Hi-ya,
In the initial two Thinking Solo newsletters, I’ve broken down how to know if the self-employment lifestyle is for you and how to cut back to increase profit potential. Now it’s time to discuss an issue that’s not always within your control: When you get paid.
When you receive payment from your clients will be key to ensure ongoing success in your business. This timeframe between when you meet the client, sign a contract, begin work and eventually get paid will vary by industry and the contract design that you have developed. But, from a financial perspective, it’s important to have enough free cash to pay expenses. Your bills will not stop coming just because you’re waiting on a check from a client. This creates a risk that you must prepare for before you begin and as you’re in the throes of your self-employment journey.
There’s two ways to do this. First, prior to beginning your self-employment, build up that emergency fund to cover six months worth of expenses. You calculated this during step two of the self-employment plan. By having six months of coverage, this gives you time to find those first clients, do the work and get paid without fear that you won’t be able to cover expenses.
The second strategy: coordinate contracts in a way to encourage regular payments, as opposed to waiting until you have completed all of the work.
The ability to pull off the second strategy will depend on the work you do and the type of contracts you take on. The larger the contract, the more it’s necessary to incorporate payment structures that will allow for the portion of the total payment to come throughout the length of the contract.
This may look like a project that will take four months to complete. Incorporating different check-in opportunities will provide the chance to implement payments. Maybe that payment comes monthly. Maybe it’s after a certain part of the project is completed (say 50%). Whatever it is, this will allow for more regular payments - protecting you from the risk of not covering expenses.
This strategy also has an important extra benefit. It protects you from clients that have no intention of paying. By having these benchmarks in the contract, you will know early on if the dream client is actually just using your work with little intention of compensating you for it. You would be surprised how often that happens.
When I worked as a writer, it happened once to me. It wasn’t enough money to pay for the legal fight to get the funds. But it was enough to cause worry at the time, and it still rankles me to this day. You don’t want that experience.
Incorporating that pay structure can ease that stress.
Do you have any other strategies to combat the timing of when you receive payment? Make sure to share it.
Some extra Solo links:
Here’s a good rundown of the self-employment taxes that you have to pay. It’s much more onerous than if you’re working for an organization. (Yahoo!)
When do you need a fiduciary investment advisor? I’m quoted in this piece, discussing how you have the ability to learn investing as well. (Forbes.com)
Over 50? This piece mentions a wrinkle to the new Secure Act 2.0 and catch-up contributions by those self-employed worth knowing. (Tri-Cities Journal of Business)
Photo by Pictures of Money.
Ryan Derousseau, CFP® is a financial planner and founder of Thinking Cap Financial, where he has a focus on those that want to build flexibility in their career by going on their own. You can find more of his work at ThinkingCapFinancial.com.