Millennial Money Man

Helping Millennials Make More Money, Save More, and Pay Off Debt

February 6, 2017

5 Things You Need to Know About Self-Employment

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5 Things You Need to Know About Self-Employment

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As M$M has grown, I've been super fortunate to meet a lot of people that are either self-employed or hoping to make the jump in the future. Every time I get an email from a reader that looks like: “You've inspired me to start my own business“, I'm really excited for them!

But…I'm also scared as hell for them.

Starting a business and/or leaving your job is a massive life decision, and the odds of failure are much higher than the odds of success. I understand that people are ultimately going to do what they want, so I feel like my job is to give as much helpful information as possible.

If you're considering starting your own business (even if blogging sounds like something you'd like to do), there are a few critical things about full-time entrepreneurship that you need to be aware of.

Here are five things you need to know about self-employment:

1. You need a basic understanding of accounting

After I quit my teaching job, I really had to rely on my friends/mentors that were experienced in business for this. There's a big difference between reading music and reading a profit and loss statement. 🙂

The concepts are actually fairly simple once you start dealing with your books on a daily basis, but if you don't familiarize yourself with basic accounting you could really hurt yourself in the long run. Don't just assume that you can open up an accounting program like Quickbooks or Freshbooks and be good to go!

Even “automated” programs take a good amount of tweaking and have a learning curve.

2. Taxes suck (but you have to stay on top of them)

In my first year of business, I didn't really make a bunch of money. That's pretty common in any business, but as things start to grow and more money rolls in you have to prepare for potentially substantial taxes that you'll have to pay.

Since I'm less than two years in and my income is changing drastically, I'm really preparing for the worst!

Related: January 2017 Online Income Report: $16,683.77

My best advice is to consult an accountant when you first set up the legal structure of your business (LLC, S Corp, General Partnership, etc.), even if you don't want to use an accountant long term. A qualified accountant can help you decide the best tax structure for your business and develop a long term strategy moving forward.

3. Don't plan on buying a house

My wife and I were in a financial position to buy a house right before I left my teaching job to run M$M. However, one of the things that people don't realize about self-employment is that mortgage lenders generally want to see two full years of tax returns from your business before lending you money.

For us, that meant that we had to rent for the past two years while I grew my business. It actually turned out to be a great thing for us because of the flexibility that renting can provide, and we'll be very financially prepared to buy a house and pay it off quickly.

Just FYI, the two year waiting period isn't an absolute rule…but it is a good guideline when you're trying to plan your living situation and start a business at the same time.

4. There is no set “retirement plan”

As much as I didn't really agree with the TRS (teacher retirement system) that I paid into as a teacher, I will admit that it was nice having a set retirement plan. One of the great benefits of having a normal job is that you can either pay into retirement systems or some form of a 401k.

When you're self-employed, you're on your own.

You'll have to develop your long term retirement strategy, and I have to admit that even I am not 100% sure how I'm going to approach this over the next 30+ years. I opted to hold a large portion of our money in cash because I wasn't sure how this business would do.

Things have settled in now, so my focus is now shifting towards the future rather than just surviving.

The biggest thing to understand is that your retirement plan will change as your life does. I have friends that are near the end of their self-employed careers that are still making adjustments to their original retirement plans. There's no “right” answer unfortunately. You just have to pick a strategy and roll with it.

5. Every day you wake up unemployed

Alright – this isn't technically true, but it's a mindset that I learned from a good friend that has helped me tremendously in my first year and a half of being self-employed.

I think the number one trait of successful entrepreneurs is hunger. We are creatures of habit, and it's very easy to get set in a routine. The problem with business is that you can't put things on auto pilot and expect to get rich.

You have to wake up every day with a little bit of fear that you're going to fail. That fear of not making any money is what drives me to try different strategies, hustle a little more, and ultimately guide my business towards success.

If you can tap into that feeling of insecurity from time to time, you'll be shocked how quickly your business grows.

Live differently. Your bank accounts will thank me later. ~M$M

Don't miss another M$M post.

Learn more about attacking debt, making more money, and creating an awesome life you love.

Comments

  1. Great article! For your retirement have you looked into a SEP IRA? On the accounting front do you use a program like Quickbooks or still have an accountant. Trying to plan ahead for the self-employed life…thanks!

    Reply

    • Thanks! Yes I have – actually going to do a post about that later this month. I use Quickbooks and have an accountant (that has access to my books). Makes life a little easier 🙂

      Reply

  2. All very good points. There’s a lot less certainty when you strike out on your own. I think that’s why so many people stay at jobs they don’t love–you’re dependent on that reliable paycheck to pay off the materials or responsibilities you’ve assumed.

    I’d still like to grow my own blog into a business (it’s getting there slowly), but it’s important to take things like accounting and taxes into account so you don’t get totally screwed over.

    I’m not sure if this helps, M$M, but my mom was self-employed and did her taxes quarterly instead of annually. She still paid the same amount, but it was spread out among 4 times a year instead of one giant, punishing lump sum.

