Why Personal Finance is Harder for Solopreneurs, and What to Do About It

personal finance solopreneurBefore I dig deeper into why I feel that personal finance is harder for solopreneurs, I must share a little bit more background with you.

According to Wikipedia, a solopreneur is the “sole owner of an independent company.” In other words, a solopreneur is an entrepreneur that works alone.

On a personal level, I have been a solopreneur almost exclusively for the past 12 years. Since 2005, I’ve owned and operated my own “law firm” (as I loosely define that term). During that time, I’ve worked alone, had an assistant, had my wife help me, and hired contract attorneys to assist me.

But for the most part, I’ve worked largely alone.

I’ve tried numerous systems for managing my personal and business finances, with mixed results. The only consistency in my system is that I’ve been inconsistent over the years, which has happened for a number of reasons:

  1. When I started out, I was single. Now I’m married.
  2. Technology has changed drastically over the years – Apps, smartphones, the cloud, and the internet have changed personal finance in ways I could have never dreamed about in 2005.
  3. Podcasts started becoming more mainstream.
  4. My Wife and I moved to a new state in 2009.
  5. We have had three kids during the past seven years.
  6. We lost a lot of money during the financial meltdown in 2008, but have lived to tell the tale.
  7. I’ve never been truly passionate about my legal practice area, causing me to switch from one practice area to another, not really getting a whole lot of traction in any particular practice area.

However, over those years, and particularly since 2012, I’ve learned a tremendous amount about money, finances, entrepreneurship, online marketing, and much, much more. As a result, I feel uniquely qualified to write about the topic of personal finance for solopreneurs.

So let’s start with a question – why is personal finance harder for solopreneurs?

Why Is Personal Finance Harger for Solopreneurs?

I would argue that personal finance shouldn’t be any harder for solopreneurs than it is for people who hold regular jobs.

The bottom line is, it doesn’t matter whether you have a job or you are a solopreneur. If you earn more than you spend, personal finance is easy.

But I suspect if I were to poll a group of solopreneurs, many more of them would have months where their expenses exceed their income.

And even though you can plan for this by putting one to three months of expenses into a savings account, it is mentally stressful and taxing to dig into that account if you didn’t earn enough to pay your bills in any given month.

Therefore, I submit that personal finance is just harder for people who earn an irregular income when sometimes they don’t earn enough money to pay for their monthly living expenses.

I can already hear the PF Bloggers coming out in full force… “if you don’t make enough money to pay your bills then you should just go and get a job.”

Or, my other favorite, “you need to cut your spending…”

Both of those arguments are, on their face, completely legit.

I don’t dispute them.

But by the same token, they are short-sited and misguided, especially if the person making those statements has a job and does not necessarily understand the ups and downs of life as an entrepreneur.

In my experience, most personal finance bloggers (with the exception of those that have retired), did not earn their money through entrepreneurship. They earned it working at a J-O-B. Having a job has a number of perks, most notably:

  1. A steady, reliable and predictable paycheck.
  2. Good health insurance that is typically paid for by your employer.
  3. An automated retirement plan (typically with a company match).
  4. Regular, predictable hours that allow you to spend evenings and weekends on your “side hustle”.

On the other hand, as a solopreneur, you must contend with:

  1. Unpredictable and unreliable income.
  2. Finding your own health insurance that is extremely expensive and usually requires a high deductible.
  3. Finding your own retirement plan, and no company match.
  4. Working 24/7 because your “job” IS your side hustle.

When comparing these two tracks, who in their right mind would consciously pick the life of a solopreneur?

It’s sheer madness, right?

Maybe to some. But to the solopreneur that finds themselves “proudly unemployable” as Michael O’Neal would say, this is the ONLY way to live.

The potential upside to entrepreneurship is just so much greater, in my opinion, than working at a traditional job. I recently wrote an extensive blog post on why I’ve decided to not attempt to find a job.

Which leads us to why personal finance is harder for solopreneurs.

