Starting Your Own Business? Are Your Personal Finances in Order?

Dear Carrie,

After several years as an employee, I'm launching my own construction business as a sole proprietor. I've got a great accountant for the business side, but need help figuring out the personal side of my money. Can you help?

--A Reader

Dear Reader,

In the excitement and challenge of launching your own business, it's easy to get caught up in your professional financial needs to the detriment of your personal finances. But it's important to take equal stock of both, so you're smart to be asking this question.

When we work for a company, we tend to take for granted some of the benefits that come with being an employee, such as healthcare and retirement. When you're on your own, those things require a lot more attention because you have no one to rely on but yourself.

In addition, as you build your business and provide your own income, you'll want to pay careful attention to where your money is going. Here are several financial steps to take to make certain you're personally as well as professionally prepared to succeed in your new venture. While I realize that some of these may be difficult to accomplish in the early days of your business -- and the costs might be a stretch -- I think they're all worth striving for to protect yourself and your family.

Set up a retirement account

Retirement may not be at the top of your list as you look at your business balance sheet but, for your own sake, it should be. There are several small business retirement plans, but the simplest for a sole proprietor is a SEP IRA. Annual contributions can be as high as 20 percent of net self-employment income for an owner, up to $53,000 in 2016. It also gives you the flexibility to vary contributions according to your annual business needs. Plus, you can contribute to both a SEP and either a traditional or Roth IRA in the same year, increasing your savings even more.

Another option is either an Individual 401(k) or an Individual Roth 401(k). Each requires more paperwork than a SEP, but allows potentially higher contributions because you're not restricted to only contributions based on self-employment income. You can contribute 20 percent of net self-employment income PLUS an additional $18,000 in salary deferrals for 2016. The total maximum is still $53,000. However, those 50 or older can contribute a "catch up" of $6,000, for a max of $59,000.

Make sure you have the right types of insurance

Having adequate insurance is another top priority. There are three types you should especially consider:

  • Health insurance -- This is crucial. And you may have a couple of choices. If your spouse has insurance through a company plan, it may make the most economic sense to get coverage through that group. If that's not an option, look for a high-deductible policy. Then open a Health Savings Account (HSA). Similar to an IRA, you can make tax-deductible annual contributions to an HSA and earnings grow tax-deferred. Withdrawals for qualified medical expenses are tax-free. Contribution limits for 2016 are 3,350 for an individual and6,750 for a family, with a1,000 catch-up for people over 55.
  • Private disability insurance -- This is an important backup in case of an illness or injury that would prevent you from working. While certain states provide disability insurance paid for through payroll taxes, the terms of coverage vary, both in length of time and percentage of income replaced. It would be wise to consider a private policy that ideally covers up to 80 percent of your income. The policies can be complicated, so best to work with an agent you trust.
  • Life insurance -- If you don't already have life insurance, put it on your list now -- especially if you have minor children or other dependents. In general, a term policy makes the most financial sense unless you have a dependent with needs that will continue indefinitely. Term insurance is fairly inexpensive, and well worth it both practically and in terms of peace of mind.

Beef up your emergency fund

When you work for yourself, you can't always count on a steady income, so an emergency fund is essential. Build up to having enough cash to cover at least six months living expenses in an easily accessible account. This is a bit more than I normally recommend, but a prudent measure when you're first starting out on your own. If you have to dip into your emergency fund during lean times, make certain to replenish it when business is booming.

Refine your budget

Again, not always having a steady income means you have to be even stricter about your budget. Take a look at the spending patterns you had as an employee to see if you need to refine them. If you need to reset priorities, do it now. The last thing you want is to get into heavy personal debt to keep your business going.

Use credit to your benefit

And speaking of debt, carefully check out your options for a business credit card with an eye not only to fees and interest rates, but also to perks that make the most sense for you and your business, whether that's cash back or travel points.

Chances are the accountant you have for your business can also help you with your personal finances and tax return. Discussing both with an expert who can help you see the big picture should help you stay on top of both sides of the books. Best of luck!

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Looking for answers to your retirement questions? Check out Carrie's new book, "The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions."

This article originally appeared on You can e-mail Carrie at, or click here for additional Ask Carrie columns. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Asset allocation and diversification cannot ensure a profit or eliminate the risk of investment losses. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. Diversification cannot ensure a profit or eliminate the risk of investment losses.