How Do You Tailor a Financial Plan for Self-Employed Individuals?
Crafting a financial plan for self-employed individuals requires a blend of expertise and personalization. We've gathered insights from top financial professionals, including Lead Financial Planners and Financial Planners, to share their strategies. From focusing on flexibility and tax efficiency to building an emergency fund and monitoring it regularly, here are four tailored approaches to consider.
- Focus on Flexibility and Tax Efficiency
- Budget for Variable Income and Retirement
- Personalize Plan to Individual Goals
- Build Emergency Fund and Monitor Regularly
Focus on Flexibility and Tax Efficiency
When tailoring a financial plan for self-employed individuals, it's essential to focus on both flexibility and tax efficiency. A key strategy is setting up a Solo 401(k) or SEP IRA, which allows for higher retirement contributions while taking advantage of business tax deductions. We also prioritize building an emergency fund that can cover business fluctuations and periods of irregular income. Additionally, self-employed clients often benefit from optimizing health insurance options and tax-advantaged savings like HSAs. I once worked with a client to structure their income to maximize tax efficiency while building both short-term reserves and long-term wealth—a plan that gave them greater confidence and financial stability in their business.
Budget for Variable Income and Retirement
Self-employed individuals need to plan for three different things than W-2 employees.
1. How to appropriately budget their variable income: Owners need to save for taxes, invest in the business, and hold an emergency fund. Typically, this looks like keeping a large amount within the business checking account in order to be able to ride out sparse months when expenses are still coming their way.
2. Selecting the correct retirement account: The options are a Traditional IRA/Roth IRA, SEP IRA, SIMPLE IRA, Solo 401(k), or Traditional 401(k). It all depends on business size, savings goals, and the investment vehicles you intend to use.
3. Account for business value: Future business growth, valuation, and sale are all variables that need to be accounted for. Your business is likely going to be the largest item in your financial plan. It's worth knowing which variables make it more valuable to a would-be purchaser and using that knowledge to guide your growth as you move forward.
Personalize Plan to Individual Goals
Every financial plan is different: different goals, different incomes, different spouses' incomes, different tax brackets for both federal and state, as well as different goals. Personal finance is personal, which is why planning is different for each self-employed person. You start with their goals and what they have going on, then you build a financial plan that is unique to those areas.
And then it changes every year as the business grows or slows down, goals change, etc.
Build Emergency Fund and Monitor Regularly
Designing a unique financial plan for self-employed individuals starts with understanding the unpredictable nature of their income and business expenses. It's crucial to build a substantial emergency fund that can cover both personal and business needs during slower periods. Retirement planning should focus on options like a SEP IRA or Solo 401(k), which are specifically designed for self-employed individuals.
Tax strategies play a significant role, so maximizing deductions and minimizing liabilities is essential to keep more of their earnings. Regular monitoring of their financial situation allows for timely adjustments as their business grows or changes. Tailoring the plan to reflect both their personal and business goals ensures a comprehensive approach to financial security.
