Smart Money Podcast – Is Self-Employment for You? A Financial Guide for Entrepreneurs

Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions. In this episode:

Master your self-employment finances with answers to questions about budgeting, planning and separating funds.

How can you manage your finances effectively after becoming self-employed?

What can you do to plan for unpredictable income and the tax implications that come with being your own boss?

NerdWallet's Sean Pyles and Elizabeth Ayoola host a discussion that delves deep into the world of self-employment. Elizabeth interviews Rianka Dorsainvil, a self-employed certified financial planner, about critical questions to consider before embarking on your entrepreneurial journey. She also discusses the importance of budgeting, the necessity of maintaining separate personal and business finances, and the significance of establishing an emergency fund.

Aspiring to be financially savvy while managing your own business can be daunting, especially when dealing with variable income and tax requirements. The podcast offers a treasure trove of insights for anyone considering or already navigating the solo financial journey.

Rianka, with her expertise, sheds light on creating a simple yet effective budgeting framework, avoiding the pitfalls of commingling finances, and the psychological aspects of self-employment, including the benefits of professional help and therapy. This episode is a guide to crafting a stable financial foundation for anyone looking to become economically self-sufficient through entrepreneurship.

Check out this episode on your favorite podcast platform, including:

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• Spotify

NerdWallet stories related to this episode:

Business vs. Personal Checking Account: What’s the Difference?

4 Strategies for Using Side Hustles to Fund Retirement Savings

How to Apply for a Personal Loan if You’re Self-Employed

Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.

Episode transcript

This transcript was generated from podcast audio by an AI tool.

Sean Pyles:

We're a month into the new year, and if one of your goals for 2024 was to become your own boss, have we got the series for you. Going out on your own, self-employment, can be a tough decision to make and an even tougher transition to go through. But we are here to help by getting you answers to some of the most common questions about self-employment.

Rianka Dorsainvil:

You have to figure out The Why, right? Why am I, one, going to start this business? Two, now it's going to take my time. Time away from other things, time away from other goals, time away potentially from my family. And so The Why definitely has to be great for you to start the business and also to see it follow through.

Sean Pyles:

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Pyles.

Elizabeth Ayoola:

I'm Elizabeth Ayoola.

Sean Pyles:

This episode kicks off our nerdy deep dive into self-employed finances. If you are a contractor, or freelancer, gig worker, or very small business person, you know that figuring out everything from taxes to retirement can be head spinning. There's no HR department doing it all for you.

Elizabeth Ayoola:

Or a finance department for that matter.

Sean Pyles:

Exactly. If you're a company of one or maybe two, you're doing it all on your own, maybe with the help of an accountant or attorney, but it's mostly just you, and the rules and laws are complex. So in this four-part series, we're going to answer some of the most important questions for those who are self-employed or want to be. How do you figure out what type of business entity to set up? What kinds of retirement options are available to you? What are the tax rules? Our goal is to help you become the most successful boss you can be of yourself. So Elizabeth, tell us a bit about why you wanted to do this series.

Elizabeth Ayoola:

Because I think some of us dive into self-employment without enough knowledge about the financial implications. And yes, it's me, I'm talking about me, I'm some of us. I am self-employed in addition to working full-time at NerdWallet, of course, and I have been for some years now. And along the way, I've made plenty of financial mistakes because of what I didn't know. And as you said earlier, Sean, budgeting, saving for retirement, and paying taxes can look very different for someone who is working for themselves. The less you know, the worse off your finances can be sometimes. So I'm hoping this series helps people to make the most of their self-employed income.

Sean Pyles:

Well, for those who've decided to either start down this path or who are already on it, you've got quite a bit of company. There are 15 million self-employed people here in the US; that's about 10% of the workforce. Today we're going to be talking about the segment that you could call 1099 workers, people who work on their own for wages paid by another person or company. That could be a gig worker, freelancer, contractor, a solo entrepreneur, someone who makes a living selling wares on Etsy. All of those and more.

Elizabeth Ayoola:

Yeah, we're not going to get into the weeds of starting a small business with employees and a payroll today because that can get really muddy, and that's a whole other conversation. But plenty of us either are or want to be working on our own with clients. And if that's you, then this four-part series is definitely for you.