    Reply

  4. That’s a loaded question. I think what people want to know is how quickly they can make a successful business and start turning significant profits. Unfortunately, this is very much a personal question in terms of business type. As a personal finance blogger – I guess my biggest question is, in terms of monthly page views, what increase/percentage is considered successful? See – that’s a very tough question. But, I’d be happy to hear your response, nonetheless 🙂

    Reply

    • I don’t know what I’d consider successful – I think if you can bring in any audience consistently it’s a win. However, I think 100,000 views/month is enough to do this full-time and actually make a decent living.

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      • That was a very helpful response. Thank you! I didn’t expect such a straight forward answer to such a complicated question. See! That’s why you’re making the big bucks 🙂 I like having a goal. 100k PV/month doesn’t seem like a huge stretch – that makes me feel good.

        Thanks again!
        Mad Money Monster

  5. Kind of an unrelated piece of advice: Keep your personal expenses low to give your business a better chance. When folks don’t have their personal finances squared away and need $70k+ a year to live, it gets hard to put in the 1-2 years needed to turn a good profit.

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      • The house thing was my struggle too. I had the $ for down payment and excellent credit, but the bank wouldn’t budge until I had the W-2’s. It was a good motivator to really make by business take off. But it was frustrating that I had to throw some money away on rent for awhile.

  7. Good words. I aspire to be self employed and the accounting end of it worries me most as math and numbers have never been my strong suit. I think that will be a place that I need to spend a few bucks and hire a pro!

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  8. Bobby,

    Great points on being self employed. I think people overlook the accounting part. Having a business degree has helped me out a bunch in knowing how to stay on top of the numbers.

    I think seeking out an expert to help set up your business and get your started is a great idea.

    The last point of being hungry is always true as well. You do a great job of creating awesome diverse content that keeps your readers coming back, including us.

    Taxes can be a real pain in the neck. Sounds like your on top of them better than years past. Wish you the best of luck. I found paying every quarter helps by not taking such a big hit all at once.

    But on the flip side storing money away in an account like Betterment can have huge benefits.

    Imagine having $5,000 your making interest and dividend off of all year instead of giving it to the government right away. #Winning

    Reply

  9. Thanks for the helpful info Bobby. I like number 5 the best, if that doesn’t lite a fire under you I don’t know what will.
    I think something that people need to know is to invest money back into the business and not take the money and run. In your last income report that you mentioned that you invested heavily in education and put money back into the business and I think it is a great strategy for growth and taxes.

    Reply

    • No problem! Yes, I have been investing quite a bit into the business lately. I could definitely go to the Bahamas a few times this year with the money I’m spending, but I’ve just been around too many successful business owners to know that investing in the company is the smarter move.

      Reply

  10. This is so timely! My spouse just gave his notice last week in order to strike out on his own. It’s a little scary, but mostly exciting since we’ve been living way under our means for years now and will be able to afford our current lifestyle on just my salary. We definitely wouldn’t have been able to feel this sense of freedom without first saving, paying off debt and avoiding lifestyle creep!

    Reply

  11. The flip side of it being self employed allows you more flexibility in structuring your income. That should mean lower taxes when done right. It’s all a trade off, with the right path matching the type of person you are.

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  12. Great points. Accounting and taxes are a big one. The government doesn’t mess around when it comes to getting their money. Making your quarterly estimated tax payments on time is very important when it comes to owning your own business.

    Another key point is benefits. If you don’t have a spouse’s plan to jump on, you’ll have to take care of your own health insurance. I think many people fail to account for this when budgeting to leave their job. Also, to go along with taxes, you now have to pay the full portion of social security and medicare taxes as you are covering both the employer portion and the employee portion.

    Reply

    • Yeah definitely on the taxes – I need to do a post on business structure pros/cons. Currently set up as a LLC with a S Corp designation. Wanted to minimize my social security and medicare taxes by paying myself as an employee.

      Also, my wife’s insurance wasn’t an option unfortunately! We would have been paying $800/month for two non-users and a high deductible plan. I went with my own through the marketplace. Pretty crappy insurance, but I’m just banking on the probability that I won’t need it for a while.

      Reply

  13. When my fiance and I first moved in together, he had been self-employed for about 4 months. We had to get our parents co-sign for us, which felt like traveling back in time 5 years. He’s been pretty successful since, so I don’t think we’ll have to deal with that the next time we move.

    The thing I will miss when I’m fully self-employed is being paid hourly. No more getting paid to just be at work. I’ll either be making money or I won’t.

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  14. These are all great points you make on becoming self-employed! It isn’t always easy at first, but with time everyone can get the hang of it and be successful! It is definitely worth it to be self-employed if that is what you want to do!

    Reply

  15. You make some great points here. #5 is spot on. I would even extend that to everyone in the workforce, regardless if they are self-employed. At the end of the day, we’re all in business for ourselves. Your blog and your story inspired me to start a blog and consulting business. Keep posting great content!

    Reply

  16. The number of people becoming self-employed has grown and a lot are setting up their own business. A person who can build it up his or her own business can demonstrate its ability to continue in the future, but it is not easy because the issues are always present before setting out and it should need to be considered. Glad to read this article to have an idea and an insight before for you to come up with a massive decision in life.

    Reply

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