Working as an independent consultant and being your own boss offer a number of benefits, including setting your own hours, determining your specialties, and choosing your clients. However, independent consulting is not without its challenges. In our recently released 2nd Annual MBO Partners’ State of Independence in America report, we surveyed independent consultants to learn about their opinions of their experience in consultant, and inquired about what they saw as their greatest challenges. Here, we discuss two of the most often-reported challenges, and steps you can take to overcome them.
One of the many benefits of working as an independent consultant is the opportunity for an unlimited income. On the other hand, running your own business also means losing the comfort of a guaranteed salary. In our State of Independence survey, 55% of respondents reported an unreliable income as one of their top challenges.
Solution: Though income uncertainty is simply part of self-employment, there are steps you can take to prepare and protect yourself against financially leaner times.
- Maintain Savings: One of the wisest choices any business owner can make is to have a substantial savings fund set aside for emergencies. We recommend keeping at least six months’ of operating costs and living expenses in a savings account. Ideally, these savings will be established before launching your business.
- Cut Office Costs: The newest and best equipment, technology, and amenities aren’t always necessary. By knowing where you can cut costs in your business, you can often save a significant amount of money that can be put towards your savings or into business development.
- Budget: Budgeting your business expenses can help prepare you for uncertain income. However, with an income that fluctuates, many traditional budgeting methods are ineffective for independent consultants. One popular alternative budgeting method is to prepare each month’s budget based on the prior month’s income, so that budgets are designed using money already in the bank rather than expected income.
Another common concern for independent consultants is the uncertainty and challenge of planning for their retirement. No matter how much an independent consultant may love what they do, few wish to continue working full-time forever. In the corporate world, employees can often rely on their employers to provide 401 (k) plans and investment opportunities that would help build a retirement savings. Without the benefit of this option, independent consultants are solely responsible for ensuring that they will be financially prepared for retirement.
Solution: Though retirement planning may seem daunting, there are a number of retirement plan options available to independent consultants. The solution that will work best for you will depend on a number of factors, including your goals and income, which you can discuss with a financial planner. A few of your options may include:
- SEP-IRA: Simplified employee pensions (SEP) offer a high amount of flexibility with low administration costs. For the 2011-2012 planning year, contribution maximums are set at $49,000 or 25% of an individual’s income.
- Solo 401 (k): For independent consultants who wish to save more money than allowed by a SEP-IRA, solo 401 (k) plans provide the opportunity to contribute up to $50,000 in savings in 2012, or $55,500 for those over the age of 55. Though they require more paperwork and administration than an SEP-IRA, solo 401 (k) plans can also be borrowed from to cover emergency expenses.
- Independent consultants who run their business through MBO Partners are entitled to take part in our corporate 401k plan.
What steps do you take to overcome these challenges? Tell us in the comments.