Financial planning for the self-employed

Good day,

Going at it alone has never been more popular. Technology advancements have allowed for setting up shop to be a low-cost and seamless process. One doesn’t even need an office or staff to compete and function globally. Record numbers of workers are shunning traditional employment for the freedom of running their own business.

Being your own boss has many perks. It provides the flexibility to set your own routine, work when you want to and sleep in when you feel like it, with no boss to keep tabs on you. It seems an enviable life – one that perfectly meets work-life balance, as you get to determine when and how building a business occurs, based on your vision and values.

What they sadly forget to tell you is this reality only exists at the end of a long, hard and unpredictable road. It is a rare reward for those who have managed to create sustainable businesses that no longer require their founder’s intervention to function daily. Unfortunately, statistics still show that many home-based businesses fail within the first two years of commencing. They fail often due to poor financial planning.

In the beginning, and for many years to come, whatever results you earn are based solely on your efforts. Your monthly expenses are similar to that of a salaried person, yet your monthly income fluctuates constantly. It is in this environment that planning, especially financial planning, is essential for survival. You need to plan your finances differently from the salaried. With no employee benefits in place, the onus is completely on you to secure your future. Taking proactive steps can go a long way to helping secure your financial present and future and it is your responsibility to protect yourself.

So how do you get started and what should you be prioritising?

Build an emergency fund

Given the erratic nature of their income, it’s extremely important for self-employed professionals to maintain an emergency fund. Keep aside at least 12 months’ worth of expenses in liquid assets such as a unit trust. This provision should not only cover daily expenses, but also all insurance premiums, utility bills, children’s education costs etc.

Create a cash-flow statement for better liquidity management. There’s no need to re-invent the wheel; a simple excel sheet, downloading a free app, or speaking to your adviser to help you in getting started will do the job in gauging your future cash-flow.

First, list all the clients that you work for, or clients that you represent, and the payments expected from them. Next, write down the projected expenses for each month. This will help [develop the] picture better and help you save and spend diligently.

Once you have a clear understanding of your potential cashflow, the following factors should be taken into consideration when developing a method for managing your new personal financial situation:

  • Don’t underestimate your expenses;
  • Avoid relying on credit cards;
  • Keep tabs on your taxes;
  • Keep accurate records.

If your income varies from month-to-month, determine your average monthly income. Then, if you have a month where you earn more than average, put the extra amount into a savings fund to supplement less-lucrative months.

Save towards your retirement 

As a self-employed worker, you can set up your own retirement plan. It is essential that if you don’t have a retirement plan set up, get one started immediately. Unlike salaried employees, self-employed professionals are not covered by any employer-funded pension fund. It is up to you to build a sufficient retirement corpus. The main reason most people don’t save for retirement is because they have not taken the time necessary to figure out and understand what they need to do to get started.

First, know what type of retirement plan meets your needs, open an account – your future self will thank you for taking this very important step. Contributing something is better than nothing, and you are creating a healthy financial habit along the way. If your income is unpredictable, commit to yourself every time to put a percentage of your commission into your retirement plan.

The best option would be to choose an investment with a long lock-in period such as a retirement annuity (RA). For successful retirement planning, self-employed professionals need to stick to the plans which cannot be withdrawn from easily, or preferably not at all prior to retirement age. Look for a low-cost option that provides flexibility and variety in investment choice.

RAs offer the following advantages:

1) accrued growth is not taxed during the policy lifespan. There is no income tax or capital gains tax on the investment return earned in a RA;

2) depending on your tax situation you may qualify for an annual tax-rebate;

3) invested funds are protected from creditors; and

4) it allows for estate-planning as retirement money does not form part of your estate (you can accumulate a huge amount of wealth without being ‘penalised’ for being wealthy). If structured properly you can avoid estate duty tax and executor’s fees.

Ensure you’re properly insured

When you are self-employed, you are the most ‘key’ of key persons. You need to ensure you have appropriate insurance coverage in place. When you’re a business owner you must be able to look far enough down the road to take care of potential problems before they arise. It’s essential to provide appropriately for the financial loss you and your family will suffer upon your illness, disability or death. Not doing so will be catastrophic to the survival of your business, let alone your family life.

Life insurance and income protection are among the most overlooked benefits by self-employed professionals, as they opt to use their limited cash-flow for business operational expenses instead.

How can you prioritise the survival of your business over your own life or that of your family? What would you do if you were no longer able to work? Insurance may not seem like a big deal, but if you can no longer provide for yourself, how will you go on? How will your business continue?

If you run your own business as the sole employee, income is likely to dry up quickly if you can’t work. That’s a fact and not a scare tactic and it is just plain negligent to think otherwise. I am constantly told by self-employed professionals that they believe in making and saving some money, rather than spending it on insurance. This can’t be the case, not for any person, but especially not for self-employed professionals. In addition, the insurance premiums you pay for disability, liability, long-term care, etc, are all tax-deductible expenses.

Where to from here?

Just get started. Contact us to assist small business owners make sense of their situation. Stop thinking that you’re too busy to worry about this now. Your schedule will never allow it unless you make the time.

We all have great intentions and, understandably, your biggest priority should be your business, your customers and employees. but never forget yourself in the process.

Until next time, take care,


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