Are you fed up of 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 precariousness is probably one of the most difficult elements of being self-employed, 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 tips for anyone who is self-employed but 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 to fall back on but this should be increased to at least 12 months for anyone who is self-employed.
2. Try it as a side hustle first
So many small business owners 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.
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.
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 to build cover for illness or injury into your overall financial plan. In addition to a general health insurance policy you should consider both critical illness cover 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 a small business owner has come unstuck facing big tax bills which 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.
6. Get an accountant
You may feel that an accountant is 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.
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 saving for retirement, or delay it until you feel more financially 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. If you decide to wait until you feel financially 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.
9. Keep business and personal finance separate
It is important to clearly separate your business earnings and expenses from your personal funds. Separate accounts are a must to avoid blurring the boundaries between work and play. Taking the time to set things up correctly from the start will make it easier to keep track of everything as your business takes off.
10. Get some financial planning support
As a new 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 and retirement planning and find policies tailored to your own particular situation. 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.
