Making the Leap to Solopreneur

It was a big, scary decision to make—going from a conventional 9-to-5 desk job working in operations of a small company, to launching my own digital business where I work as a content manager and writer.

I thought it was time to stop coasting in a dead-end job and do work that felt meaningful to me and helped others. I was motivated by the freedom, flexibility, and fulfillment that entrepreneurship offered, and I wanted to create a work that supported the life I wanted. I also loved the fact that as a solopreneur, my earning potential was theoretically unlimited.

Now I get to create my own opportunities and follow what interests and challenges me, all while working off my own creative schedules and personality needs (read: I’m a huge introvert and the only coworkers I can handle for 8 hours, day in and day out, are my cats) without being limited by 10 vacation days and a set schedule.

I worked on my business part-time for seven months in an effort to ensure the work I was creating for myself was sustainable, lasting, and reliable. Even though I tried to prepare as much as possible before making the leap to full-time self-employment, I’m learning firsthand that there’s still a lot to juggle even after planning ahead.

For one, I’ve had to change my money habits and how I look at my income. I no longer get the benefits an employer provides, like health insurance or a 401k match. I also have to pay my own taxes.

There’s that fear when you go out on your own that you may not have that steady stream of cash that translates into the same, reliable paycheck you received every two weeks. Income goes up or down with slow and busy seasons; you can lose clients or have trouble finding new customers.

Yet, even with the challenges, when you’re ready—like I was, you figure out ways to overcome them. Here’s how I keep my finances on track and my life and career goals alive:

When your income changes from month to month, it’s hard to create a set budget that you can stick to over time. Don’t set yourself up for failure by assuming you’ll have X amount of dollars to cover big financial needs.

Here’s how I manage it: First, I built-in a “pay-yourself-first” system. Every time I receive a payment, that information gets logged into an “earnings” spreadsheet. I record the gross amount first, and then I calculate a percentage of that payment that has to go to taxes and a percentage that has to go to my retirement account (more on that in a moment).

These percentages get subtracted from that gross amount, along with any expenses. Then I record the net total I’m left with, and that number is what I use for the rest of my budget needs.

For everything else that you need to cover with your net earnings, set up a budget that’s just as flexible as your income. Break it down into wants vs. needs. This makes it easier to quickly drop down to a bare bones budget whenever work is a little slow.

While many personal finance writers tell you to automate bill payments or contributions to savings to stay on track, entrepreneurs with flexible incomes may not be able to get away with a “set it and forget it” approach. Instead, I suggest becoming actively involved with your monthly personal finances so everything can flex and change with your variable earnings.

A final budgeting trick I use for my household expenses is to assume expenses will be larger and earnings will be lower than what they really are. This helps me avoid cutting it too close in either direction and typically provides me with a little extra wiggle room in my monthly budget—never a bad thing when you’re self-employed.

Even when you lose that generous employer match in your 401(k), you still have good options for retirement savings. Educate yourself about the choices, make a decision that is right for your situation, and take charge of putting away as much as you’re able.

From the options available for small businesses—the SEP IRA, Solo 401(k), and SIMPLE IRA, I found that if you’re going it alone, a SEP IRA or Solo 401(k) is likely the smartest choice. SIMPLE IRAs are good for entrepreneurs who plan on expanding and hiring employees.

Personally, I went with a SEP IRA. A SEP is really straightforward and also quite flexible. I was able to contribute to that account, along with my employer-sponsored plan and my Roth IRA, while I was still a W2 employee. For 2014, the contribution limits are 25% of your earnings up to $52,000. Those contributions are also tax-deferred, which means self-employed folks like me have the opportunity to enjoy a huge tax break each year they’re saving for retirement.

I love that you don’t have to be full-time self-employed to take advantage of the SEP. You simply need to have some sort of self-employment income (so if you file a 1099 you’re most likely eligible, but speak to a financial professional first to make sure).

This means if my content management and writing business fell through the floor and I returned to the world of workin’ for the man, I could still contribute to my SEP IRA and reap the benefits as long as I retained a freelance gig or two.

It’s smart for anyone, self-employed or otherwise, to expect the unexpected when it comes to money, career, and life in general. But it’s even more crucial if you’re self-employed to establish large emergency funds because you’re facing a little more risk than traditional employees.

Having a diverse income stream will help mitigate some of the risk, but the fact remains that you could lose a few clients unexpectedly or work could slow down. Or you could get slapped with a tax bill you didn’t account for, or a big business expense could pop up before your latest round of invoices are paid.

Having an emergency fund is going to help smooth over any financial bumps and get you through the tough times without resorting to racking up credit card debt or dipping into your retirement savings, which can really stress your business and your financial security.

A great way for a potential entrepreneur to build up a healthy emergency savings is to work a bridge job, or hang onto their full-time job working for someone else before making the leap. That job could cover your expenses and all your earnings from your business can be funneled into savings or investments.

That’s precisely how I managed my own self-employment income as I was working towards jumping into full-time solopreneurship. I counted any earnings that were made on the side of my full-time job as “extra” and initially invested almost everything I made.

As I realized that quitting my day job and dedicating myself fully to my business was a feasible option, I knew I’d need cash on hand in case things hit a snag or something unforeseen happened. I allowed my earnings to pool up in my business checking account. That money became my business emergency fund.

This is one point where many entrepreneurs do things differently. I only maintain a single account right now for my business. I keep such meticulous records on my own that even though I might pull up my account balance online and see that it looks like a lot of money waiting to be spent, I know to the cent exactly how much is earmarked for taxes, my next retirement contribution, expenses for the business, and opportunities to reinvest in myself.

Others might want to try opening multiple accounts to hold funds for each of these categories; it’s something I’ve been considering as my business continues to grow.

What tips and tricks can you share about managing your money when you’re self-employed? Please let us know in the comments below.