3 Ways to Build Wealth as an Entrepreneur
Running a business means making a lot of high-stakes decisions.
But as a busy entrepreneur, you only have so much brain power. Understandably, this leads independent professionals who have to focus their mental energy on essential business strategies and dozens of daily decisions to often neglect the less fun, less immediate side of things: taxes and retirement savings.
But those things can make a big impact toward building wealth.
Do you recognize what we like to call the “fingers crossed” approach to business management?
It goes like this:
➡ Money comes in
➡ Pay the business expenses and your necessities (bills, mortgage, etc.)
➡ Spend what’s left until it’s gone (where does it all go???)
➡ Repeat
Until tax time.
Then it’s:
OMG how much do I owe the IRS?
➡ Sort through credit card receipts
➡ Wrack your brain for logins to all your accounts
➡ Search Quickbooks for that one report (again).
➡ Calculate income.
➡ Hunt down every expense (was that Amazon transaction a business expense? Or was it laundry detergent? I don’t know!?!).
➡ Do some fancy math
➡ Cross your fingers and hope you don’t get slapped with a huge bill.
➡ Realize with regret that you didn’t do a very good job of paying yourself and you haven’t tucked anything away for retirement - again.
If that sounds familiar, you’re definitely not alone. But there’s a radically different way to handle the whole thing — and it’s actually going to help you build more wealth with less stress.
Build Wealth Tip #1:Pay Quarterly Taxes
The first step to building wealth with less stress is switching from the “fingers crossed” approach to a more intentional approach.
You may even be able to keep more of the money you earn in your own account instead of handing it over to the IRS (more on that later).
But…exactly how do you do that?
You set aside enough money to pay your quarterly taxes on time. When you do this, you get instant relief because you know there won’t be any unhappy surprises at tax time, plus you avoid fines and interest fees.
When you work a traditional job under a W2, you don’t need an estimate because your employer automatically deducts your taxable income and pays the government for you. When you work for yourself you have to do it yourself. Every single quarter!
4 ways to get a good estimate:
Pay 25% of whatever you earned last year. (Works best if you expect to earn about the same amount this year).
Look at your Q1 earnings, multiply by 4, estimate your annual taxes, then pay 25% of that (Works best if you love math).
Ask your CPA to calculate (This can get expensive).
Automate your decision making, tax and retirement withholding, and quarterly payments with the Ruby Money app.
Don’t worry if your income fluctuates. You don’t have to get this perfectly right. You just need a good estimate. A good estimate protects you from fines the IRS would charge if you fail to pay quarterly and from paying interest on the money you owe.
Now that you know how much to pay quarterly, let’s talk about how you pay it.
3 ways to pay quarterly taxes:
1. The Old-School, Pre-Internet Era Method
Your CPA sends you a pdf voucher that you need to print out.
You write a check for the appropriate amount (do you even have paper checks in your life at this point?).
Follow a rabbit trail of Google tabs in search of the correct IRS address to send your money to.
Pop the envelope into the mailbox.
Then, lie awake hoping your check arrives on time (how snail-ish is “snail mail” these days, anyway?) and doesn’t get lost along the way.
2. The Bureaucracy-Gone-Modern Method
Go to IRS.gov.
Look for the “Make a Payment” button.
Frantically try to remember your login credentials.
Answer “Reason for Payment” — except it’s a drop-down menu and the reason you’re making a payment isn’t listed in the menu. (You said I had to pay you quarterly. Why is “Quarterly Payment” not an option in this drop down menu?).
Verify your identity (Yep, it’s ME Uncle Sam. Don’t you know me by now? No, I’m not a robot. Robots don’t get frustrated. Can’t you tell by the way I’m clicking furiously — I’m an extremely frustrated HUMAN?).
Neither of these methods seems like they’d have a positive effect on a person’s mental health. Around here, we like to trade in the bureaucratic nightmares for…
3. The Ruby Money Method
Open the Ruby Money app on your phone
Tap “Pay Taxes”
Whichever method you choose, you’ll need to keep on top of those quarterly payments if you want to keep the Tax Monster quiet and out of sight.
But what if there was a way you could pay less and still keep that Tax Monster tucked away in the corner, all calm and quiet? That brings us to the second way you can build wealth with less stress: by funding your retirement account.
Build Wealth Tip #2: Save For Retirement
The second most important way to reduce your stress while building wealth is through retirement savings. Retirement contributions are hands down the best way to save on taxes, because it’s one of the only ways you can simultaneously save while building your future wealth.
People talk a lot about deducting more business expenses as a way to save on taxes, but you’re still spending that money on equipment or supplies. At the end of the year, it’s gone! With retirement, it’s your money, it grows over time, and you don’t pay taxes on it.
Did you know that one of the biggest benefits of being self-employed is that you can put up to $61,000 into a retirement account pre-tax for 2022? That’s 3 times the amount you can put aside as a W2 employee, and it’s worth $20k in tax savings.
What does pre-tax really mean? It’s essentially that your retirement contributions lower your taxable income, aka the “net income” line on your spreadsheet tab. And the lower that number, the lower your taxes. Plus, you’ll be setting “Future You” up for a happy retirement at the same time. #winwin
There’s even a type of retirement account that was built specifically for independent professionals, freelancers, and small businesses. It’s called a SEP-IRA. Intrigued? Ruby Money did the research for us, so check out their list of the 3 Best SEP-IRA investment providers for the Self-Employed.
Build Wealth Tip #3: Pay Yourself First
Adopting a “pay yourself first” mindset doesn’t just address the practical aspects of reducing decision fatigue; it also helps you conquer those feelings of doubt that maybe you’re not saving enough, not earning enough, not doing enough.
When you pay yourself first, you shift from a mindset of scarcity and doubt to a feeling of empowerment.
Take note that when we talk about paying yourself first, we mean this literally. Set aside those savings before you look at your expenses.
Flip your mindset from…
Income→Expenses→Savings
to…
Income→SAVINGS→Expenses
What’s great about this model is:
You will maximize your savings, which means you are prioritizing the long term, investing in your own future, and paying yourself first.
You get peace of mind, which is really the goal here. If you know how much you are setting aside for your retirement and future and for your taxes, you won’t get hit with any surprises.
We love mantras around here, so if this new paradigm feels challenging for you, try repeating this mantra: “When I get paid by clients, I’ll set aside my savings first, then tackle my expenses.”
Ready to get started? Here’s your to-do list:
Step 1: Adopt the “Pay Yourself First” mindset
Step 2: “Set and forget” your tax payments and retirement savings with Ruby Money
Step 3: Go forth and build wealth with less stress!
Want more help as you grow your business?
If you want more guidance on how to work smarter not harder and grow a profitable business that brings you more joy, consider the quantum leaps you can make when you hire a business coach who has been there done that, and wants to help you to it, too.
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