
Interested in a more flexible work schedule?
Or simply ready to be your own boss?
I spent years daydreaming about eventually working for myself, but it took an unexpected job layoff to finally make the leap.
Am I happier? You bet.
Are there things I would change? Absolutely.
Is working for yourself in the cards for 2017? Here’s how to start getting your finances in order now.
Disclosure: This post may contain affiliate links.
Pay off as much debt as possible.
Whether you are wrestling with student loans, car payments, or credit card debt, try to pay down as much as possible. As we all know, debt limits our ability to make choices.
In addition to reducing your monthly expenses, lowering your debt burden can also help your credit score. A higher credit score and lower debt-to-income ratio will give you access to more reputable lenders and better credit cards, both of which can be important when you are growing a business.
Work on improving your credit score.
When was the last time you checked your credit score?
The best place to get your full credit report is through AnnualCreditReport.com. The government authorizes a free report from all three of the credit reporting agencies—Experian, TransUnion, and Equifax—every twelve months.
However, it’s important to keep an eye on your credit in between these annual updates.
I have been monitoring a summary of my credit report through Credit Sesame.
Here is what my dashboard looks like:
Credit Sesame is a free website that offers a score from TransUnion, credit analysis, and monitoring. No credit card is required, so it’s easy to sign up.
You will need to upgrade to a paid plan if you want to receive your complete credit reports and regular monitoring from all three agencies. However, their free plan offers plenty of value if you want to stay updated in between your annual free report from AnnualCreditReport.com.
Here is how your credit score is calculated:
35% – payment history
30% – total debt / utilization
15% – length of credit history
10% – types of credit in use
10% – new credit
One of the easiest ways to improve your score is by continuing to make on time payments and to always keep your credit card utilization below 10%.
Calculate your bare bones budget.
Do you know the bare minimum you need to get by? Chances are, you are probably spending more than you need every month. That wiggle room may offer flexibility as you launching your business.
Start by reviewing each monthly expense, line-by-line, and look for money leaks. Monthly subscriptions, insurance premiums, and your cell phone bill are worth scrutinizing.
Make large expenses more manageable by budgeting for them monthly.
No one likes coughing up the money for large bills, but many of these are predictable and can be planned for throughout the year. Breaking these down into more manageable chunks helps keep your monthly budgets intact. For example, I save for my annual car insurance bill, holiday travel expenses, and quarterly haircuts every month.
Save the biggest emergency fund you can.
I had saved $14,000 in cash before I was laid off. A normal month of expenses costs me ~$2,500, so I was covered for about 5.5 months. Personally, I would have felt more comfortable with at least a year of expenses in savings (~$30,000).
The right amount for you is a personal decision based on a number of factors:
- Do you have other sources of income?
- What are your monthly expenses?
- What is your bare bones budget?
- Do you have a partner or spouse who could support you?
Income can be unpredictable when you are self-employed, and unfortunately, clients don’t always pay on time. A sizable cash buffer can make a huge difference when you are waiting on checks and monthly bills are due.
Looking for a savings hack? I’ve been using Digit for some extra help. Digit monitors your spending and automatically moves a few dollars into a separate account every couple of days. Their bots save only what you can afford, and I’ve saved a total of $1,538.41 since I joined.
Get organized with your healthcare.
If you are currently covered by your employer, now isn’t the time to be procrastinating your physical, dental cleanings, or eye exams. In fact, you should be monitoring all of your healthcare needs closely. By speaking with your doctors now, you can more easily assess what type of health insurance coverage is right for you in the future.
Before my employer-sponsored health insurance ran out, I made a list of all the appointments I typically go to throughout the year. I took care of as many things as possible before switching to my new high-deductible health plan.
Switching to a high-deductible health plan? Pair it with a health savings account.
There’s a common misconception about health savings accounts. Many people believe they are only eligible through their employer. False!
Health savings accounts are portable and you may be eligible if you are enrolled in a high-deductible health plan. However, you won’t qualify if you are using Medicare or a dependent on someone else’s tax return.
Health savings accounts offer triple tax advantages:
- Your contributions are both pre-tax* and tax-deductible.
- Your earnings grow tax-free.
- Your withdrawals for qualified medical expenses are tax-free. At 65, withdrawals for non-medical expenses are taxed at your current rate, like an IRA.
*Contributions are only pre-tax if they are made by an employer through a payroll deduction.
I recently joined Health Savings Administrators. I chose this company because I wanted an account with a combination of cash & index funds. As I mentioned, health savings account funds grow tax free and can be used for health expenses in retirement. It’s important to review the fees for any health savings account before deciding what’s right for you.
Open separate bank accounts and credit cards.
Tax professionals advise against co-mingling personal and business expenses for a number of reasons. For starters, it makes paying quarterly taxes a lot easier. And you will be more prepared if the IRS flags your for an audit. It’s also be important if you think you will be applying for a loan—like a mortgage—in the future.
Get your finances in order now.
There’s a lot to think about when it comes to making the leap to self-employment. However, it’s never too soon to get your personal finances in order. By taking the necessary steps now, you will be ahead after the holidays have passed and you are ready to make a move.
Readers: Are you self-employed? How did you prepare financially? Do you have any additional advice for someone who is ready to make the jump?