Achieving wealth and financial security requires planning. Wealth is not just income. Creating wealth is about diligently investing in yourself, acquiring knowledge, learning financial basics, understanding risk and reward, and taking appropriate action where required. All of this and more is wrapped into these Wealth Building Tips for Solopreneurs.
Being an active Solo 401k investor certainly demonstrates that you have the best intentions about investing in your retirement. But we also know that solopreneurs tend to be remarkably busy people. Maybe you manage your investments with the same discipline as you do your grocery shopping on Saturday morning and paying your bills by the 15th of the month. Or maybe your investments don’t always make the top 10 on your “To Do” list. Either way, automating part of the process is high on the list of wealth building tips for solopreneurs.
Rollover multiple 401k accounts into a single Solo 401k. One of the most challenging investing chores is managing multiple 401k accounts still at employers that you no longer work for (including old 457 plans, Thrift Savings Plans, SEP IRAs, and 403b plans). You may have even forgotten about some of these old accounts or not taken an active interest in them for years. If this is you, one of the most important wealth building tips for solopreneurs that you can follow is rolling these accounts into a single consolidated Solo 401k that will be much easier to manage and grow your investments for years to come. A Solo 401k rollover changes complexity into simplicity.
Automate fund transfers into your investment account. If you are a part-time solopreneur still working for another employer, you probably have automatic withholding into the employer-sponsored 401k up to the limit of the matching funds. However, the matching funds limit is not the tax-deferred total you could be contributing through a Solo 401k. In 2022, you can make combined employee contributions up to $20,500 ($27,000 for those age 50 and older). As a solopreneur, you are also your own employer and through your business, you can contribute up to an additional $40,500. The contributions can be automated through your checking, savings, and/or business accounts into a Solo 401k.
Digitize business documents. Rental properties and other alternative investments can generate copious amounts of business documents that require legally binding signatures. If you are still using a paper system, going digital allows you to transmit documents electronically as well as provides an organized document management system using mobile apps to put all this information in the palm of your hands. If you have not done this yet, it could be your best tool among the wealth building tips for solopreneurs.
Make automated investments. If your diversified Solo 401k account includes mutual funds and similar investments, a Robo Advisor might be a good tool for you. A Robo Advisor provides investment recommendations based on a series of algorithms and computations with little human interaction. You enter basic information about yourself and your goals. This information usually includes the amount you want to invest, your risk tolerance, and when you want to retire. The Robo Advisor will take this information to create a recommended profile for you. Some Robo Advisors will also auto-invest for you, based on your preferences.
2. Set Financial Goals And Track Your Progress Over Time
When you are running your own show, the only limit to how much you can earn is your ambition and market demand. One big reason why solopreneurs venture out on their own is that a corporate pay structure boxes people into how much they can earn. However, a challenge of being a solopreneur is that you are responsible for setting and tracking financial goals.
Track your expenses and taxes. When it comes to wealth building tips for solopreneurs, this may be one of the least used benefit. Carefully tracking your business expenses brings major tax savings at the end of the year. After expenses are paid, whatever is not paid in taxes typically becomes your income. Of course, you can further reduce the taxes on your income with a tax-deferred Solo 401k but that’s not the main point here. You have income, expenses, and taxes. If you don’t carefully track your expenses and deduct them from your taxes, you will end up paying taxes on your expenses because they will become classified as income. Not Good!
The number one way to better track your business expenses is by keeping your personal checking/savings accounts separate from your business accounts. Also, keep your business credit/debit cards separate from your personal cards. Making it a habit to pay business expenses only with those accounts will greatly simplify tracking your expenses. If you pay cash, have a specific file that the receipts go in rather than a cubbyhole in your car.
The next step is getting religious about entering all of your expenses into a business software such as QuickBooks. Another common error among solopreneurs is waiting too long to hire a CPA to keep a growing business organized and finding overlooked tax deductions like an Uber driver writing off mileage instead of actual vehicle expenses.
Think in percentages. You might think of rent and food as fixed dollar amounts but many of your other finances should be based on percentages of your business income. This can smooth out hills and valleys when your income varies from month to month. Instead of taking a large paycheck during a good month, make your paycheck a percentage of the business income so that money remains to pay yourself during a slow month.
The same goes for emergency savings and retirement savings. Instead of a fixed dollar amount, make these a percentage of your monthly income. You’ll find your savings and wealth grow more consistently and predictably. You can also apply percentages to many of your business expenses such as bringing in new technology or your marketing budget. Working with percentages smooths out many of your financial ups and downs.
Pay yourself. It’s intuitive that paying yourself is among the wealth building tips for solopreneurs. But there is more to it than just taking cash out of your business. It needs to go through your business account and into your personal account as “salary.” The same thing needs to happen with your employee and the employer contributions to your Solo 401k. When you are a solopreneur, all your finances can easily become intertwined. Be sure you keep accurate records, or you could end up paying more in taxes than you should. With accurate records, you can also set clear financial goals along with a plan to reach them.
Plan for retirement. Many people want to acquire wealth as a pathway to early retirement and/or a wealthy retirement. If you don’t have a clear retirement goal and contribute to it, chances are good that you’ll end up working many more years than you want. Keep your eye on the prize. A Solo 401k works into your retirement plans in many different ways. Not only is it about big tax savings during your working years, but the alternative investments made available with a Solo 401k can be one of the surest wealth building tips for solopreneurs.
Whatever your goals in life and your stage in life, your finances play an undeniable role in your quality of life. Following all or most of these wealth building tips for solopreneurs leads to obtaining your most important goals and aspirations such as building a dream home, higher education for children, luxury vacations, a better life, and more.
Unless you inherit a fortune or win the Lotto, you aren’t likely to become wealthy overnight. Investing is a long game. The first two wealth building tips for solopreneurs were about getting your business and your finances in order. Now we look at long-term strategies for becoming wealthy.
Alternative investments is a strategy that should not be overlooked if you are skeptical of stocks, bonds, and Wall Street in general. First, having your financial house in order is important when investing long term. Otherwise, liquidating assets to withdraw funds early undercuts your goals, may force you to sell at the wrong time, and have expensive tax consequences. Also, know your time horizon. If you are young or will be in a high tax bracket during retirement, the tax-free Roth Solo 401k is likely the right long-term retirement account for you.
After you determine your entire time horizon, you can break it down into shorter periods such as 5 to 15 years, 15 to 30 years, and more than 30 years away. These are helpful to develop different investment strategies based on risk tolerance. For instance, nearer term, you might want to invest in more conservative alternative assets such as tax liens with a high rate of interest and a known time horizon. These are just possibilities. You have to do what’s right for you and what you’re comfortable with.
Real estate investing can be a good choice for the 15 to 30-year bucket. This can be in houses, condos, land, mortgage notes, and more! The goal is usually collecting monthly rent payments while the value of the asset increases faster than inflation over the years. Cryptocurrencies could be a good match going out beyond 30 years. As a new investment class, the future is not fully known but early returns have been very promising and could result in extraordinary wealth long-term.
Your next step is allocating your investment funds across your strategies and time horizons. Again, think in percentages so that as you increase your investment amounts, you’ll have an allocation model to follow without having to rethink it every time. With a Solo 401k, you’re in full control. You’re going to decide on your investment model but as a starter, it could be 40% in more conservative investments with the remaining 60% allocated to mid-and long-term investments.
Regardless of how simple or complex a tax strategy is, each is designed to accomplish one or more of these goals:
- Reduce your amount of taxable income.
- Lower your tax rate.
- Claim available tax deductions and credits.
- Control the time when taxes are paid.
- Avoid the most common tax planning mistakes.
When it comes to wealth building tips for solopreneurs, the Solo 401k retirement account designed for the self-employed is a proven and powerful method for reducing your taxable income. Not only does it allow alternative investing it also allows the largest tax-deferred contributions. Contribution limits to a Solo 401k are extremely high. For 2022, the max is $61,000 in 2022, with an additional $6,500 catch-up contribution if 50 or older. If your spouse is earning money from your small business, it means they can also contribute up to the same amount. If you are both 50 years old or older, the combined contributions could be up to $136,000 per year!
Those contributions go directly towards reducing your taxable income. This will likely lower your tax rate and your solopreneur business expenses apply towards tax deductions and credits.
With a Solo 401k, your contributions are made as both an employee and employer. As the employee, you can contribute up to $20,500 in 2022, or 100% of your compensation, whichever is less. Those 50 or older get to contribute an additional $6,500. As your own employer, you make an additional profit-sharing contribution up to 25% of your compensation or net self-employment income, which is your net profit minus half of your self-employment tax and the plan contributions you made as an employee. Your contributions can be based on up to $305,000 of income in 2022. A Solo 401k for the solopreneur is the most tax efficient retirement account available.
You might think that the top 1% of the wealthy are all billionaires or at least multi-millionaires but, in some states, it includes anyone earning more than $230,000. Unless it is given to them, the way people earn this kind of money is by making a budget and sticking with it for long-term financial well-being. Check out our Home Budget Calculator to see how you are doing.
If you are not quite there yet, here are a few budgeting tips that even the already wealthy follow:
Track your expenses. Especially the big stuff. Do you first figure out what the total cost of a new luxury car is going to be? Not only the higher monthly payments but also the other expenses like insurance, maintenance, and annual excise or registration fees. After understanding the total costs, a more practical car might become your choice. Maybe you should do the same thing before a $12,000 vacation balloons into a $25,000 vacation.
Figure out your monthly costs. This doesn’t have to be down to every latte that you buy but be sure to cover all your big costs – housing, cars, college loans, utilities, lunches and dinners out, clothes, credit cards, etc. Then subtract it out of your take-home pay. You might decide that you should cut back in a few places. Then you can decide what is reasonable to spend and save each month.
Have obtainable financial goals. Even if you are a high earner, don’t assume your goals will all work themselves out eventually. The first step to becoming wealthy is understanding your financial goals. At the top of your list might be getting out of debt or planning for retirement. Use those goals to shape your budget.
Build an emergency fund. Emergencies happen. If you don’t have savings to address them, an emergency can destroy a well-thought-out budget and wreck your retirement planning.
Build a budget that works for you. Creating a harsh budget when you love the better things in life is not a plan for building wealth. Once you blow a too strict budget, you might not ever go back to it. Building a realistic budget that can occasionally be exceeded or adjusted is a budget that you are more likely to stick with.
A simple definition of financial discipline is controlling your money and avoiding impulsive spending. This ensures that you don’t end up with an empty bank account before paying your bills and contributing to your retirement account.
If you want to build wealth, you have to plan for it. According to The National Study of Millionaires, 3 out of 4 millionaires (75%) said that regular, consistent investing over a long period is the reason for their success. Regardless of where their income comes from, they actually save money and invest!