Many of the folks in the FIRE community are gainfully employed with a consistent and predictable salary. Self-employed financial independence would seem to go hand in hand. But in fact, almost every podcast I’ve listened to or blog I’ve read from someone in the FIRE community was posted by someone who was/is gainfully employed until they decided to “retire” so that they could pursue their passions.
While the FIRE community is filled with stories of individuals who have achieved financial independence through traditional W-2 employment, my pursuit of FI as a self-employed entrepreneur has presented me with a different and unique set of challenges, especially when it comes to cash flow.
I am self-employed and have been for about 20 years.
While this gives me a lot of freedom in my life, it also means that my income can often be unpredictable. For someone like me that craves certainty in my life, this can be quite scary and anxiety inducing.
Before I get into how I plan to tackle this uncertainty, I wanted to illustrate this contrast by taking a look at some of the well-known figures in the FIRE community and how their paths differed from mine.
FIRE Case Studies
The following are just 6 of the many, many financial bloggers on the internet who have posted about their journey to reach financial independence. I’m hoping to join the ranks of these bloggers (not in noteriety, but in terms of early retirement) within the next 5-8 years, if not sooner.
One thing they all had in common is that they worked for someone else before retiring from their jobs after they reached financial independence.
- When Mr. 1500 first started blogging in 2013 he was employed as a contractor according to his first blog post. His goal was to contribute $2,000 per month to his investments so that he could reach his FI number of $1,000,000 by 2017.
- Mr. Money Mustache “worked in standard tech-industry cubicle jobs in various locations throughout the late ’90s and early 2000s” before he retired in 2005.
- The Mad Fientist retired from gainful employment in 2022 after his employer told him he had to return to the office, and than remote work was no longer an option (he had been working and living in the UK).
- Jeremy Jacobson from Go Curry Cracker lived frugally and biked to work before quitting his job to travel and spend time with family.
- As the hosts of the Catching Up to FI podcast, Bill Yount is a practicing physicion and Jackie Cummings recently retired from a corporate job.
- Mr. and Mrs. ROG left their jobs after ten years of saving nearly all of their income and living frugally.
The Benefits of Gainful Employment
As with most people, I have plenty of friends and family members who are gainfully employed and happily trade 40 hours a week of their time for the promise of a steady paycheck, 2 weeks vacation, health insurance and a variety of other benefits.
And if I’m being honest, I envy them quite a bit.
And with the salaries that people are making these days easily exceeding $100,000, there is a lot of draw to that.
The Costs of Self-Employed Financial Independence
Most gainfully employed people probably think that self-employment is this amazing utopian dream full of lavish vacations and huge financial windfalls. The truth, for most entrepreneurs, is something far from that.
Self-employment is stressful, requires long hours, and there is no guarantee that you will receive a paycheck at the end of the month.
Instead of being responsible for one project or aspect of your work, you wear all the hats in the business. You are responsible for marketing, product development, accounting, HR, and client service. Some months are great and other months you are looking at financial ruin.
It’s like an unending roller coaster. The hope is that things will get better, and start to smooth out, but for some people that never happens.
In my situation, having a wife who enjoyed spending money meant that if I earned $10,000 revenue in any given month, to her that meant I earned $10,000. But in reality, after factoring in taxes and the typical expenses necessary to run my business, it meant I was earning maybe $4,000 per month in net profit.
Over time, this meant that we incurred more and more debt, which turned into higher debt payments each month. At one point I took out a personal loan to pay off the credit cards when my wife promised that we wouldn’t use them anymore. That was short lived, and now we have the loan to pay off with credit card debt on top of it.
So after years of overspending (which I take full responsibility for), I am left with a business where I struggle each month because I have to take more out of the business to pay debt than I should actually be withdrawing.
If you choose the path of self-employment, you MUST be disciplined with your money. If you aren’t, then it is just a matter of time before your house of cards will come tumbling down.
How I Plan to Manage My Uncertain Cash Flow
As I write this post in August 2024, I’m about 2 years into restarting my business. I’ve hired an assistant to help me and a business coach to keep me on track.
I’ve been working hard to market my business and develop referral partners. We are starting to see more leads turn into clients. I’ve even raised rates in the past few months.
But August is typically a slow month – and this August has been no different. Right now I’m sitting with $10k in my business bank account, $8,750 in fixed costs that I must account for and a potential refund from a client for $1,250. If I want to pull money out of my business this month, I need some revenue – and with 20 days left in the month I’m already feeling the stress.
So you can see why my anxiety is ever present. I don’t know where my next paycheck is going to come from, or if it is going to come at all.
After separating from my wife last month, I’ve been able to get my spending under control and have created a plan to pay off my debt within the next 5-8 months, at which point I envision things getting a lot easier and life will become somewhat less stressful.