Sean Pyles:

All right. Well, we want to hear what you think too, listeners. To share your ideas and questions around self-employment with us, leave us a voicemail or text the Nerd hotline at (901) 730-6373. That's (901) 730-N-E-R-D. Or email a voice memo to [email protected]. So, Elizabeth, where do we start today?

Elizabeth Ayoola:

Well, we're going to start by chatting with Rianka Dorsainvil, who is a certified financial planner and also happens to be self-employed. She is the co-founder and the co-CEO at 2050 Wealth Partners. What they do is they work with entrepreneurs and particularly first-generation wealth builders, which are people who are the first in their family to have and build wealth. Rianka is going to answer some of our questions about how to budget when self-employed, whether you need to separate your personal and business finances, and so much more.

Sean Pyles:

All right, stay with us. We are back in a moment with episode one of our series on self-employment.

Elizabeth Ayoola:

Rianka, welcome to Smart Money.

Rianka Dorsainvil:

Thank you, Elizabeth, for having me. I'm so excited to be joining you today.

Elizabeth Ayoola:

Tell our listeners a little bit about your background and why you went into business for yourself.

Rianka Dorsainvil:

I am a certified financial planner, and I have been a financial planner for almost 15 years, which sounds so wild to say that. Very quickly, I stumbled upon personal finance when I was in college. I actually first went for math, engineering, and trying to figure out what it is that I wanted to do, but I knew I loved helping people. I stumbled upon a personal finance 101 class, and literally, the rest was history. I was like, I need more of this. During that time, I learned about 401ks, disability insurance, student loans.

I saw right then and there that I could make a tangible impact right away in my friend's life. So fast-forward, I graduate from college in the traditional wealth management space. And because I was starting off in my career and also known as a financial planner amongst my peers, a lot of people wanted to start working with me. And unfortunately, the firm I worked for, you had to have a million dollars of investable assets in order to work with me. And I'm like, listen, I'm 24 years old, unless you have an inheritance, what 25-year-old you know has a million dollars?

Elizabeth Ayoola:

I don't know anyone.

Rianka Dorsainvil:

Okay, but listen, these 25-year-olds were yearning for the education and to get their money right. So I'm like, who am I to say I need to hold hostage this information that I have only to people who already have amassed a million dollars? So after five, six years working for a firm, I decided to leave and launch my own. And so that's just the short end of it. I know that's not the topic of conversation for today, so.

Elizabeth Ayoola:

I appreciate that, and you sharing your story, that is so inspiring. So on that note, my next question for you is how can people decide whether entrepreneurship is for them? And when I say entrepreneurship, I'm talking about gig work, contracting, freelancing, or even starting a small business. So what are some things that people should consider before they dive into that?

Rianka Dorsainvil:

Well, we are definitely in the gig economy right now. Everyone has a side hustle. So even my clients who have jobs that are paying them well, they are not necessarily living paycheck to paycheck. They are starting these "side hustles" or these passion projects because that's what it is. It's a passion. And who am I to say, or who is anyone to say, that you shouldn't pursue your passion and also get paid for it? So I'm thinking about this in two different ways, Elizabeth. I'm thinking about this as a side hustle, and then I'm thinking about this as a 100% you are transitioning from employee to entrepreneur. So if this is your side hustle, there's no risk associated with that. So I am all about multiple streams of income. Now, what you do with this money is very important because you have to figure out The Why. Why am I, one, going to start this business? Two, now it's going to take my time. Time away from other things, time away from other goals, time away potentially from my family.

And so The Why definitely has to be great for you to start the business and also to see it follow through. And then, if we can, I want to lean into those who are transitioning from employee to entrepreneur. 100%, for me, the reason why I ultimately decided to transition from a very well-paying job, I was earning a W2, I had a retirement account, I had health benefits, I had everything. You want to know why?

Elizabeth Ayoola:

Why?

Rianka Dorsainvil:

My mental health. And so prior to me taking the leap, and this is guidance, not necessarily advice, but guidance for those who are thinking about transitioning from employee to entrepreneur, is you have to have a budget. This is something that I share even with those who have a 9 to 5. I have worked with hundreds of families, I've worked with millionaires and I've worked with thousandaires. And it does not matter how much you earn, it matters how much you keep. So you can be a millionaire or a thousandaire, everyone needs a budget because if you don't know where your money is going, you're going to wonder where it went. So before you start anything, you have to take stock of where you are.