The Top Five Reasons Personal Finance is Harder for Solopreneurs

So why is personal finance harder for solopreneurs in general? There are five main reasons:

  1. Income is irregular and unpredictable. We’ve already touched on this.
  2. You must manage two sets of finances – business and personal. That’s a lot of numbers.
  3. Psychologically, it’s harder to invest into a retirement account if you think you will need that money the following month to pay bills.
  4. You must force yourself to live off of last months income.
  5. You must automate certain areas of your life.

So knowing these things about why personal finance is harder for solopreneurs, what can be done to make our financial lives easier or less stressful?

How to Make Personal Finance Easy for Solopreneurs

I personally believe that one of the main reasons that personal finance is so much harder for self-employed people is psychological.

During months when I don’t make enough money to pay bills and I have to dip into my personal savings, it is really stressful to me. It is during those months that I really consider whether I should be looking for a job.

When this happens repeatedly over several months, it can wear you down psychologically.

And if you can’t handle that stress, perhaps you are not cut out to be a solopreneur.

For me personally, it is during those low-income months that I double down on my side hustles and internet businesses. I want more than anything to retire from the practice of law so that I can focus on making money through my online businesses full-time.

The beauty of an online business is that it is scalable in a way that most jobs or in my case, law firms, never will be. (Arguably, I could scale up my law firm and hire more staff, but I don’t want that headache). So once you get to the point where you are earning money consistently online (which arguably may take months or years to happen), you can scale that up and earn exponentially more.

One of my favorite bloggers, Michelle Schroeder-Gardner of Making Sense of Cents, posts a great income report each month to show her current monthly income compared to where she previously was. She says that it was the income reports of other great bloggers, such as Pat Flynn of Smart Passive Income, that motivated her, so now she wants to motivate others in the same way.

Reading about people like Michelle and Pat Flynn help to keep me motivated and writing for this blog on a regular basis.

5 Steps to Make Personal Finance Easy for Solopreneurs

Assuming you can handle the psychological ups and downs of solopreneurship, here are 5 steps you can take to make personal finance easier for you.

  1. Don’t leave your day job
  2. Save up 3-6 months of personal expenses IN CASH
  3. Follow the Profit First system
  4. Pay yourself like an employee
  5. Save massive amounts of money during the good months

#1 – Don’t Leave Your Day Job

If you have a day job, don’t leave it until your solopreneurial venture is making at least as much as your day job for a minimum of three to six months. During those months, you are to be SAVING every penny you earn from the “side hustle”. This will be the beginning of your emergency fund that will help you out during the lean months after you quit your job.

If you don’t have a job but are only working on your own venture right now, then you can skip ahead to step #2.

#2 – Save 3-6 Months of Personal Expenses IN CASH

Create a separate account with a new bank or investment firm and set aside at least 3-6 months of personal expenses in that account to help smooth things out during the lean months. You should keep this money in cash or short term CD’s that you can access quickly if needed. I leave mine in a money market investment at Fidelity.

#3 – Follow the Profit First System

If you don’t know what I’m talking about, you need to go pick up this book by Michael Michalowicz (affiliate link) immediately. Essentially, you will set aside the money you earn into one of several buckets/accounts based on the percentages that you have chosen given your level of income. One of those buckets is the “owner’s pay” account. This is the account that you will use to pay yourself a salary in the next step.

#4 – Pay Yourself Like an Employee

You need to decide on what a reasonable salary for you should be, and that is what you will pay yourself. By doing this, you can ease the psychological stress of dipping into your savings when times are tough. It doesn’t matter whether months are good or bad, you will pay yourself the same amount each month. I recommend paying yourself twice a month, but you can pay yourself as frequently or infrequently as you want. The key to this step is that you pay yourself the same amount and the same frequency each month.

#5 – Save Massive Amounts of Cash During the Good Months

When the times are tough, I recommend paying yourself the same and dipping into your savings account. But when times are good, you should top off that savings account and invest anything that is left over. If you aren’t contributing to your retirement account through your normal monthly pay (which I recommend), then you can use the extra cash over and beyond your 6-month safety fund to max out your retirement accounts. Some of the options available to you include a SEP IRA, Simple IRA, Self-employed 401(k), and Roth IRA accounts.

Are You a Solopreneur?

Are you a solopreneur? Does this resonate with you? Please leave a comment below and let me know your thoughts on this advice and solopreneurship in general.