how self-employment affects your personal finances

Are self-employed people better off financially? Find out how self-employment affects your personal finances.

By Rieva Lesonsky

Four out of five self-employed people surveyed in the QuickBooks Self-Employed 2019 Personal Finance Survey say they were “financially motivated” to become an entrepreneur. But is the financial side of self-employment all it’s cracked up to be? Well, that depends who you ask. Here’s what the survey found.

How self-employment affects personal finances

QuickBooks asked people how their personal finances have changed since they started working for themselves. The results were largely positive:

  • 50% say they earn more money (Just 22% say they earn less than they did as employees.)
  • 40% say they have more personal savings
  • 38% say they have a better credit score
  • 33% say they have more disposable income
  • 35% say they have less personal debt

All good things, right? However, respondents did admit to some challenges related to being self-employed. The top three challenges survey respondents struggle with are:

  1. Adapting to the cost of living
  2. Inconsistent cash flow
  3. Too many expenses

Cash flow struggles of the self-employed

A whopping 84% of survey respondents admit to having personal cash flow problems at one point or another. However, just 19% “always” or “often” have cash flow problems.

One way to reduce personal cash flow problems is to pay yourself a salary. The survey found that self-employed workers who pay themselves salaries are less likely to have cash flow problems, more likely to stick to their personal budgets, and more likely to have a credit score of 700 or higher. They’re also more likely than others to say that being self-employed enables them to afford the lifestyle they want.

Dealing with business and personal cash flow issues is stressful, there’s no doubt about it. Nearly six in 10 of the survey respondents report feeling “moderate” or “a little” stress due to cash flow problems. However, 23% say they experience “a lot of” stress as a result of cash flow challenges; for 5%, the stress is so extreme that it makes them want to quit working for themselves.

Not surprisingly, it seems that novice entrepreneurs are more likely to struggle with cash flow (and stress out about it) than veterans. People who have been self-employed for 10 years or more are less worried about cash flow than those who have been self-employed for less than a year.

Prevent cash flow problems when you’re self-employed

How can you prevent the common cash flow problems that affect so many self-employed people? Here are some tips for getting your finances in gear.

  • Create sales projections. Based on your past sales and prospects in the pipeline, try to project sales for the coming year.
  • Invoice clients immediately. Find out how soon you can invoice your customers, and then do it. If you delay invoicing, you’re also delaying getting paid. The faster you ask for payment, the faster you’ll get it. Learn how to write an invoice that gets paid fast.
  • Pay close attention to your receivables. Today’s small business accounting software allows you to track when invoices are due. Get alerts so you can act quickly when a payment you’re owed is late. Often, all it takes is a quick call or email to the client to nudge them into action.
  • Keep an eye on your cash flow. SCORE has a template you can use to develop a cash flow statement, which helps you track money coming into and going out of your business so you’re better prepared for expenses. Don’t put your head in the sand and ignore cash flow problems.

Despite the stress of self-employment, the vast majority of self-employed workers (76%) say that self-employment allows them to live the lifestyle they want. Almost one in three say the freedom they enjoy more than makes up for the stress they experience. The longer respondents have been self-employed, the more likely they are to say the freedom of self-employment is worth the worry.

Businesswoman in rain of dollar bills stock photo by ImageFlow/Shutterstock