Elizabeth Ayoola:

So now let's talk about red flags. So what do you think are some red flags that may tell someone, hey, you know what, maybe I'm not cut out for this business thing.

Rianka Dorsainvil:

You may not be ready to fully transition to self-employment or entrepreneurship if you have a lot of debt. And I say that only because you do not want to be making fear-based decisions when you are self-employed. And so what I've found for self-employed individuals who are running low on capital. And what I mean by that, most of us self-fund. I self-funded my business. I didn't take out a loan or anything. I also have a low overhead business. It was virtual, so I ran it in my home. And so now if you have a business that has products or items that you have to buy, this is a completely different story. You may need to take out a loan, but even if you do take out a business loan, if you have consumer debt, which are credit cards or a personal loan, car debt, which is normal, car debt is not too bad.

And then, of course, also a mortgage payment. And so one of the red flags is you have a lot of consumer debt. And so you want to know what is my, we say in the business world like the burn rate, right? So if I have a mortgage or rent, that's X amount. I have to pay utilities, I have groceries, these are my essential expenses, internet, car, health insurance, car insurance. Think about those essential expenses that you have on a monthly basis that if you have a job or not, these expenses are still coming. And then you have to think about the debt that you have. So if you do have student loans, or a personal loan, or a car payment, those debts do not care if you have a job or not. They want to be paid on a monthly basis at the same time.

And so that is in addition to those essentials, if you are thinking about starting a business and moving fully to being an entrepreneur, you may want to have at least four to six months. And that's not even being conservative, four to six months of those expenses. Because if you do not bring on one client, if you do not sell that one widget, at least you know for the next six months, you do not have to worry about or stress about money. You know that you'll continue to have a roof over your head. You'll have food on your table, you can pay for your essential expenses and also cover your debt.

Elizabeth Ayoola:

I love those two red flags, especially the second one, because I think in our current culture, and it's been like this, I think, for a while, in my opinion, people are just like, yeah, my job sucks. Quit it and become an entrepreneur. But there's not enough sometimes financial planning that goes into it. And while some people are lucky and they take that dive and things go well for them, some people could end up really falling flat and finding themself in a financial ditch. All right, I would love us to get more into budgeting. So budgeting, as we know, is an important tool that you can use to know how much you're making. And I've come across so many self-employed, side hustler, entrepreneur people who are making money, but they don't have any bookkeeping. And then, if they actually break down the numbers, they realize they're barely just breaking even. So with that said, for people who are stressed and confused about budgeting, what are some simple tips that you have for them to get started?

Rianka Dorsainvil:

Well, just like you said, Elizabeth, every dollar that you earn is taxed. So Uncle Sam wants his money. And so from a budgeting standpoint, if you're just strictly thinking about the income that you're receiving from your business to take care of yourself and your household, one, you want to make sure that you're earning enough to pay those essentials and that debt, as we talked about earlier. Next, you want to also make sure you're earning enough to save. So if you worked in the workforce and was earning a W2, most employers offered a retirement account such as a 401(k), 403(b), TSP if you work for the government. And so now you have to save for yourself. And also, by saving for yourself in these qualified retirement accounts, you're also helping in taxes. So for, let's say, every dollar that you save, you're reducing your overall taxable income by X percentage depending on what tax bracket that you're in. That is another way to, one, reduce your overall taxes, but also to save for your future.

That's something that you do not want to stop doing as a business owner. And one thing I always say to clients, it doesn't matter if you are a business owner, if you have a side hustle, or if you're still working your corporate job, is that you have to put your financial oxygen mask on first. And what I mean by that is we want to see your business thriving. And so you may be doing a lot of things and creating a lot of expenses, but you have to take a step back and say, okay, am I still making sure that I am okay? Am I making sure that I'm still paying for my essentials, the debt that I have, and am I saving? Saving is so important because when a rainy day comes outside of your retirement account, you want to make sure you have an emergency fund because you want to borrow from yourself, like pull from savings versus borrow from a financial institution.

