Yahoo Finance Here’s How You Should Change Your Financial Management If You Are Going to Become Self-Employed
People always give Singaporeans flak for not being entrepreneurial enough, but that might not be entirely fair. Sure, we might not have another Mark Zuckerberg (and we bet Mark Zuckerberg wouldn’t have gotten to where he is today if he had been living in his parents’ home and saving up for an HDB downpayment when he was at Harvard), but we do have a growing number of people who are starting up their own freelance careers, despite naysayers’ advice to just stick with their stable jobs.
That might have you nodding vigorously at your screen, thinking that’s the perfect way to escape a life of drudgery behind those cubicle walls. But it’s not all rainbows and shooting stars. If you really want to make it as a self-employed person, you’ll need to get your finances in order first. Here are four things you must do.
Realise you won’t be receiving CPF contributions, so set aside money to make up for it
As an employee, even if you spend every cent of your salary, you’ve still got your CPF contributions. Now, we’re not saying that’s going to be at all sufficient to enable you to retire, but hey, it’s better than nothing, and if you’ve got a decent salary you’ll probably have a chance to own a home someday thanks to that lump sum in your CPF account.
Freelancers don’t receive CPF contributions, which means that if you don’t save anything, you really have nothing. Keep that up for the next few decades and you’ll be in very bad shape when you start thinking about retirement.
While freelancers have the option to pay money into their CPF accounts, many choose not to, because once your money goes in you might never see it again, or at least not for a very long time.
Still, that doesn’t mean you shouldn’t try to set aside at least as much as you would be saving if you were making that 20% CPF contribution. Benchmark at least 20% of your earnings each month and put it away to invest.
Ideally, you should get to the point where you’re able to set aside a total of 37% (20% employee’s contribution + 17% employer’s contribution) of your monthly takings, just so you would be on par with an employee earning the same salary. If you’re not at the point where you can save that much yet, you need to try to work your way up to it.
Medisave contributions are compulsory so long as your net income is at least $6,000 a year, so you’ll need to set aside the money for that as well.
Figure out how to file your taxes
As an employee, paying your taxes is a no-brainer. Because your employer will have been submitting information about your salary to the government, you’d probably be exempt from filing. All you need to do is log onto the IRAS website and pay.
Freelancers don’t have it quite so easy. You need to first find out how to calculate the amount of taxes you have to pay, which isn’t that easy, especially if you’ve been receiving your income in bits and pieces. You’ll also have to subtract from your earnings your business expenses for the year, which can range from taxi fare to meet your clients to money paid to a web developer to set up your website.
You then need to learn how to prepare a statement of accounts (don’t worry, for most self-employed people this consists of just a four-line table), and then file your tax return.
It’s definitely more trouble than what employees have to go through, but once you’ve done it successfully the first time it gets a lot easier. Newbie freelancers should check the IRAS website so they’re not taken by surprise.
Build up your emergency fund
While everybody needs to have an emergency fund no matter how much or how little they earn, freelancers need to have a bigger one than they did when they were employees. It’s a good idea to double your existing emergency fund. If you previously saved up 3 months’ of expenses, make it 6 now.
That’s because when you go freelance, you can pretty much kiss income stability goodbye. You might be swimming in cash one month, and then begging on the streets another.
To make matters worse, when you first start out, unless you already have a golden client ready and waiting, you’re going to be broke. So save up your emergency fund before, and not after, you quit your job. If you can’t even do that while you’re gainfully employed, we hope you like the taste of grass, because that’s all you’re going to be eating for a while.
Don’t ignore insurance and investing
The early days of freelancing are hard, make no mistake about it. While you might have given little thought to your insurance premiums, make sure you don’t neglect paying them even at the start of your freelance career when you’re broke, or your policies might lapse and you’ll find yourself in an even bigger jam if something bad happens.
Don’t tell yourself you’ll get back on the insurance bandwagon when you have more money. The possibility of an accident or illness aside, you could also find yourself paying heftier premiums in some cases. The best thing to do is to automate your insurance payments so you remain covered come what may.
You’re probably also going to end up cutting down on your investing in the early days as you struggle to find a regular income source. That’s just another thing you’ll have to factor in when putting aside portions of your income for the future.
While freelancing might sound like a welcome break from unreasonable bosses and late nights at the office, as you can see you’re going to have to be a lot more conservative with how you spend and manage the money you take home each month. In other words, you’re going to have to choose between that Chanel and never having to see your boss again.
Do you have any other advice for self-employed persons trying to manage their money? Share your tips in the comments!
The post Here's How You Should Change Your Financial Management If You Are Going to Become Self-Employed appeared first on the MoneySmart blog.
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