“The secret of change is to focus all of your energy, not on fighting the old, but on building the new.” Dan Millman, Way of the Peaceful Warrior
Managing your cash-flow can seem impossible at times. Just like changing eating habits or becoming more active, it’s important to have a better view of how things work behind the scenes. Having the knowledge gives you a stronger sense of control over your actions, thoughts and decisions.
Although this term is primarily used for business finances, the principles for managing assets and risk are the very similar.
From an early age you begin to gain skills, experience and expertise. At some point you begin to exchange your assets for compensation. Initially the transaction may be very simple, such as 1 hour of tutoring for $25. You do the work and get paid as agreed. Great.
Over time you continue to gain additional skills, certifications and recognition based on your accomplishments. At some point you decide to either continue as a freelancer or contract worker, or you accept a position working for a business. Terms are negotiated and you set about doing the work.
Soon your compensation isn’t quite as straightforward. Rather than getting paid immediately, you may have to wait 2 weeks to 30 days or more. Once you are paid, either your employer or you will need to set aside part of your income for federal, state and local taxes. And then there’s your Social Security and Medicare contribution.
Here’s where your first decision comes into play. Whether you are self-employed or work for someone else, take time to calculate your estimated annual taxes ahead of time. Complete or update your W-4 to accurately reflect your choice with your employer. If you are self-employed, you can pay estimated taxes quarterly to stay ahead of the game. For additional self-employed tax resources, check out the IRS website.
After taxes and Social Security obligations, you still have a few more important cash-flow items to consider. How will you manage your Health Care Needs and Retirement Income? Both of these have the potential to create significant financial hardships. Your best plan of action is to understand what options you have today and make adjustments as you can.
First, understand that taxes and Social Security contributions must be reported and paid annually. You can make monthly or quarterly payments or save up to pay all at once. Rather than getting a refund, it might make more sense to receive more of your compensation for present needs.
Second, take advantage of every possible resource to reduce Health Care Needs. Set aside funds to cover unexpected illness or accidents. If you don’t have a Health Insurance Plan or a High Deductible Plan, seek out local clinics, free or reduced services and urgent care facilities near your home. Ask about installment plans with the hospital or provider as soon as possible. Whether you have an Insurance plan or not, expect to contribute at least 10% – 15% of your annual compensation for premiums and out of pocket expenses.
Finally, saving for the day you want to have more flexibility in your schedule should start as soon as possible. If your company offers a 401k plan, be sure to contribute up to the full match. Review the investment options on a regular basis and ask lots of questions. If your company doesn’t offer a retirement plan, start your own. Build up your contributions to the IRA/Roth IRA annual maximum of $5,500 per year ($6,500 if over 50). Start with what you can.
Next, look for Part II as we dive deeper about cash-flow and why it matters.
photo courtesy of MustangJoe via pixaby.com