Elizabeth Ayoola:

Yeah, that's really helpful. So now I want us to get into, so those were some really good tips in terms of having an emergency fund and just saving enough if you can. So when I'm budgeting, the approach that I use is how much do I need or how much do I have within my self-employed budget to pay for any bills that my 9-5 doesn't pay for? And then the rest goes into my emergency fund, and then my retirement accounts, which you mentioned earlier, which reduce my taxable income. So that is the approach that I take to budgeting, and even to take it more practical, I use a spreadsheet to do all of that, or even the notes on my phone. So can you just give me a quick framework in terms of how people can go about budgeting versus what needs to be in the budget? So what are the steps? Someone is like, okay, I need a budget, I don't know where to start. What is the framework they should use?

Rianka Dorsainvil:

Well, Elizabeth, this is a really good question, and I think where people kind of trip their self up is making it complicated. So creating a budget is super simple. One, as you mentioned, you can do it in a spreadsheet, and this is actually where we start off with clients at our firm is we have a tool called a money rhythm that we created, where at the top it's how much do you earn? How often are you paid? Weekly, biweekly, monthly, boom, that's at the top. So that's your total monthly income. And then we have them list out their fixed expenses. Fixed expenses, again, is things with regular due dates. It doesn't matter if you are earning money or not. Your mortgage or rent, utilities, cell phone, gym membership is part of a fixed expense, because for me, even if I didn't have a job, I still need to go to the gym because it's a part of my mental health.

So you want to list out your fixed expenses, and then you have your total non-discretionary expenses. So discretionary means variable. Things that will change from month to month. It could be food, gas, personal care, vacations. Some people, when a vacation comes, they're just like YOLO, you only live once. So my friend just hit me up. I'm about to go to Cabo with them. Listen, we know you need to go somewhere every year. You need to feel that sand between your toes. You need to run that Baywatch run into the ocean. So just plan for it, right? And let's say that the trip costs like $5,000. So if the trip costs $5,000, let's just plan on a monthly basis. Let's make sure that you are at least saving around $400, $420 a month for this trip that we know is going to happen. So that's one of the keys, too, is not just budgeting for the right now, also budgeting for the future as well.

The things that we know that are going to come up. Once you have all of that, then you have your budget, right? But that's how you can build your budget, one, in a spreadsheet. Or two, I use a tool called YNAB, You Need A Budget, and I absolutely love it. This is something that I also used prior to transitioning into entrepreneurship because I wanted to literally know where every dollar was going and I also wanted to make sure that my emergency fund was funded, and if I didn't earn $1 for four months, I would be okay.

Elizabeth Ayoola:

So as you were talking, something that came to mind is one of the roadblocks I faced when I initially started my journey as a self-employed person when it came to budgeting was inconsistent income. There are so many self-employed people out there who don't have consistent income. So how do you budget when you don't know when your money's coming or where it's coming from?

Rianka Dorsainvil:

You have to know what your expenses are and then have cash saved and set aside because clients will come and go, your widgets will stop selling, then they'll boom, and then they'll go down, oh, it's the holidays, I'm doing a special, Black Friday. And then your product is selling, and then it goes back down. Everything is seasonal or cyclical, and so you have to prepare and budget for that. And so again, you want to borrow from yourself versus financial institutions. So if you know that you have a type of business where it has an influx of income, one month is up, one month is down, you want to always make sure that you have an emergency fund or cash set aside to be able to supplement that income during the down months.

Elizabeth Ayoola:

Yes, yes, yes, yes. Yes to that. I'll be talking about this in a future episode on taxes, but emergency funds saved me, I think two years ago, when I decided not to pay my quarterly taxes and instead to do a lump sum, and ended up with a penalty. So those emergency funds definitely, definitely come in nifty. So the next thing that I want to talk about, which kind of links to something we're already talking about in terms of how to budget and organizing your budget, is not commingling finances. When I finally decided to start getting organized and figure out how much money was coming in and where it was going, one of the things that challenged me was I had money coming and going everywhere. And when I say that, I mean, it was going through a personal account, through a savings account, through a business account. So can you explain the importance of separating your self-employed income from maybe your 9-to-5 income, especially for people doing both?

