The entrepreneurship journey is exciting, but entrepreneurs don't have the luxury of pulling in the same amount of money on a bi-weekly or monthly basis. There's also no one to remind you that you should be planning for your financial future. Not knowing exactly what your monthly income will look like makes managing your finances and planning for retirement more difficult. Here are five ways to tackle retirement planning as an entrepreneur.
1. Keep it separate. If you own your own business, create a separate business checking and savings account and a credit card used solely for business expenses. Having clear and concise numbers about separate business and personal accounts will help you with tax planning. It can also allow you to identify the best uses and strategies for your money for retirement planning.
2. Make your budget flexible. Having a volatile income makes it even more important to understand where your money is going, both within the business and personally. Create a budget that covers the essentials and is flexible. You might need to cut expenses for discretionary items if you experience a lean month. This will ensure you're not racking up debt and that you're able to maintain the savings plan you put in place. Guarding against lifestyle inflation is also important, because swings in your income may allow you to live large one month, but limit you substantially the next. Be cognizant of cash flow.
3. Plan ahead. Be proactive about unexpected expenses by building multiple fallback funds or having an emergency fund that is much larger than the average recommended amount. Aim to set aside three to six months' worth of household expenses that can help you get by if you experience a few months of low earnings. Once you have this fund established, work to build a separate fund that will help cover emergency situations. With savings cushions in place or being built, begin diligently saving for retirement.
4. Automate your savings. It can be hard to save when you don't know what your monthly income will be, but that doesn't make it an excuse not to do so. Review your past earnings and calculate an average. Based off this number, determine a safe guess for what you're comfortable contributing to your savings on a monthly basis. Set up an automated transfer to your retirement account, because it's easy to skip a month if you have to do it manually.
Also set up a time to regularly review your finances. You could schedule a recurring money date on a monthly basis to review all your financial accounts and make adjustments to spending and saving as necessary. Perhaps you can contribute more than the usual amount to your retirement account during a good month.
5. Leverage one of these retirement accounts for entrepreneurs. There are several types of retirement accounts designed for small businesses.
-- Solo 401(k). A Solo 401(k) is a 401(k) that covers a business owner with no employees or that person and his or her spouse. A business owner can make elective deferrals of up to 100 percent of earned income up to a maximum annual contribution of $18,000 in 2015 and 2016 and employer non-elective contributions of 25 percent of compensation, with total contributions not to exceed $53,000 for 2015 and 2016.
-- Simplified Employee Pension IRA. A SEP IRA is a retirement account for entrepreneurs that allows for a contribution of up to 25 percent of each employee's pay (and 25 percent of your net self-employment income). Annual contributions are limited to the smaller of $53,000 or 25 percent of compensation for 2015 and 2016.
-- Savings Incentive Match Plan for Employees IRA. A SIMPLE IRA is a retirement plan designed for and available to any small business with 100 or fewer employees. The employer is required to contribute either a matching contribution of 3 percent of compensation or a 2 percent non-elective contribution for each eligible employee (meaning the employer contributes even if the employee doesn't). An employee can contribute $12,500 in 2015 and 2016.
When it comes to planning for your retirement as an entrepreneur, there's nobody else to look out for you. Managing your personal finances can be tricky, but it isn't impossible. With organization, flexibility, consistency and automation, you can get yourself set up on a solid savings plan and continue to enjoy your freedom and independence while you build your business.
Mary Beth Storjohann is a certified financial planner for Gen Y and the founder of Workable Wealth .
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