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Tax-Efficient waterfall - simple investing strategy for the "Business-of-one"

It's no secret that financial lives of those who chose to go at it alone, feels very different than those who work for someone. So many aspects of it are different.

First and foremost, when you choose to become a freelancers, solopreneur, business-of-one, etc. - you theoretically choose yourself, but in essence you need to worry about both you (and spouse, parent, kids, etc.) and the new entity on the block. Namely, "your business". Thinking of your business as it's own entity, with needs, opportunities, and more is key to succeeding on your independent journey.

Second, your life is not built by a cycle of monthly payments. Nia's heard from endless people who are self-employed - "don't speak to me using the words "paycheck", "salary", "monthly contributions", and more. The life of the independent worker is not built out of guaranteed paychecks on a monthly cycles. Incomes fluctuates throughout the year requiring consideration for the ups and downs of inconsistent income.

Third, we don't have our "employers-back". Putting aside payments for different goals, whether to pay taxes in the future, or contribute to retirement is all up to you. And that's where Nia's help comes into play. Our goal is to simplify these decisions together with you and help ensure that in the day-to-day craziness of being your own boss - you don't forget to invest in your future-self.

So if you've seen these types of images around the internet, and waived them off as "not relevant to me, as I don't have a 401k or employer-matching", we now created the waterfall investing strategy that was built for the "business-of-one".

In a nutshell, here is how you should be thinking about it -

  1. For every payment you receive, depending on your tax bracket, think about putting aside anywhere between 25-50% towards your taxes and retirement.

  2. If you don't have an emergency fund of 3 months of living expenses - add to the fund.

  3. If you have credit card debt, try to pay off more than your minimum payment so you can eliminate credit card and high-interest debt.

  4. The money you put aside for retirement in step 1? move it to your SEP IRA, Solo 401k or your Roth/Traditional IRA and invest it.

  5. If you have additional funds that aren't going to your day to day, evaluate if investing in your business can increase your revenue and help you grow in the long run, or invest it in a taxable brokerage account.

As a freelancer, it's important to start thinking about your financial future and how you can protect yourself. There are a few things that traditional employees have that freelancers don't - like an employer-sponsored retirement plan or health insurance through their employer - which is why it's so important to start saving now. A great way to start is by taking our free audit to check for missing benefits.

*This post is not investment advice or personal tax advice and should not be relied on for such advice or as a substitute for consultation with a professional accountant, tax, legal, or financial advisors.

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