As I move away from the standard paycheck-based income and into a self-employment status, I’ve begun to think seriously about how I need to plan things throughout the month to make sure all of the bills are covered. I’m not worried about paying them – we have plenty of income and a good emergency fund – but I am worried about what sorts of choices will change as a result of my career shift.
Before looking at solutions, it’s useful to look at the actual changes that need to be addressed.
Total income goes down, especially at first. I’m walking away from a large income stream, albeit one that eats up a lot of my time. Thus, in the short run, I won’t have as many dollars to throw around. My belief is that with more hours to spend on writing, my income will head northward, but that remains to be seen.
Income goes from regular to irregular. I’ll no longer be receiving a paycheck for an identical amount every two weeks. Instead, I’ll be receiving irregular amounts from a number of different sources on various schedules.
Entirely responsible for my own income tax, Social Security, etc. Out of those payments, I’m basically entirely responsible for taxes. This means I need to have my tax planning done very carefully.
Entirely responsible for my own retirement savings. I no longer have a 401(k)/403(b) plan to rely on, which means I need to look into other avenues for retirement savings.
Preparations and Actions
With those major changes coming down the pike, there are a number of things that I need to do.
Keep more breathing room in the checking account. With pay being irregular and so many of my bill payments set up automatically, I need to make sure that there’s more breathing room than usual in my checking account, as I don’t have the reliability of the regular check being deposited there each pay period. To do this, I set up an alert to let me know if my balance will go below $2,000 at any time, substantially more than even my largest scheduled payment from the account.
Have a larger emergency fund. Again, this is due to the irregular status of the income. Our emergency fund right now is pretty substantial, but I’m focusing very strongly on just rolling every penny I can into it right now. This means that I’m just making minimum payments for now on my student loan debt and instead maximizing the cash in the emergency fund.
Save half of all income for taxes and Social Security. Every time I receive a payment, I pay any tax-deductible expenses that need paying (like taxes, research material, or computer equipment) and then take half of what’s left and sock it away for taxes. Then, when I need to make tax payments, I just pull out this cash and pay away.
Look into self-employment retirement options. I want to devote appropriate time to this, so for now I’m going to wait until I’m in the groove of writing on my own before doing the research. Of course, this research is a top priority (and will likely result in a post or two) once things have settled down. Thankfully, I’ve been socking away money very aggressively into my retirement plans and thus I’m significantly ahead of pace for where I should be at my age.
Work hard. My new choices will require diligence and hard work, especially at first. Any temptation I have to slack off will set an ominous example for the months and years to come. Thus, I’m setting a lot of very strong goals for the first few days, the first week, and the first month, giving me something to work vigorously towards.
Are there any readers out there who are self-employed who might have additional suggestions (both for myself and for the benefit of other readers)?