We all strive to have our personal finances in order. Managing our financial resources wisely brings peace, security, and allows us to utilize our financial resources on in ways that are important to us.
Proper financial planning requires work and diligence and tends to be more of a continuous process rather than a one-time event that you can check off your list and be done with.
Financial planning is also full of pitfalls for the unwary. This is especially true for those who have taken the leap to start a small business or become self employed, such as many bloggers.
I discuss below some of the most important financial planning issues faced by bloggers and in particular how those issues change and become more complicated once you become self employed.
Although I am specifically referring to financial planning issues faced by American bloggers, many of these principles will also likely apply to bloggers in other countries as well.
Cash Flow & Budgeting
Managing cash flow is something that many people struggle with, especially those who are self employed. Salaried employees generally receive a regular pay check that they can count on. When you are self employed though, your cash flow is likely much less certain and may vary from month to month. To ensure that you always have the cash necessary to make ends meet, consider doing the following:
- Set up a budget. During higher earning months, make sure you are putting money aside to be used during lower-earning months.
- Create an emergency fund that can be used in the event of a large, unexpected expense so you don’t have to go into debt or pawn your wedding ring. This fund should be liquid and easily accessible in the event of an emergency, but should not be used for any other discretionary spending. Conventional wisdom says to save at least 3-6 months worth of living expenses in your emergency fund, but the appropriate amount will vary by person. For the self employed, it may be wise to have even more saved up.
Estate planning is the process of putting in place legally effective arrangements whereby a person can accomplish important goals, such as the following:
- Plan for incapacity
- Reduce or eliminate potential fees and taxes
- Plan for business continuity
- Avoid probate
- Appoint guardians for minor children
- Protect assets
- Spell out healthcare wishes
- Ensure an efficient distribution of assets
Just about everyone should have an estate plan in place. It is one of the most important components of a good personal financial plan, yet it also tends to be one of the most neglected. I can’t tell you how many new clients I have met with who haven’t had an estate plan in place.
This is especially true for the self employed business owner/blogger. Sadly, it is not uncommon to see people work hard during their lives to create a valuable business only to throw it to the wind at their death.
We may never have our houses burn down and we may never become disabled, but we will all die some day. Hopefully this is not news to anybody. If you have worked hard to create a valuable blog, what will happen to it should you suddenly die or become incapacitated? Additionally, who will take care of your minor children and how and to whom do you want your assets distributed? Put in place leally effective arrangements so that your personal affairs and your business will be in order no matter what the future holds.
Risk Management & Insurance
We all face certain risks in life. Some of these are best avoided, while others may be hedged against using insurance or other appropriate risk management strategies.
If you are a self employed blogger, many of the financial risks you face in life are no different than those faced by employees, and many of the commonly used strategies to protect yourself are also the same:
- Death – Life Insurance
- Auto Accident – Auto Insurance
- Fire, Damage, Accident at Home – Homeowners Insurance
- Health Care Expenses – Health Insurance
- Disability – Disability Insurance
- Long Term Care – Long Term Care Insurance
- Personal Liability – Umbrella/Personal Liability Insurance
- Dental Care – Dental Insurance
The difference, however, lies in how you obtain this protection. Employers commonly provide certain types of insurance to their employees as part of their employee benefits, including the following:
- Life Insurance
- Health Insurance
- Disability Insurance
- Dental Insurance
If you are self employed, you likely still face many of the same risks in life, but you must obtain this insurance on your own.
Small business owners may also be subject to additional risk that an employee may not be, such as certain types of legal liability. Forming an appropriate legal entity or obtaining additional insurance for your blog/business may be appropriate methods of dealing with these risks.
We all know the importance of saving for retirement. Many employers provide their employees with a retirement plan such as a 401(k) as part of their benefits. Employees generally have the option of automatically contributing a certain percentage of each paycheck to their 401(k). Employers may even provide matching contributions up to certain limits. Most of the work in setting up and administering the plan is done for the employee, so there is very little that the employee has to worry about.
It’s a different story for the self employed. If you are self employed, you must generally open up your own retirement account or plan. Nobody will do that for you.
The most common types of retirement plans for the self employed include the following:
- SEP IRA
- SIMPLE IRA
- Solo 401(k)
Each of these retirement plans has its pros and cons, so use one that is appropriate for you. Learning how to invest and diligently saving for retirement can help you achieve your retirement goals.
Taxes are the single biggest annual expenditure for many people. Taxes significantly affect just about every area of financial planning.
Doing some simple tax planning and understanding some basic tax principles can go a long way in reducing your tax bill and keeping more of your hard earned money in your own pocket.
Don’t get me wrong, I believe we should all obey the laws of the land and pay whatever tax we legally owe. However, I also know that with a little bit of foresight and planning that amount can oftentimes be reduced.
As a CPA, I spend a lot of my time helping clients stay tax compliant and finding ways to legally and ethically reduce their tax liability. Unless you enjoy paying for the alcohol at the White House holiday parties, I suggest you also take a close look at your taxes.
Taxes tend to be a huge pitfall for the self employed in particular. Here are just a few of many issues to consider:
- Choice of entity: Are you using an appropriate business entity for your blog? This will likely affect your taxes as well as other important issues, such as your legal liability.
- Estimated tax payments: If you are a self employed blogger and your blog is profitable, are you making periodic estimated tax payments to the government? If not, you could potentially be charged interest and penalties depending on your situation.
- Financial and tax recordkeeping: Are you keeping proper tax and financial records? If you were audited by the IRS, would you be able to substantiate the positions you took on your return?
- Employer Identification Number: Are you splashing your social security number all over the internet? Depending on your particular situation, it may be appropriate to obtain an employer identification number that you can use instead of your social security number.
The Bottom Line
We all strive to manage our personal finances wisely. Financial planning requires knowledge, diligence, and work. It is full of pitfalls for the unwary, especially those that have taken the leap to start a small business or become self employed like many bloggers today.
Disclaimer: It is impossible to give specific professional advice in an article written to a general audience. The above article is therefore provided for informational purposes only and should not be construed as professional legal, financial, or tax advice. Should you need such advice, seek out and consult a qualified professional who can give advice on your specific situation.
This post is written by LD, a CPA and CFP® who blogs at Personal Finance Insider. You can sign up for his free personal finance e-course, which covers all of the major topics in a good personal financial plan (including those discussed in this article) here.