Retirement

Battling Burnout: How To Turn Self-Employment Income Into Wealth

The one consistency in the US labor market has become burnout. Between long hours, uncertain financial futures and a general lack of resources, workers of all ilk show signs that they’re tired.

In self-employment, the threat can become even greater since you’re managing both the business and often creating the income flow through the work you do with clients. Recent surveys have found that 30% of entrepreneurs admit that they’re often or constantly burnt out. Meanwhile, a group I work with – who often operate in solo or small practices – therapists, have a burnout rate of 45% according to an American Psychological Association study.

What causes the burnout can range from a myriad of factors, from the goals sought, to personal demons and concerns. But there’s a financial component to this as well, since often people will continue to push through the business-building process to turn the practice or business into a self-sustaining entity, putting their personal health on the backburner. In the process, you’re not giving time for yourself to heal, rest or recover.

To create this space from a financial perspective, especially service-based self-employment, requires turning self-employment income you earn into long-term protection, savings and wealth. To achieve this, you must use the investment tools available to the self-employed: Investing in the markets, the business or real estate.

Without addressing some or all of these investment vehicles, then the ability to grow wealth outside of the hours you work in front of clients will be difficult to achieve.

Investing in the Markets

This is the most common way that people consider retirement saving or long-term protection. When running a service-based self-employment business, it’s important to make a decision on how to invest that’s reflective of your growth.

For those operating solo, then looking towards a Solo 401k can provide the most upside – and potential savings. You can invest income that you receive as both an employee and employer, with a very high cap of $69,000 total for 2024.

As an employee, you can put aside $23,000, just like any other employee with a regular job. Except, you’re also the employer. An employer isn’t likely to decide to give you $40,000 to invest, but you’re the employer so you can choose to do so in the Solo 401k.

For those with a few employees, they will likely need to look at a Sep-IRA for retirement, at least until you have a large, consistent business that can handle a regular 401k. The Sep-IRA has the same limits as the Solo 401k, but you cannot go above 25% of employee compensation. If you pay yourself $100,000 in the business, then it’s essentially capped at $25,000 (it’s capped at 20% of net income for solo businesses). Meanwhile, if you give 25% to yourself, then you must also give the same percentage to everyone else that qualifies for the Sep.

Investing in the Business

Often, the self-employed believe they’re investing in the business to grow the client base and ensure a safe income. In reality, that’s investing in the income of the business. But it may not be investing in a fashion that will turn the business into an asset that can be sold.

In fact, most service-based businesses cannot ever be sold because they do not have assets that can live beyond the skills and work of the business owner. A one-person dentist office named after the owner has very little assets to sell come retirement (outside of a dentist chair) – a buyer isn’t likely to purchase on a hope and prayer that clients stay.

Instead, it requires creating a business that can last beyond you. And there’s real opportunity, as the Gen-Z enter the workforce, with an expectation that they will account for 30% of talent by 2030. Meanwhile, 10,000 baby boomers exit the workforce every day.

Through the use of an installment sale, a business owner can train their successor to take over the business, and then allow the business to fund the purchase. In this design, the buyer puts a down payment of say, 20%, and then pays the rest of the balance (with interest) over the next 10 years, for example.

Meanwhile, the business owner can pass along the company’s assets – and not use retirement funds as much in the early days of retirement, allowing the investments to continue their growth.

It’s a win-win, for those selling to successors that can manage a business. But you want to protect yourself in case your handpicked mentee does poorly and fails to make the installment payments.

Investing in Real Estate

Real estate investing has many different potential opportunities, depending on where you want to invest, what type of property and what type of renter you seek. But when doing so, make sure you’re benefitting from all four ways that the real estate can work for you. These include:

  1. Cash flow – The money you receive from renters.
  2. Appreciation – The growth of the property over time, increasing the value.
  3. Equity – Using the money from the renters, you can pay down the loan on the property which increases your equity.
  4. Depreciation – You can write off a portion of the property, reducing the taxes on the cash flow you earn.

While some may view real estate as the ultimate investment vehicle, it’s important to remember it’s not a passive process, nor risk free. But when utilizing it within a larger investment strategy, it can create significant protection using the self-employment income.

With that protection comes less burnout and more ability to invest in other areas of your life or business. And that, in essence, improves the long-term viability of your work.

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