Self-employment can open numerous doors for your financial future, including the freedom to define your own income. Finally, you are able to work for your own profits and set your own working conditions.
But, there are some risks to self-employment, too – and it is important to protect yourself against the risks of self-reliance.
Take out the right insurance
When you are your own boss, your income journey can feel like a rollercoaster ride. When times are good, you’ll feel on top of the world. But, if leads dry up or you suffer an injury, you don’t benefit from the usual sick pay and redundancy packages.
All self-employed people should plan ahead to combat this. As soon as you go solo, take out a personal insurance and an income protection policy. You should also make regular savings a priority, creating a large emergency buffer to guard you in the event of extended sickness, injury or loss of income.
Plan for Later Life
Self-employed people often find it difficult to save for retirement. With no ready-made company pension package and no employer contributions, all the admin and financing is down to you.
But, if you’d like to enjoy a financially secure retirement, it is worth taking the time to plan ahead. It is a good idea to invest in several retirement funds – for instance, by combining a private annuity with savings and investments. It is also worth knowing how much state pension you will receive, and planning around this.
It is also worth considering how you will protect your assets at the end of life, including optimizing the inheritance you can leave loved ones.
If you own significant property or business shares, this can complicate the inheritance process. Your family may accrue probate fees – so make sure you account for this and organize your assets in the best possible way.
Manage your Debts
While interest rates are low, seeing a return on investments can be slow progress. With this in mind, it may be a good idea to focus on paying off personal and business loans. Review your borrowing to ensure you are using credit sustainably, and only invest when you have this in order.
Since the Bank of England predicts a 20-year continuation of low rates, investments cannot be delayed forever. Use the best beginner investment platforms to get started with the world of trading funds. Though all investment comes with some risk, having business interests in multiple pots can be a good way to secure your savings as they grow.
Make good use of your ISA allowance
If your income fluctuates, you will need a combination of flexible and high-interest savings accounts. The individual ISA limit is £20,000 in 2018/19, and you can split this in a number of ways.
Cash ISAs tend to favor easier access – so if you need the money, you can gain access with relatively little notice or cost. You can also invest in stocks and shares ISAs or the new Lifetime ISA – but note that these are longer-term income protection solutions, and less suitable for covering drier periods in the near future.
Review your tax plan regularly
One of the most significant challenges of being self-employed is filing your own tax return. More specifically, it is important to always ensure you have put away enough money to cover your tax bill.
Use a budgeting tool to ensure you aren’t hit with a nasty surprise next April.
Understand Capital Gains allowance
If you have investments, it is worth considering whether there could be capital gains to be made. If you need an income supplement in the future, assets act as a safety net since they can be sold for a profit in tougher times.
To minimize your tax liabilities, try to manage asset sales within the Annual Exempt Amount (AEA). In the current tax year, this limit is £5,850 for most individuals.
Spread your finances
The best way to secure a happy and healthy self-employment is to invest your money in several pots. Take some time to explore multiple routes of income protection, and you can focus on reaping all the rewards of independent working.
- Book: The Last Chance Millionaire
- Self-Employed 401K: Retirement and Tax Savings Tool for Small Businesses
- Four Ways to Protect and Enlarge Your Nest Egg
- Tips on Lowering Your Health Care Costs
- Why Self Employment?