Financial security: things to consider before becoming self employed

Posted on 7:00am Friday 1st Jan 2021

Many people believe being self-employed or running your own business is the dream. It’s a lifestyle that many are envious of and wish they could pursue themselves.

The thing is, anyone can choose to be self-employed and set up their own business, but being successful is another story.

When you take the leap into self-employment, it is exciting, but it is not without fear!

You are suddenly on your own and dependent upon yourself to make a living. There’s no guaranteed pay check at the end of the month and this can cause a lot of stress and anxiety.

If you are considering becoming self-employed, then here are my best words of advice before you take that leap.

I can talk from my own experience having started my self-employment journey in 2012 and going full-time in 2017. My husband, too, has been full-time self-employed since summer 2019.

Make sure you are really ready to take the leap

My best words of advice would be to make sure you are ready to commit full-time to your self-employed business. It’s very rare that people quit their jobs and start their self-employed adventure from scratch, and I wouldn’t advise it.

I still worked at employed jobs whilst I started my business, until it was off the ground and making enough money for me to commit full-time. Once my business was making a full-time income for six months straight, I then quit my last employed job and dedicated all my time to my business.

My husband also started his business around his full-time job, working on it during evenings and weekends and annual leave, to ensure there was demand before leaving the security of his paid employment.

It’s really risky to leave a job and expect your self-employment to be successful right away. It takes time, sometimes months or even years to get a business off the ground to a sustainable income.

Be sensible and don’t put yourself in financial difficulty by quitting your regular job before you know your self-employment will be a success.

Save, save, save

If possible, save as much money as you can!

We did this before my husband quit his job to go self-employed full-time. I was already self-employed without a guaranteed income and we have two young children and a mortgage!

It was a really scary experience for my husband to go self-employed too and for neither of us to have a guaranteed income each month, so we hard-core saved for the last year he was employed.

These savings are our absolute emergency fund. A last resort. Not just for a rainy day, but to cover us for sickness or injury if we really cannot work and have no income.

When self-employed there is no sick pay from an employer. You’re on your own financially in all circumstances.

Saving a substantial emergency fund will offer you some peace of mind should you not be able to work for a period of time.

Get ahead of yourself

It’s also a good idea to get ahead of yourself by at least one month when it comes to finances.

You never know when you’ll have a quiet month when self-employed, when things will go wrong, when lockdowns will happen and force your business to shut or when you’ll lose your best paying client.

Get ahead of yourself by saving at least one month’s income so you are prepared for a quiet month and don’t have to dip into your emergency fund.

Keep a buffer for business outgoings

Another great thing my husband and I do is keep a buffer in our business bank accounts. This buffer is for business outgoings to cover our business bills and for my husband, two or more customer returns (he makes and sells furniture).

We always keep a list of our bills and outgoings each month and know when to expect them, but this buffer covers us just in-case. It means we always have some ‘business’ money if we need it for a larger than expected business bill or if a customer returns a product.

It also means our business bank accounts always have a balance and we never risk going overdrawn or to zero in our bank accounts.

It’s another layer of financial security to give us the peace of mind we need with our self-employed finances and reduces anxiety!

Income protection

I’ll be honest, this is one thing we haven’t done yet, but I’ve looked into it a few times and it’s a great idea for many people’s circumstances, even if you’re employed!

Whether you are self-employed, or employed, income protection provides financial security if you can’t work due to illness or injury.

There are different levels of cover with many paying around 50-70% of your usual salary, but for a higher premium you can choose to receive 100% of your salary.

If you would suffer financially if you couldn’t work due to illness or injury and have no other way to support yourself through savings or via your partner or a family member, then you should really consider taking out income protection.

Don’t just think about short term situations, but consider not being able to work for several months. Could you cope? If not, then look into an income protection policy for financial security.

No annual leave

Don’t forget, that as well as not receiving any form of sick pay like you would from an employer, you also don’t get paid annual leave when you are self-employed. It’s one of the many cons of working for yourself.

This means you’ll either want to save money during the rest of the year to cover the income you need if you decide to take a week’s holiday, or more. Or you will need to continue to work on holiday if you can.

My laptop comes on every holiday and I continue to work online mornings and evenings, as well as replying to emails and applying for work from my phone. I mostly work online so I am able to do this so I don’t lose money or clients whilst away.

Of course not every business can continue to work whilst away and you may not want to. So make sure you prepare and can afford the time away not earning money.

For some, an employed job with five weeks paid holiday might suddenly appeal!

If you still want five weeks off work when self-employed then you’ll need to make up this pay yourself.

Business costs

Whilst thinking of how much money you need to earn and save, don’t forget about your business expenses. It’s important to work these out as they’ll eat into any profit you make!

Business costs can vary wildly depending on the type of business you have, but here are some examples of the costs your business might have:

Office premises
Workshop premises
Business rates
Utilities
Website costs
Business insurance
Business banking
Business equipment
Stock
Accountant
Hiring freelancers / staff

Accounting

When working for yourself, you’ll be responsible for documenting all your business incomings and outgoings, calculating turnover and profits, and paying taxes.

You’ll need to be organised with your bookkeeping and submit your self-assessments on time as well as make tax payments.

When it comes to filing your tax returns, there are several things you are allowed as an allowable expense as a business or even when working from home.

I cover some basic tax advice for self-employed and some self-assessment organisation tips already on this blog, but if you want to become more proficient in accounting to maximise your profits, minimise your losses and understand how business money works, then further education is a great idea.

To enhance your business and skillset, you can take a course and learn accounting online in the comfort of your own home alongside running your business.

If you’re simply too busy then you can always hire an accountant to take care of this side of the business for you, but if you want to save money then learning to do it yourself (if you have the time) is best.

Retirement

You need to save a retirement fund for yourself. You can set up your own pension, savings account and/or retirement LISA.

Working for yourself means you need to take care of saving for your retirement. There is no workplace pension and no employer contributions to your future.

I have a savings account for retirement and I also save into a retirement LISA which is worth checking out as the government top up your savings with a 25% bonus of up to £1000 per year!

Tax payments

As mentioned above, you’ll need to save your own tax and make the payments. You’ll need to be organised and make sure you save these payments ready for your next tax bill.

Even if you have an accountant or bookkeeper, you will still need to make sure you don't spend the money dedicated to your tax!

Set it aside each month and leave it. I have a separate savings account purely for my tax, national insurance and student loan repayments. I put a percentage of my earnings into this account every month, so when it comes to submitting my self-assessment payment each July and January, the money is already saved.

Working for yourself means you really need to be organised with your self-employment income as it’s not all for you to spend! There are many expenses and things like tax and national insurance that you now have to pay yourself, so you need to be responsible and allocate this money appropriately.

Check out this article for some great advice: 6 handy tax tips for bloggers and self employed

Don’t rule out getting a job

One thing my husband and I have never ruled out is getting a job. If we ever go for months not making money in our businesses then we will get a job, even a part time job in the evenings and weekends whilst we pivot our businesses or try different ways to build them up again.

Self-employment might be your dream, but if it’s not working out and you’re not making money then don’t put yourself in financial difficulty. Get a job and continue to work on your dreams and passions in your spare time. You need to admit when something really isn’t working and come up with new ideas.

Final thoughts

Working for yourself is so exciting, but without the financial security of a paid job, you need to ensure you are sensible and financially prepared!