Entrepreneurship is exciting, but entrepreneurs go without the luxury of company-driven retirement plans with matching contributions or strategic deposits. There’s also no one around to remind you that you should be planning for your financial future. Not knowing what your monthly income will look like also makes managing your finances and planning for retirement that much more difficult. Here are a few tips to help you plan your retirement as an entrepreneur.
1. Separate Your Finances
If you own your own business, it’s important to separate any checking and savings accounts you use for personal and business related expenses. Credit cards should be used solely for business expenses so that you can have clear and concise numbers to help you with tax planning. It can also allow you to identify the best strategies for retirement planning.
2. Be Flexible
Having inconsistent income makes it even more important to know where your money is going. Create a budget that covers the essentials but that remains flexible. You might need to cut expenses for discretionary items if you experience a slow month. This will ensure you’re not racking up debt and that you’re able to maintain your savings plan. Protecting your assets from lifestyle inflation is also important, as swings in your income may allow you to live one way one month, but limit you substantially the next.
3. Plan Ahead
Be proactive in regards to unexpected expenses by building multiple emergency funds. Aim to set aside three to six months’ worth of household expenses that can help you get by if you experience a few months of low income. Once this fund is established, you can work to build a separate fund that will help cover other unexpected costs.
4. Automate Savings
It can be hard to save when you don’t know what your monthly income looks like ahead of time. Review past earnings and calculate an average to save against. Based on these numbers you are able to estimate a safe guess for what you’re comfortable saving on a monthly basis. Set up an automated transfer to your retirement account to assist you with accountability.
Also set up a time to regularly review your finances. You could schedule a recurring money date on a monthly basis to review all your financial accounts and make adjustments to spending and saving as necessary. Perhaps you can contribute more than the usual amount to your retirement account during a good month.
5. Financial Education
Understand the different retirement accounts and select the one that is best for your lifestyle and your business.
A Solo 401(k) is a 401(k) that covers a business owner with no employees or that person and his or her spouse. A business owner can make elective deferrals of up to 100 percent of earned income up to a maximum annual contribution of $18,000 in 2015 and 2016 and employer non-elective contributions of 25 percent of compensation, with total contributions not to exceed $53,000 for 2016.
Simplified Employee Pension IRA. A SEP IRA is a retirement account for entrepreneurs that allows for a contribution of up to 25 percent of each employee’s pay (and 25 percent of your net self-employment income). Annual contributions are limited to the smaller of $53,000 or 25 percent of compensation for 2016.
Savings Incentive Match Plan for Employees IRA.
A SIMPLE IRA is a retirement plan designed for and available to any small business with 100 or fewer employees. The employer is required to contribute either a matching contribution of 3 percent of compensation or a 2 percent non-elective contribution for each eligible employee (meaning the employer contributes even if the employee doesn’t). An employee can contribute $12,500 in 2016.
When it comes to planning for your retirement as an entrepreneur, there’s no one else who is going to look out for you. Managing your personal finances can be complicated, but it isn’t impossible. With organization, flexibility, consistency and automation, you can get yourself set up on a solid plan and continue to enjoy your freedom while you build your business.