5 budgeting tips for the self-employed
5 budgeting tips for the self-employed
More and more people in the UK are striving to be their own boss, and given how the coronavirus pandemic is changing our attitudes towards the world of work, the trend towards self-employment doesn’t look set to slow down.
There are many reasons why people may want to be self-employed, from being able to work from home, to setting their own hours. A common thread among those making the shift, however, is that they see it as an opportunity to improve their finances.
In this blog, we look at five ways you can boost your budget and save money as a self-employed person.
1. Save for retirement
The golden rule for anybody who is self-employed. If you work for yourself, you won’t have a company squirreling away money for you throughout your career, to keep you going later in life.
That may not seem like a problem for right now, particularly if you’re young, fit, and business is good. But you can’t work forever, and when you reach the end of your career and begin thinking about slowing down, you’ll need a nest egg to fall back on.
The best amount to save for retirement is always however much you can afford without overstretching. That’s entirely based on your circumstances, however, so if you’re looking for a rule of thumb, try halving your age and saving that percent of your what you earn each month (that means if you’re 30, you’ll save 15%).
Another (probably more accurate) way to calculate what you should save is by using a retirement calculator. And don’t panic if you’re a bit later on in your career and haven’t put much thought into your retirement planning – the most important thing is to start saving as soon as you can.
2. Understand what you can claim as a business
Self-assessment season is in January every year, and it’s a time that is marked in bold ink on the calendar of every self-employed person.
It’s the time of year when the self-employed need to pay their entire tax for the year by filling in detailed accounts of every cost and expense related to their business, so it’s easy to understand why many people descend into a panic each January.
You’ll make the self-assessment process a lot easier on yourself by keeping it front-of-mind all year round. This means keeping detailed accounts of transactions throughout the year, and understanding the list of expenses and exemptions self-employed businesses can claim.
Given what the world has gone through throughout the coronavirus pandemic, there’s now a range of additional schemes the self-employed can take advantage of – most notably the SEISS grant- so it pays to keep your ear close to the ground.
3. Pay yourself a salary
The view many self-employed people take towards their income is that they “earn what they earn”. Sometimes you have good months where you take in a lot, other times you have bad months where your income is minimal.
If you’re looking to save money as a self-employed person, you should aim for more structure when it comes to your earnings. That starts by paying yourself a salary.
For many self-employed people this might seem like a no-go, especially if the whole reason you went self-employed in the first place was to maximise your earnings. But paying yourself a salary still allows you to do that – only with the added benefit of helping you control your finances.
Paying yourself a salary helps keep your income steady and means you know where you stand. It should be benchmarked against your average intake, so that you should always have enough income to cover your own wage.
This way, in the lean months, you always know you’ll have a steady income. And in the better months, anything over and above your wage can either be reinvested in your business, taken as a ‘personal bonus’, or put towards that retirement nest egg we talked about earlier.
4. Keep your business and personal accounts separate
You’ve probably heard the saying “Don’t mix business with pleasure”. What it really means is you shouldn’t muddy the waters between your personal and professional lives, and when it comes to bank accounts, that’s most definitely the case.
While it’s possible for the self-employed to use a personal bank account for business, especially if they’re operating as a sole trader, there are several reasons why you should avoid this approach.
The first is just to keep things simple. It can be hard enough keeping track of incomings, outgoings, who paid for what and when – even when you have your own business account. Throw your personal expenditure into the mix and you have yourself an admin nightmare.
The second reason is financial. There are benefits to using a business account if you’re self-employed, from improving visibility of your cash flow, to making your life easier when it comes to claiming business expenses (you’re far less likely to be challenged on items being charged to a dedicated business account).
5. Hire professional help
OK, we did say that the golden rule for self-employed people was to save for retirement, and it minimises the impact of a golden rule if you have more than one of them. But if you could have two golden rules, this would be the second (or joint-first).
While it’s important to do your research when it comes to managing your finances as a self-employed person, and everything we’ve discussed will help you on your way, you shouldn’t try to manage everything by yourself. You should get professional help.
Whether you’ve been self-employed for ten years or ten minutes, you should have your own accountant. It can cost as little as £250 a year to hire a professional to manage your books (money that, as your accountant will tell you, can be offset against your taxes).
No matter how much money you spend on an accountant, the money they save you in the long run will make it worth it. They will keep you up to date on your taxes, let you know of any expenses or exemptions you’re not taking advantage of, and save you countless hours of admin that you can reinvest in your business.
Over and above the money, hiring an accountant or money adviser lends your business an air of legitimacy, makes it more likely that current and prospective clients will consider you as a serious outfit, and gives you a better chance of success going forward.
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