Rianka Dorsainvil:

Elizabeth, one of the things that I share with self-employed individuals is do not mix church and state. Do not mix your personal and your business finances, period, point-blank, end of conversation. But then again, as always, well, why? I feel like my three-year-old is in the background, asking "But why, Mommy?" Well, this is why. We highly encourage you not to mix your personal expenses and your business expenses, because in the unlikely event that you get sued and they can see that your money is going through your personal accounts, now your personal accounts can get attached to that suit, versus if your business income was strictly in your business account, they can only attach the suit to that business account. So that is the ultimate why. Secondary to that is bookkeeping. Numbers don't lie. And if you don't know your books, you don't know where your money is going, then you're going to wonder where it went.

And so your bookkeeper, I think, is the first person you should hire. Once you have a surplus of funds, hire a bookkeeper. It will make tax time so much more easy, right? Because you're going to have to produce financial documents in the event that you get audited, which there is a high audit rate right now, especially for self-employed individuals. If you get audited, you're going to have to reproduce where your income has come from, your expenses, and you do not want to have to be sifting through your personal checking account, your personal savings account, and then also your business. So first and foremost, just open up a business account, even if it's not a business account, because some financial institutions require you to have either some sort of LLC operating document, etc. If you're not there just yet, just open up another checking account separately, period. Have any automatic payments that are coming in from your company to that particular checking account. Please, please, please do not commingle your funds. Additionally, do not pay your personal expenses from your business account. Just transfer the money.

Elizabeth Ayoola:

Absolutely. Thank you so much, Rianka. I don't know if you have one tip before you go that you want to give the listeners, for people who are self-employed, and what you think could help them if they're looking to dive into self-employment this year.

Rianka Dorsainvil:

If you are looking to dive into self-employment, make sure you also budget for a therapist. It is a lonely road. So many financial traumas that you have suppressed are going to come out, and you don't want to be tackling that head-on while you're trying to propel your business.

Elizabeth Ayoola:

Oh, that's awesome. Thank you so much for coming, Rianka, for telling us about how to budget as a self-employed person, and also for sharing your story with us.

Rianka Dorsainvil:

Thank you so much, Elizabeth, for having me and good luck and well wishes for the new year.

Sean Pyles:

Elizabeth, I so love how Rianka talks about the connection between the nuts and bolts tips for being self-employed, like having a budget and an emergency fund. And how they're really inseparable from some of the more internal stuff, like knowing your why and not making decisions from a place of fear. Because being self-employed is hard work, as you know well. If you don't have that internal motivation to get the work done and to do it the right way, your career and your finances can really suffer.

Elizabeth Ayoola:

No, absolutely, Sean. Definitely, definitely have been in that boat before. And if I'm being completely honest, I am not a meticulous or detailed budgeter. I just like to work with lump sums and guesstimate, which is sometimes not the best, but sometimes works for me. So that said, I love how Rianka broke down the different aspects of your budget as a self-employed person. And I also like the reminder about separating your business and your personal finances. I do have separate accounts, but sometimes I commingle, so it's a reminder to get more organized.

Sean Pyles:

Yeah, we can always use that reminder. Well, Elizabeth, tell us what's coming up in episode two of the series.

Elizabeth Ayoola:

We are going to be getting into everybody's most dreaded topic. Yes, I did generalize there, but we're going to be talking about Uncle Sam and his tax bill. I'm excited about this one, because while taxes can be a pain, understanding tax rules and ways to cut your tax bill can be a fun sport. We're going to be chatting with a tax pro who's going to provide insider tips. Listeners are also going to get to hear about my wonky tax math and the expensive mistakes I have made as a result.

Krystal Todd:

We need quarterly payments just of you estimating how much you think you'll be paying in taxes, and then at the end of the year, when you actually file your taxes, they'll make adjustments based on whatever credits and deductions you're eligible for, what you've already paid. And then you'll see what you net.

Elizabeth Ayoola:

For now, that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us with your questions at (901) 730-6373. That's (901) 730-NERD. You can also email us at [email protected]. Last but not least, visit nerdwallet.com/podcast for more information on the episode, and remember to follow, rate and review us wherever you're getting this podcast.

Sean Pyles:

This episode was produced by Tess Vigeland. I helped with editing. Courtney Neidel helped with fact-checking. Sara Brink mixed our audio. And a big thank you to NerdWallet's editors for all their help.

Elizabeth Ayoola:

And here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes, and it may not apply to your specific circumstances.

Sean Pyles: