How to Protect Your Finances When Self-Employed
by Sumona Finance 04 March 2022
Self-employment provides many perks, such as a better work-life balance, the ability to shape your salary, and daily freedom. Yet, poor financial planning can affect a hard-working professional’s cash flow.
While you might be an expert in your field, you might not have the financial expertise needed to grow your savings and prevent debt. If so, read the below tips on how to protect your finances when self-employed.
Ways to Protect Your Finances When Self-Employed
1. Build a Rainy-Day Fund
Earning inconsistency is one of the biggest downsides of self-employment. If a professional hasn’t built up a financial safety net, they might be unable to pay their bills on schedule or maintain their lifestyle.
As work droughts are common as a freelancer or contractor, it is essential to build a rainy-day fund to protect your finances. Save between three to six months of outgoings, which will provide peace of mind that you can pay your bills on schedule each month.
2. Invest in Income Protection Insurance
If you are self-employed, you might believe government benefits will cover your outgoings if you experience a debilitating injury or illness. Yet, these will likely only cover a small fraction of your everyday expenses.
Rather than taking chances with your finances, invest in income protection insurance. The policy covers up to 70% of your gross monthly income if you’re diagnosed with a short or long-term physical or mental illness.
3. Hire a Certified Accountant
Self-employed professionals can complete their annual tax returns themselves; however, they’re more likely to save money and prevent late tax charges by hiring a qualified London accountant. In addition to submitting your tax return on schedule, a certified accountant can factor in various deductibles to lower your taxes and maximize your cash flow.
4. Pay into a Pension
Auto-enrolment has made it easier for business employees to save a pension; however, this service isn’t available for self-employed workers. Protect your financial security and enjoy a comfortable retirement by paying into a pension scheme each month.
Unfortunately, self-employed professionals will not receive employer contributions, but tax relief is available when paying into a pension. The relief rate is based on your income tax band. For example, you will receive a 20% boost if you are a basic rate taxpayer.
5. Buy Business Insurance
Self-employed professionals aren’t legally required to take out business insurance policies, but it might be a smart financial decision. Professional indemnity insurance is a good choice if you’re a self-employed worker, as it will provide financial coverage if a client sues you for making a mistake or negligence. For example, you might face a lawsuit if you breach a client’s confidentiality agreement.
If you provide services to individuals, public liability insurance could protect your finances. For example, it could help you pay for client or customer compensation if they sustain an injury or illness when hiring your services. It’s an intelligent choice of various self-employed professions, such as hairstylists, makeup artists, handypersons, and carpet fitters. The policy will allow you to work with confidence each day.
These tips can help you to protect your finances if you are self-employed.