Making money from a business of one’s own is exhilarating and a bit heady sometimes. While getting a paycheck from an employer is sometimes exciting but always gratifying, the income that one earns from a freelance enterprise somehow seems different.
It almost seems like free money. It can be very tempting to turn around and reward oneself by spending that income. However, being an independent businessperson, even if that business occurs in the virtual marketplace, we face the same finance imperatives that a bricks and mortar entrepreneur faces.
We need to invest in our own enterprise. We need to offset inflation. We need to offset fees. There are probably a dozen other good reasons, but these are the most obvious to this independent entrepreneur. Let’s look at the ways that we can plow our income back into the growth of our business and the reasons to do so.
It is axiomatic that we need to invest in our own businesses in order to make them successful in the long term. This is economics at its most basic and fundamental. If we do not invest in our equipment, our supplies, our personnel, our facilities, we will eventually have very little to offer our customers.
This is true even if the only staff is, in fact, us, and the only apparent equipment is, in fact, our laptop. Computers obsolesce – blast them! Eventually, that prime piece of equipment will have to be upgraded with a new brain transplant, or replaced with a newer model. At the very least, income from a business should be set aside for a replacement fund down the line. All the other equipment and peripherals also obsolesce and break down sooner or later, and need their own successors.
In bricks and mortar businesses, this sort of setting aside of money for big replacements or new purchases is called capital funding, and there is a whole realm of accounting to keep track of it. Don’t worry about that right now. Just know that we need to save some portion of what we earn to keep our computer humming, our printer clicking, our paper tray filled, and our internet access turned on.
We need to save some portion of our business income, as well, to cover us during those periods when income is down, perhaps non-existent. There are ups and downs in every business, whether seasonal/or annual, or related to the overall economy (see the Great Recession of 2008). It makes sense to keep aside something for the proverbial ‘rainy day’.
This proverb, however, does not refer to sitting inside wrapped in a quilt, drinking a hot beverage of one’s choice, while the rain patters down scenically and moodily outside. No, that rainy day is when, metaphorically, we cannot get outside to collect food, to protect crops, or to start a new season’s work. That rainy day is when we face the prospect of no income for some time to come. That is when the savings come in handy. The alternative, if we do not save, for many of us, seems to be learning how to say, “Do you want fries with your order?”
There are some other reasons not only to save, but also to save in a way that makes even a tiny level of interest. If you are paid through a service such as PayPal (the one with which this writer is most intimately familiar), you are perhaps leaving a balance with them for longish periods of time.
If this money is sitting in a non-interest-bearing account, it is essentially losing value. Why? Because inflation is, it seems, inevitable and inexorable. As your money sits there, it declines in purchasing power. Thus, when you finally take it out, whether to make a purchase, or to transfer it to a conventional bank account, it will have less value in the marketplace than when your happy customers deposited it on your behalf.
Once upon a time, PayPal offered an interest bearing option. They would do what is called a “sweep” of funds that were not otherwise allocated, into an account that paid something. It was a very low rate, but in this era of ludicrously small interest rates, it was something.
As an aged relative would have said, it was better than a poke in the eye with a sharp stick. Sadly, alas, and also, alack, PayPal has elected to eliminate this service. A search on their web site shows a careful expunging of such phrases as ‘Money Market’. However, there are other options out there online and off, and we need to investigate them.
Now, going outside PayPal brings us to another reason to save. Transfer fees involved in doing business online are…well… family-appropriate words entirely fail this writer. Between two currencies, the bite is even deeper. After your hard-earned income comes out of one of these payment services, it needs to be restored, and fattened up to its original size. Interest-bearing instruments for our monies have proliferated wildly.
However, investing in Certificates of Deposit in varying lengths of term (a well-regarded investment strategy called ‘laddering’) is eminently simple and has the enormous advantage of including no obvious fees. The US Treasury Department, through Treasury Direct, offers individual investor another attractive option. This program gives us the chance to buy their securities with no fees, and make offline transfers with modest fees. Check them out to make sure you understand the process.
The money we get from our independent businesses is not funny money, no matter how much it may seem to be. We need to invest in either our own enterprise or in an instrument that will pay interest. This is the bedrock rule of any business.