There are quite a few benefits when it comes to being your own boss, but the financial benefits are usually not top of mind. They're generally included pretty far down on the list, after thinking about long lunches, no commute, and the ability to stay in sweat pants (or no pants) all day long.
But the financial benefits of self employment can be even more appealing than the sweat pants/no pants benefit. These benefits don't come easily and they don't come without a fair amount of old fashioned hard work. But if you're self employed you're no stranger to that.
1. Understanding the real value of money
I remember when I received both my first paycheck from my corporate job and my first paycheck when I was self employed. I was proud and excited by both. But looking back I realize there was a subtle difference in how I viewed that money. With my corporate paycheck I was excited to see money in the bank because it had been a hard first few weeks of work and I had bills to pay. With my self employed paycheck I loved and appreciated every single dollar. I knew how hard I had worked to earn each dollar and how hard I would need to work to continue earning my own money.
I've always had an understanding of the value of money, but it has never really been so profound as when it came from self employment. I now find myself spending smartly and spending less. Not because I've become more frugal or scared to spend my money, but because I know how much work went into making it and I need to really love how I'm spending it.
2. Knowing you have skills others will buy
While it may seem counterintuitive, there is a lot of financial security in self employment. You may not know where your next paycheck is coming from or how large it will be, but you do know that you have skills others will spend money on. Whether it's creating a product or a service that people buy, you know how to hustle and how to make money on your own. You don't need to worry about layoffs, corporate downsizing, or a bad boss. The longer that you spend in self employment, the more confident you become in your ability to survive and thrive on your own, regardless of the situation.
3. Retirement Savings Options
You may not have an employer match anymore, but being self employed you can still put aside a lot of money tax deferred, and you can choose the retirement plan that works best for you. I won't get into the technical features of how great it is to invest tax deferred dollars, but basically you have the opportunity to prioritize your retirement and create a healthy nest egg.
If you are self-employed and don't have any other full time employees, you can participate in a solo 401k or a SEP IRA. For the solo 401k you can contribute $18,000 as the employee plus 25% of net income as the employer (up to a total of $53,000 per year). With the SEP IRA you can contribute up to 25% of net self employment income (up to $53,000 per year).
4. Expense Deductions
Whenever I tell someone I am self-employed their typical response is "that's amazing. you can deduct everything and you won't have to pay taxes!". While the concept of expense deductions has been blown out of proportion (no, you likely can't deduct your haircut), there are a lot of things you can deduct.If you're a sole proprietor, these amounts will reduce your net income, which is what you pay self employment and income tax on. It's important to stay organized and strategic, and to not treat deductions as an afterthought. Some potential deductions include:
- computers and office equipment used in your business
- auto expenses on a car used for your business
- startup costs, up to5,000
- professional fees (lawyer, accountant, etc)
- travel expenses incurred on a business trip
5. High risk, high reward
There's no doubt about it. Self employment is not for the faint of heart. But with passion, drive, and discipline you can reap not just lifestyle benefits, but serious financial benefits as well. That point was made clear in The Millionaire Next Door by Thomas J Stanley and William D Danko. They found that though self-employed people only make up 20% of the population, two thirds of working millionaires are self-employed.
When you work for yourself, you're in control of your own destiny. The money that you make or save impacts your personal bottom line, not that of a corporation. You're not standing in line for a promotion or hoping that you're included in the bonus pool this year. There is a lot of risk, but it comes with some amazing rewards.