Which leads me to the point of this post. How do I plan to manage my cash flow to meet my financial needs in the coming months?
If I’m being honest with myself, I’m starting to rethink my choice to use my entire emergency savings to pay off debt last month. At the time it seemed like a smart move, but now I’m not so sure.
So here is how I’m attacking my cash flow now…
6 Steps to Managing Cash Flow when You are Self-Employed
Managing cash flow has been a bear for me for years due to the fact that my Wife and I overspent during our marriage. But now that we are separated, I have significantly more control over how I spend my money each month.
Here are the 6 steps I’ve developed to manage cash flow when you are self-employed (and this assumes you are still growing your business and cannot yet take a regular salary).
- Get a handle on your fixed costs
- Determine your take home pay (use the past 3 months as a guide)
- Take only enough out of your business to pay your fixed expenses
- Decide whether you need to supplement your income through other means
- Minimize credit card use
- Use any additional profit to 1) pay off debt or 2) invest for FI
Let’s review these one at a time…
1. Get a handle on your fixed costs
Before you do anything, you must, must, MUST determine what your fixed costs are.
If you are not making enough money to pay your fixed costs each month, then you may need to take a seriously look at whether self-employment is the right decision for you.
Of course, this assumes that you are single or the sole income earner for your household. If you have a partner or spouse who can help you out while you are getting your business going, then that is a different calculus.
Before I dig into my fixed costs, here is a quick definition of the term. Fixed Costs (also called expenses) are costs that remain mostly the same from month to month – they don’t vary much, if at all.
Ok, with that in mind, here are my fixed costs as they stand right now:
- Rent – $2,095
- Child Support – $1,092/month or $252/week
- Contractual Child Expenses – $429/month through end of 2024
- Utilities – $350
- Car Payment – $607
- Fuel – $100
- Insurance – $153
- Groceries – $400
- Student Loan – $300 (5.5 payments left)
- Personal Loan – $1,304 – 18 payments left if I don’t pay off sooner
- Minimum Payments for Credit Cards – $823 (Ugh – I didn’t realize it was this high still!)
- Extra/Unknown (5%): $383
TOTAL FIXED EXPENSES: $8,035
You will notice that I didn’t include anything in this budget for my debt paydown plan, entertainment, travel or any other miscellaneous spending – although you could argue that these things would be found under the “extra/unknown” category in line #12.
Once my debt is paid off, my fixed expenses will come down to $5,002 – still high, but when it all shakes out, I think they will settle in at under $5,000 as I don’t anticipate using the full “extra” amount each month.
One last note on my fixed expenses – if money is tight you should look to see if there are any expenses that can be cut. In my case, the only potential item I could cut would be my car payment. It is WAY higher than I would like it to be. However, I also know that I tend to keep cards for a very long time and than after this car is paid off I will probably keep it for another 10+ years.
With this in mind, let’s see how my income is doing.
2. Determine Your Take Home Pay
If you are self-employed, I recommend using your last three months take-home as a guide for what you can expect to earn. This is because in entrepreneurship, it doesn’t matter how much money you earned last year or 5 years ago – your business can flip in a hot minute.
Ideally, you want to see your income trending up. And if your income is going down, you should be asking yourself why and what you can do about it.
In my case, I actually have two businesses that I draw income from. I have my main business that has the most growth potential, and I also earn money from Youtube Adsense revenue, affiliate sales, and some online digital product sales.
In addition, I have a rental property that I intend to sell next year after the lease is up with my current tenant. I’m keeping that out of this calculation as I basically break-even on this rental each month.
Here is a table with my take-home income for the past three months (I’m able to quickly grab this data using the reports feature in YNAB – Here is my affiliate link if you want to try it ou!)
| Month | Business #1 | Business #2 | Total Monthly Income |
| May 2024 | $4,312 | $2,771 | $7,083 |
| June 2024 | $3,032 | $1,804 | $4,836 |
| July 2024 | $10,461 | $2,304 | $12,765 |
| Total Income | $17,805 | $6,879 | $24,684 |
| Average Monthly Income | $5,935 | $2,293 | $8,228 |
What does these numbers mean?
It means that I am stressed, and rightfully so. Right now my fixed expenses are 98% of my take home pay. Once I pay off my debt, they will drop to about 60% of my take home pay.
For me personally, I would like to see that number come down to between 40-50% of my take home pay. And since I am currently trying to aggressively pay down debt, and the only expense I can really do anything about is my car payment (and I don’t want to sell the car right now), then my only option is to earn more money.
Fortunately, one of the benefits of being self employed is that you have the freedom to increase your income if you know what you are doing. (This is a big IF, however).
3. Take Only Enough Out of Your Business to Pay Fixed Expenses
This is where, for years, I have made a huge mistake. And I suspect if you are reading this post and trying to get a handle on your personal finances as a business owner, you have ALSO made huge mistakes in this area.
