There are approximately 4.3 million self employed people in the UK comprising 15% of the working population. This is a large amount of people on irregular incomes and growing daily by all accounts.
While I hate the word Budget, a conscious spending and savings plan is an integral part of a stable financial foundation for those with an unpredictable earnings stream. In fact it is the key to living a less stressed life.
While it is impossible to pigeonhole how everyone outside of a salaried job earns income, here are six suggested building blocks to creating a simple wealth building plan. The plan rests on being super organised around how you manage your money and it really pays (practically but hopefully also financially) to have a bank that supports multiple account openings. As far as I am aware most banks are flexible in doing this, however the online challenger banks seem to have made this a fluid and simple part of their account offering which does make life that little bit easier!
Step 1: Quantify the cost of your monthly necessities
These are quite simply the costs you cannot avoid and in quite simply are non negotiable for survival. Things like:
- Housing costs: either rental payments or mortgage
- Utilities: water, electricity and gas
- Groceries: food
- Transport: public transport or your own vehicle
- Insurance: hopefully you have income protection and disability insurance – another non-negotiable when you are self employed
- Debt service: repayments on credit cards and loans
- Childcare costs
- Taxes: falls up there in terms of priorities as the taxman takes no excuses for non-payment.
Step 2: Open various bank savings accounts
In addition to your main transactional account I suggest you create seven sub categories or accounts, if your bank doesn’t facilitate the sub categories. Yes, I know seven seems like overkill but bear with me.
- A Necessities Savings Account
- A Tax Savings Account
- A Saving for Pension Account
- A Savings for Emergency Fund Account
- A Saving To Invest Account
- A Saving For Fun Account
- A Saving for Goals Account (this can be opened later, I explain why in my steps
Step 3: Allocate your inflows as follows as they come in during the month:
- Firstly allocate 25% to your Tax Savings Account
- Secondly to your Necessities Account.
- Once your Necessities Account is at the amount required to meet your budgted monthly necessities for that month contribute the remainder to the other accounts:
- 25% to your Saving For Pension Account
- 25% to your Savings For Emergency Fund Account
- 25% to your Savings to Invest Account
- 25% to your Saving For Fun Account
At the end of the month if your Necessities Savings Account is not enough to cover your monthly necessities transfer 50% of your Savings for Fun to that account. If still not sufficient transfer out of your other savings accounts in this order.
- Saving to Invest Account
- Saving For Pension
- Saving For Emergency Fund
It is a priority to meet your monthly fixed costs, however that doesn’t mean you shouldn’t leave a little for a small token to yourself in appreciation for what you have achieved that month. The 50% that you leave behind in the Saving for Fun Account may be a small acknowledgement but it is important to recognise the positive actions you are taking and how hard you are working.
Being a solo-entrepreneur, no matter how big and successful your business, is hard work. It is vital that you reward yourself for all that you are doing to build your bigger life and vision.
One caveat, if you have any high interest rate debt such as credit card debt, direct the amount you would allocate to your Savings to Invest account to pay down extra against this debt. If you would like to turbo charge your debt pay down direct a minimal amount to the Saving for Pension and Saving for Emergency Fund and focus the majority of your excess cash on nuking the debt. Saving the interest on this debt by paying it down earlier is the best investment you can make for yourself. Remember to avoid putting on additional debt while you are paying down existing debt.
Step 4: Create an emergency Fund of 6 to 12 months of necessities
This step is a strategic building block. It sets you up to confidently face whatever challenge comes your way as you have created a buffer zone of protective income that you know is there no matter how that month turns out.
The surprising outcome of having this buffer for many people is that they are able to be more freely creative and open to possibility when they are released from the monthly stresses of making enough to break even.
Usually this freedom is the fuel for your business to experience notable growth.
Step 5: Start contributing to a formal Pension Plan
As soon as you find that your cashflows into your necessity account and tax account are meeting the minimum required without drawing on the other accounts it is time to start a formal Pension Plan. Initially choose your monthly contribution to your pension plan as the minimum amount you have in your Saving For Pension Account. Once this amount consistently reaches a higher level, increase your pension contribution. Make it a habit to sweep this account in full to your Pension Plan each month once your Emergency Fund is Fully Funded.
Step 6: Transfer the remaining Savings Accounts to more formal vehicles.
As soon as your Emergency Fund is fully funded, set up an Investment Account either on an Investment Platform such as Vanguard, Hargreaves Lansdowne, Fidelity, Charles Schwab or a Robo Adviser such as Nutmeg, Wealthify, MoneyFarm or Wealthsimple.
As with your Pension Plan, set up your monthly minimum payment to the Platform as the minimum monthly balance you have had in your Saving for Investing Account. As the amount in this Savings Account steadily increases, increase your contribution to your Investment Platform.
Transfer the excess above your required Emergency Fund amount in your Save for Emergency Account into a separate Saving for Goals account and keep saving as you had done for your Emergency Fund. This Saving Account is meant for those goals you wish to achieve within the next 5 years, such as saving for a house deposit, a dream vacation, Christmas gifts or a wedding
While this is not a fool proof or scientific approach to building wealth it creates the necessary habits and disciplines that will do that. Once implemented and operational this method is quite simplistic which is exactly what you need when you are facing the daily complexities of building a business.