I recently saw a Twitter thread claiming that the only path to wealth is self-employment. I call shenanigans.
For one thing, everyone defines “wealth” and “success” differently. For another, there are many different paths to attaining both of those things. As someone who works with both entrepreneurs and people who work as W-2 employees, I can tell you that it’s possible to become wealthy — or not — in both scenarios. Plus, careers are long. You can alternate between working for yourself and working for other people a few times before you retire.
Both types of employment have their ups and downs, but here are some ways you can build wealth, no matter how the IRS classifies you as an employee!
5 ways to get rich as a W-2 employee
The main benefit you get when you work for someone else is, well, the company benefits. I’m talking about a 401(k) or other employer-sponsored retirement plan, subsidized health insurance premiums, paid parental leave, paid vacation and sick time, half of your Medicare and Social Security taxes covered by your employer, company stock…the list goes on and on, depending on what your employer provides.
The downside is that not all employers offer all of these things (or any of them) — what they’re required to provide can depend on how large of a company it is and what state they’re located in. Whatever benefits you get, you should take advantage of, because they’re part of your overall compensation package. When you don’t use a benefit, you leave money on the table.
Get that 401(k) match: If your employer matches your contributions up to a certain percentage of your salary, make sure you contribute at least enough each year to get the full match. Don’t miss out on free money! Work your way up to maxing out your contribution if possible — the max for 2020 is $19,500 — which can help you get on track for retirement. If you’re contributing pre-tax dollars, you’ll also save money on your taxes, thus reducing your taxable income every year in which you contribute. Woo hoo!
Take vacation time: Americans are notorious work martyrs, but if you don’t use your paid time off, you may lose it at the end of the year. Besides, everyone needs time away. It’ll make you more productive when you are working. Life is stressful. We all need time to recharge.
Learn about your company’s stock options: If your company offers ISOs, NSOs, ESPPs, or RSUs, those are acronyms you won’t want to ignore. Many companies (especially in the tech industry) offer company stock as part of their benefits package, which can really pay off for you down the road.
Take open enrollment seriously: That’s the one time each year you get to pick valuable benefits like health insurance, supplemental life and disability insurance, health and dependent care flexible spending accounts, and my personal favorite: Health Savings Accounts (HSAs). Attend those information sessions HR puts on your calendar and ask questions. These benefits are really important and can save you money.
Put your savings on autopilot: You have the benefit of a steady paycheck, so budgeting is easier. That means it’s also easier to set up automatic contributions to savings, investing, and retirement accounts, since you know exactly how much you’ll earn every month. You’d be shocked how much money you can stash away without even realizing it. You can even have direct deposit send money from your paycheck towards your savings account so that it never hits your checking account. This can be a great way to hide money from yourself so that it’s there when you really need it.
5 ways to get rich when you’re self-employed
Working for yourself means never answering to a crappy boss, but it does have its ups and downs. Still, there’s something incredibly satisfying about building up your own company — your own legacy — instead of working to build the legacy of some big, faceless corporation. You can get choosy about your clients and projects, so you’re only working on things that bring you joy and bring good into the world.
Still, you lack the kind of stability you’d get working for someone else, and you aren’t eligible for those valuable company benefits. You also may need to plan for uneven income if your work is seasonal or if you lose a client.
Diversify your income streams: Take on projects for multiple clients so if you lose out on one opportunity, you have other irons on the fire. This helps make you less vulnerable when one project falls through or another one gets pushed out a few months.
Take advantage of tax deductions: There are many business-related tax deductions that can help save you money, like office expenses, professional dues and subscriptions, and even payments you make to a contractor. Work with a tax professional, who can help identify appropriate deductions for your business.
Invest for retirement on your own: No 401(k)? No problem! SEP-IRAs, Solo 401(k)s, and other accounts are retirement savings options for the self-employed.
Save while times are good: There may be a few months a year where business is lower than expected and you’ll need to dip into your savings. This is often the case when you have inconsistent income. That’s why it’s especially important to aggressively save in the months where business is booming. Don’t get used to living off of your gross earnings. You’ll need to save for taxes, unpaid time off, emergencies, and maybe even creating your own parental leave.
Streamline your business practices: Investing in software and other tech tools can seem expensive, but if they make your work faster, easier, or more efficient, the investment can be worth it. It creates time for you to take on additional clients or extra billable hours, and that means more earnings for you.
While I’ve watched clients become rich in a variety of different ways, building important financial habits is the key to creating lasting wealth. Whether you work for someone else or run your own company, creating financial stability is an important foundation for everyone. Earning money is an important part of the puzzle, but how you organize, budget, save, and invest those earnings can make a big difference in your life, regardless of where you work.
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