Are you fed up with being told what to do by your boss? Perhaps you have a burning passion that you want to turn into a business, or you are looking to earn money in a more flexible way that is better suited to the lifestyle you desire? These are all valid reasons for going self-employed and represent just some of the advantages of working for yourself. If you are already self-employed, you’ll know that it’s not all upside though – there are some very difficult aspects to running your own business, whether you are a one-man-band or heading up a team of hundreds.
Financial planning and precariousness are probably one of the most difficult elements of self-employment, which is why anyone thinking of taking the plunge should take some time to do some serious financial planning to prepare for eventualities, such as a business taking more time than expected to get off the ground, unexpected expenses, and not being paid promptly. If you’re already self-employed, the list below will hopefully serve as a prompt if there are certain aspects of your financial planning which you still need to sort out.
Here are some top financial planning tips for self-employed individuals, particularly newcomers preparing to go it alone.
1. Have some savings behind you
Running your own business is stressful enough without adding any unnecessary financial pressure to the load. It is a good idea to have a decent chunk of savings tucked away but easily accessible for those months when things don’t go quite as well as you’d hoped. Everyone should have an emergency fund of 3-6 months of expenditure as a financial safety net, but this emergency fund should be increased to at least 12 months for anyone who is self-employed to secure financial health and stability in any challenging financial situation.
2. Try it as a side hustle first
Many self-employed individuals recommend this approach, and it certainly makes sense, if at all possible, to keep some regular work, possibly part-time, so that you continue to have some dependable income during the early days of your new business.
Many self-employed individuals invest in various financial products that generate additional regular income streams to stabilise their personal financial situation when they go off on their own. Fortunately, there are many tax-efficient tools such as monthly income plans, mutual funds, and other investment products that can add some security to your financial plan.
3. Learn to budget for an irregular income
If you’re used to having a salary, it can be tricky to budget with a varying income. You’ll need to be even more diligent about monitoring your outgoings and ensuring that you have enough to cover them. Budget for your lowest monthly income so that you know you always have the most important costs covered. Save treats for the good months when your budget expands. Setting up your earnings in a salary-like structure is absolutely critical to ensuring a healthy budget as an independent entrepreneur.
4. Comprehensive insurance is crucial
Working for yourself means that every day off sick is a day of lost income. Even one day can be a setback, but if you have to take weeks or months off work, your finances could take a massive hit. We have seen savings completed decimated as a result of individuals falling ill and having to cover their living costs over an extended period.
That’s why it is absolutely crucial that self-employed people build a cover for illness or injury into their overall financial plan. In addition to a general health insurance policy, you should consider both critical illness and income protection. The former will give you a lump sum payout if you fall seriously ill (from any of the illnesses listed on the policy) so that you can cover both additional expenses related to your illness and your day-to-day living costs and keep your family life stable. The latter will pay you a percentage of your income while you are unable to work.
5. Don’t forget about tax
Many small business owners have come unstuck, facing big tax bills that they have not accounted for. It’s important to have a watertight business plan which details how much tax you are going to have to pay and when so that you can ensure that you are putting enough money aside for this. A self-employed person would do well getting adequate tax advice to ensure they are well-informed about their income tax liabilities and possible tax deductions they may be eligible for.
6. Get an accountant
You may feel that an accountant or financial advisors are an expensive luxury and that you can get by with a DIY approach to accounting, but a professional will save you a lot of time and stress and ensure that you don’t mess things up. A good accountant really is worth their weight in gold. Self-employed people can even benefit from a higher income tax return and other tax benefits with the guidance of a competent financial advisor about the tax legislation of their region.
7. Value your time
Setting rates or prices is one of the hardest things new businesses face. In desperation to win clients as quickly as possible, many people often underprice their products and services.
Don’t undervalue yourself, and don’t invent prices based on what others are charging. Take a good hard look at what you are providing and ensure that you are setting your rates at a level which is appropriate and makes your business viable. There is no point in making loads of sales if your level of profit isn’t going to pay the bills and give you enough to live off.
8. Make retirement provision
Once you are self-employed, you won’t have an employee pension to pay into, and with all the bills to pay, it might be tempting to skip on making pension contributions and setting up a retirement plan or delay it until your personal finances feel more stable. Don’t! It is a good idea to be proactive about your pension from the off, even if you can only afford to save a small amount and gradually increase your annual contributions. If you decide to wait until your personal finance feels secure, you might be waiting for a long time, and the longer you leave it, the less you will benefit from compound interest and the harder the task of saving enough to stop working will become. Although you won’t benefit from employer contributions as a self-employed person, you will still be entitled to tax relief on your pension contributions.
9. Keep personal and business accounts separate
It is important that self-employed individuals clearly separate their business account and earnings and expenses from their personal finance. Separate accounts are a must to avoid blurring the boundaries between work and play. Taking the time to set your own finances up correctly from the start will make it easier to keep track of bank deposits as your business takes off.
10. Get some financial planning support
As a new small business owner, you will be juggling a lot of balls and will appreciate support of all kinds. Fortunately, there are loads of organisations which support small businesses out there. Financial planning support is just as important. A financial planner can help you with many of the requirements listed above, including health insurance, critical illness cover, income protection, life insurance, and retirement planning and find policies tailored to your own individual circumstances. Consulting a professional will give you peace of mind that you have all bases covered, and knowing that they have your current and future financial needs all sorted can free up your time and headspace to concentrate on growing your business.
Here at Infinity, we understand just how demanding it can be to be self-employed, and we’d love to take the worry of financial planning off your shoulders. Why not book a chat with one of our experienced and knowledgeable financial advisers?
A leading provider of expat financial services and wealth management services across Asia.