Driving a truck as an owner-operator is a great way to make good money on your own terms. But operating as an independent contractor also comes with expenses and other financial challenges that W2 employees and other workers don’t normally face.
In addition to paying out of pocket for your fuel, maintenance, repairs, gear, food, and other expenses on the road, you need to keep track of what you spend in each of these categories if you want to minimize your costs and maximize your gross income.
And come tax time, you’ll need airtight records of all these expenses if you’re hoping to maximize your deductions, minimize your tax bill, and keep as much of your hard-earned money as possible.
Some people are just naturally good at this stuff. Good for them!
Some people pay expensive accountants to do it for them, placing their trust in people they don’t really know to do a job they can’t or don’t want to do themselves, either because they don’t understand how or don’t have the time or inclination to learn.
Many other drivers fall into one of two buckets:
- People who prefer to maintain control over their own finances, but may not have the formal training they would need to be confident in their abilities
- People who have made the decision, either consciously or unconsciously, to not think about it too much and just hope for the best
If either of these sounds like you, then you probably already know that you could be doing more to manage your money and plan for your future. You may have some savings in a bank account, or some cash under a mattress, but you know that neither of these methods does much to ensure you can cover your expenses or help your money grow.
That’s where we come in.
We’ll help you figure out where your money is going, how you can actually make money back from your necessary spending, and where you can reduce or eliminate inflated or unnecessary expenses.
Then, when you’re ready, we’ll be happy to help you work toward any and all financial goals you have, like building an emergency fund, planning for a vacation or extended break from work, or saving for retirement. Maybe you’re also thinking about making a major purchase in the near future, or saving to help your kids or grandkids pay for college. If you’d like some help with any of these, or any other financial goals you’ve been thinking about, keep reading and let’s get to work!
First things first: what do you make and where is your money going?
The first step to getting a handle on your finances as an owner-operator is to understand your cash flow: how much are you making and how are you spending it?
The best way to do this is to make a Budget.
What is a budget? Essentially it’s a piece of paper (or preferably an online spreadsheet like the one we offer) that tallies up all your income and all your expenses on a monthly basis.
It should include all your monthly income and all your monthly expenses, both fixed and variable. It can be a bit daunting to create one for the first time, but trust us when we say that the effort you put in now will save you thousands of dollars and countless hours down the road.
To make your basic budget, follow these steps:
- Add up all your Income (if this changes month-to-month, use the average of your last 3 or 6 normal working months)
- Add up all your Expenses (this is the hard part–honesty & accuracy are key–and these can fluctuate significantly over time, so again a 3- or 6-month average is best)
- Subtract your Expenses from your Income and take a look at what’s left (this number is your Net Income)
- Give that Net Income number a gut check to see if it looks right. If it’s not, go back to Step 2 and figure out what’s missing. Refine and repeat til it’s accurate.
If this is all starting to sound a bit complicated, that’s OK, because it definitely can be! But don’t worry, because we have a handy tool to help you put it all together, and it will even do the math part for you, so all you have to do is fill in the blanks and it’ll do the rest. You can access it <<here>> (link to budget model).
Making your budget will help you get all your important income and expense information in one place. This is useful by itself for understanding where your money is going, but it’s actually even better than that–it’s the key to unlocking progress on your financial goals. Keep it handy because you’ll need it for this next step.
Don’t have time to make your budget right now? That’s OK too; feel free to read ahead to inform yourself about all the ways you’ll be able to save more money, control where it goes, and put it to work for you when you’re ready.
Let’s get saving: Start by tracking your deductions
Owner-operators are considered Independent Contractors (if you receive a 1099 instead of a W2, this is how the government sees you for tax purposes) and are able to deduct all expenses they incur to complete their runs.
Fuel, maintenance, repairs, and truck rental or loan interest payments can all be deducted, as can other necessary expenses such as parts and gear, food and supplies you buy on the road, and a whole bunch of others. These will reduce your Adjusted Gross Income (AGI), which means you’ll pay less overall on taxes, and could even drop you into a lower tax bracket, resulting in further decreases in your tax burden.
Protect yourself from the unexpected: Create your emergency fund
In order to protect yourself from work slowdowns and unexpected events like health problems or job loss, you should aim to have a savings account with a minimum of 3 months worth of total expenses in it.
If you already have one, make sure it has enough in it. If you don’t have one, open a savings account and prioritize funding it to that level. It’s OK if it takes a few months or even longer to build this up, but if you’re starting from scratch, we would recommend trying to save about 20% of what you make each month, or more if possible, so that you can get your fund established in 12 months or less.
This can be hard to do if you’re not used to saving a significant portion of your income, and this may be the most significant change that most people need to make. Keep in mind that it’s OK if the numbers don’t immediately work out–the important part is to keep thinking about it, and to work on making small steps in the right direction.
If you do find yourself coming up short, it can help to take a closer look at your expenses and think about where you might be able to save.
Are you racking up high costs on food because you’re eating at truck stops and fast food joints on the road? You can cut down on food bills by buying groceries and making large batches of your favorite foods to bring with you on runs. Even just cutting $10-15 per day adds up to hundreds of dollars in savings each month. For more ideas on how to trim expenses, check out Drive Lean, our collection of ideas for saving money on the road and off.
Plan your financial future: Let’s talk about retirement accounts
People save for retirement in a variety of ways. Independent contractors have more control over, and therefore more responsibility for, making sure they have enough saved to live comfortably after they have stopped working.
Here are some common retirement savings vehicles that you may wish to consider, along with our recommendations for which ones are likely to work best for you.
Employer 401K
This is one of the most common retirement account types available to W2 employees and some others. If your employer has one, it’s worth looking into because contributions can be deducted automatically from your pay, which means you can set it and forget it, and not have to worry about making your own separate contributions each month or year.
Solo 401K
Similar to the employer 401K but usually much more flexible, the Solo 401K is a great option for independent contractors, including truckers. In fact, it’s arguably the best retirement account option, full stop, because it has significantly higher annual contribution limits than every other tax-advantaged account type out there, and your contributions are not limited by your income or tax bracket. Whereas employer-sponsored 401K accounts typically have a contribution limit of $20,500 per year, the solo 401K allows you to sock away a whopping $61,000 (or up to $67,500 if you’re over 50), using a combination of the income you make and the profits your business generates for you.
IRAs
The IRA or Individual Retirement Account is another type of retirement account that independent contractors can open and contribute to. However, whereas the limits on 401Ks are high and the tax deductions for contributions are available at any income level, IRAs have contribution limits based on your income, and fewer (or no) in-year tax benefits for those with higher incomes. We would therefore recommend choosing a 401K as your primary retirement savings vehicle, and considering an IRA as a supplementary account to utilize only if you are able to max out your 401K contributions on a consistent basis every year.
Don’t wait – get started now!
No matter which account type you choose, both 401Ks and IRAs allow your contributions to grow and compound tax free over time until you retire and begin withdrawing from them. And both are vastly better than saving for retirement in a conventional savings account or a taxable investment account, which do not share these advantages.
You will want to put some thought into which account type(s) and provider(s) you choose, but we recommend starting with a single account at a single provider, and for most independent contractors, the Solo 401K is the way to go.
For more details about how to open an account, how much to contribute each month/year, and how to choose your investments, check out our post on Retirement Investment Strategy. And remember, even if you’ve never saved for retirement before, and the best time to start would have been 10 or 20 years ago, the second best time is today.
So don’t wait, this is your future we’re talking about–it’s up to you to set your financial goals and work toward achieving them, but we’ll be here to help whenever you need it.