Entire books have been written on the subject of how to run a profitable business. In fact, one of my favorite books of all time – Profit First by Mike Michalowicz (affiliate link) – deals with exactly this issue.
Before we go into how I’ve dealt with this issue, let’s define the problem itself.
The problem, as I see it, is that when your business makes money (i.e. produces revenue), you think that all that money belongs to you.
But just like when you get paid a wage from your W-2 job, when your business produces revenue that cash has to be allocated to different expenses BEFORE you see any profit.
So if you your business generates $10,000 in revenue in a given month, you may have a variety of expenses you must pay before you can pay yourself. These include:
- Taxes
- Rent
- Software costs
- Contractors
- Cost of Goods/Services
- Marketing
- Legal/Professional Fees
- Dues
- Insurance
- etc., etc.
If you are taking that entire $10,000 out as your profit, you are going to quickly find yourself either out of business or in a huge amount of debt. On the other hand, what most entrepreneurs do is they pay all their bills each month and don’t leave anything to pay themselves.
And a third category of entrepreneurs pay most of their bills, but forget about taxes until it is time to file their returns and then get a nasty surprise from the IRS or their state taxing authority.
Although it took me some time to figure this out, when I read Profit First it was like the lights came on for me.
The general idea is that you allocate a certain percentage of every dollar of revenue to certain expenses, including taxes, operating expenses, owner pay and profit.
Without going into the details, I’m currently at the spot where I am taking out approximately 44% of my revenue as my owner pay. So if I want to earn a salary of $10,000 per month, my business must generate about $22,600 in revenue for that month.
It wasn’t until recently that I started to get a handle on my business expenses and my numbers. My recommendation is that if you are just starting out, or if you are starting to grow and expand your business, you should read Profit First and take the bare minimum out of your business until you have a good handle on what your recurring income is.
4. Decide whether you need to Supplement Your Income
If you have gotten this far in the analysis, you probably know a few things.
First, you have a good handle on what your spending is each month and what you are earning. Second, you know how much money you can safely take out of your business.
For some of you, this is going to lead to some hard questions, such as:
- Does it make sense for me to continue down this path of entrepreneurship?
- Do I have what it takes to make my business work?
- Is my business even viable?
- Is this even worth it? Should I think about getting a job?
- If it is worth it, do I need to look at ways to supplement my income in the short term?
A gazillion blog posts have been written about how to earn extra money on the side. Just google “how to earn extra money” if you want a list of hundreds of options.
The problem with many of these ideas (for entrepreneurs in particular) is that they just won’t generate enough extra income for the time invested, and they take you away from the work that is most likely to make you more money in the short term – your business.
If you are working a normal 9-5 job and you are looking to earn an extra $1,000 a month on nights and weekends to supplement your income or pay off debt, then yes – a side hustle makes sense.
But if your side hustle is your MAIN hustle, then chances are you are better off spending more time building your business than looking for ways to earn extra cash.
The only exception to this advice is if your side hustle is somehow related to your main business. For example, you are trying to build an online business through blogging and SEO, and you are looking for freelance jobs that will pay you immediately to write about the same topics you are writing for on your blog.
Or if you are building a client based business and in the interim you take on overflow or contract work from other professionals in your niche. These are both viable options.
For me personally, I am not at a point where looking to supplement my income is a viable option. I would prefer to find a W-2 job if I was forced to, but am not ready to do that right now either.
5. Minimize Use of Credit Cards
Many pundits would say you actually shouldn’t use your credit cards at all. And frankly, I think this is pretty smart advice.
But if your income is variable, then you may need to use credit cards until things get more stable.
However, I DO recommend that you stick to a strict limit on how much you will spend on your credit cards – i.e. only as much as you think you can afford to pay off so you don’t go into any additional debt.
Some credit card companies may allow you to set spending limits on your card so you don’t go over a certain dollar amount. This is a great strategy. If you know you are only going to put groceries on your credit card, and your grocery limit is $400/month, then set the limit to $400.
In my situation, I’m only spending money when I absolutely have to and I’m keeping the dollar amount low enough so that I can pay off the credit card when the bill comes due.
6. Use any additional profits to pay off debt or invest for FI
One of the nice things about being self-employed is that you will get some great months when you may earn 2 or even 3 times what you would normally earn in a given month. During those high months, you should be using that extra cash to either pay off debt or stash money in your emergency funds/investments (assuming your debt is paid off).
If you are wondering how I manage to put $5,000 towards my debt each month, this is how. I may have a few months where I’m only paying the minimums. But if I have a good month, I will sock as much towards debts or investments as I can. That $5k is not a static number than doesn’t change, it’s more of an average amount over multiple months.
Are you Self-Employed and Seeking Financial Independence?
I would love to hear from you. Please leave a comment and let me know how you have tackled some of these issues.