The economic lockdown revealed how financially vulnerable self-employed people are. People in formal employment have certain protections stipulated by their employment contracts and UIF, but if you work for yourself, you must create your own financial protection.
Many self-employed people live from feast to famine. During good months they spend everything they earn, and in bad months they end up relying on credit cards to make ends meet.
To take financial control, the first action is to separate your business and personal finances, ideally with two different bank accounts. This will make it easier to keep things separate.
Pay yourself a regular salary from your business and learn to live on this salary. Do not draw down from the business during the month.
During good months, use the extra income to build up a salary fund in your business so you can still pay yourself a salary during tougher months. Over time, aim to build up three months’ worth of your salary in the fund.
Then, make sure you have a personal emergency fund. You provide for this from your personal salary as it needs to cover those unexpected bills over and above your budgeted living expenses. This is separate from your “salary fund”, because your personal emergency fund is for unexpected expenses related to your personal budget, not your business.
Always make sure you have put money away for tax. One of the most common problems for self-employed people with multiple income streams is that they find that they are in a higher tax bracket with a tax bill they haven’t provided for. Based on your earnings last year, calculate how much you need to put aside for tax and transfer that amount each month into a separate savings account.
Make use of your tax deductions. Any expenses incurred in producing your income can be deducted for tax purposes. If you work from home, you can deduct a portion of your mortgage interest as “rental”. Keep a record of all expenses and remember to keep a logbook for business travel.
A retirement annuity is also a great tax deduction. If committing to a monthly contribution is difficult with a variable income, you can top-up your contributions before 28 February, after calculating your taxable income and what additional funds you have available.
Being self employed has many benefits, but we need to manage our money better than most.