4 financial mistakes to avoid when you are self-employed
When you become self-employed, you join millions of other business owners hoping to materialize their dreams. However, navigating the murky waters of selfemployment can be challenging.
Here are a few mistakes to avoid as a self-employed person.
Not delegating or prioritizing
Self-employed people often act as their own stunt doubles in their business during the incipient stages because of budget constraints. However, trying to do it all on your own may be a mistake, says Ronne Brown, owner of Girl CEO and Herlistic in Washington.
“We have to understand that we go fast by ourselves, but we go far as a team,” she says.
For people who feel they can’t afford to delegate, Brown says to keep your expenses low until you can afford to do so.
Brown suggests prioritizing bookkeepers and accountants, building automations or hiring someone to generate leads. Also, keep in mind that you can usually deduct the cost of contracted labor from your business taxes.
Not saving for retirement
Saving for retirement as an entrepreneur can easily fall to the bottom of your priority list.
This is a common mistake selfemployed people make, says Preston Cherry, a certified financial planner in Green Bay, Wisconsin. While it can be smart to reinvest income you generate into your business, it may be equally important to build an emergency fund with three to six months’ worth of expenses and invest in your retirement savings.
Cherry says self-employed people have multiple retirement savings accounts to choose from, including an IRA or a solo 401(k).
Contributions made to traditional solo 401(k)s and traditional SIMPLE IRAs can provide tax advantages like lowering your taxable income and enabling your investments to grow tax-deferred. That means your tax bill is deferred until you withdraw the money in retirement.
Spending money on courses
As a new entrepreneur, you may want to amp up your knowledge to make your business more profitable. That could mean spending money on courses or training, which can sometimes cost a pretty penny.
While investing in yourself can be worthwhile, you may not get a return on your investment if you don’t take the courses and apply the knowledge.
Brown recommends doing your homework before investing in a course, especially on social media.
Health care costs
Health care may be a worry for self-employed people, especially when they don’t have employer support. A health savings account is one way to make the financial load lighter since there are many tax benefits.
“There’s no tax going in. There’s no tax while in it, and there’s no tax coming out,” Cherry says.
With HSAs, contributions are made pretax, interest grows taxfree and qualified withdrawals are tax-free. In 2024, single individuals can contribute up to $4,150, while families can contribute up to $8,300.
You must have a high-deductible health care plan to be eligible to open an HSA as a self-employed person. Another option to make health care more affordable is taking the self-employed health insurance deduction if you qualify.