8 Good Financial Practices for the Self-Employed

We often tout self-employed workers’ freedom and flexible hours and that they have no boss to answer to. Being self-employed truly does bring all these advantages. But it also brings its challenges. For one, employees can rely on their employer to take care of all financial management aspects, such as salary, pension, benefits and more. In contrast, self-employed workers never have job security and must, on their own, prepare for retirement, plan their tax payments and get health insurance. If you are neither organized nor disciplined, you run the very real risk of running out of money at the end of the month or at retirement. If you are self-employed, here are some good financial management practices you can adopt.

1. Make a financial plan

The best way to set up a financial plan is to consult a professional. They will help you identify your goals for the short, medium and long term, and adjust your income and expenses accordingly. They will also guide you in finding a balance between the funds you’ll personally keep and the funds you’ll reinvest in your business.

2. Make a budget

When you’re self-employed, you never know when assignments will be coming in. You may be swamped one month and have vastly more free time the next. This is especially true at the start of your career. You must therefore budget accordingly by setting aside roughly 20% to 30% of your turnover.

• Make a budget that covers ongoing expenses like food, travel, training, office supplies, and so on.
• Set savings goals and put money aside frequently.
• Save in proportion to your income. For example, save more in high-income months and less in low-income months.
• Consider automatic withdrawals from your bank account, especially for your retirement savings contributions.
• Set a realistic goal so that automatic savings don’t become a burden in difficult times. Paying for groceries and essential expenses comes before saving!
• Have a vacation budget if you need to.
• Ask a financial planner for any help you may need.

3. Plan for instalments and taxes

Self-employed workers must be organized. Set aside money annually for instalments and taxes and you’ll avoid surprises at the end of the year.

• For taxes: Set aside 30% of your monthly turnover or an amount comparable to your tax payments in recent years. You’ll use this amount to pay your instalments.
• For your GST/QST sales taxes: Use the amount on your invoices as a guide and set it aside for quarterly payments.

Set a phone reminder to pay these bills on time and budget them as expenses. If you pay late, you’ll be charged hefty interest.

4. Open a business account

Self-employed workers are not obligated to open a business bank account, which is separate from a personal account. Yet doing so has its advantages. It will give you a clearer picture of your inflows and outflows, and simplify your accounting. For example, calculating your expenses and turnover is much easier when you can see it all just by glancing at a business account. You won’t have to sort business expenses from personal expenses as you do when these are combined in a single account. Also, should you undergo a tax audit, your accounting will be clearer. And remember to negotiate a line of credit with your financial institution: it will help you cope with the more difficult times.

5. Build a financial cushion for the unexpected

Every self-employed worker experiences income dips. It’s therefore vital to build up an emergency fund to cover unexpected events without having to borrow. As a rule, you should plan for three to six months of expenses.

6. Save for retirement 

If you have no stable income, no benefits and no employer-provided pension plans, you have to save for retirement on your own. As we mentioned above, your budget needs to include your contributions. RRSPs are often a good way to shelter money from tax. Ask a professional for advice.

7. Call on an accountant

An accountant or tax specialist can help you set up strategies that will reduce tax impacts. Many expenses can be turned into tax deductions. Don’t hesitate to consult either one of these professionals.

8. Take out individual health insurance

Suppose you become ill. How will you support yourself without a salary?

• If your spouse is covered by a private insurance plan, you should enroll in it too.
• Alternatively, you would be wise to take out your own private disability, critical illness and liability insurance. These premiums may be tax deductible.
• Professional associations frequently offer discounts to their members. Check whether this applies to your situation.

Are you a self-employed worker who has accumulated debts? Don’t hesitate to contact one of our licensed insolvency trustees. They will guide you each step of the way.