Self-employment brings with it tremendous freedom. No longer are you beholden to an employer who dictates when you can take your holiday, how much you can earn, what your conditions of employment are. Independent contracting is just that…independent. You may be based with one particular employer for a period of time – but when your contract ends you can move on to a new opportunity. You are hired for your skills and your expertise and you manage your product – you!
But being your own boss also means no regular salary cheque. It means no paid holiday, no paid sick leave. So how can you get the best of both worlds – the freedom of independent contracting and the financial security of permanent employment? The answer is you can’t – not completely. Self-employment can be more lucrative than employment but it will never be as secure. However, there are ways to manage your finances to create as much stability as possible. Let’s look at some techniques that may help you to achieve financial control.
In the short term
Day to day and month to month you need to manage your income and your expenditure. This is not unique to self-employment but becomes much more critical when income is not predictable or guaranteed. Unless you are lucky enough to secure a long-term contract, and then another long-term contract, your income will be sporadic. If you have been contracting for some time, it should be easy to work out your average income. If you are just starting out, you will need to estimate it. Be conservative! Then, in the months when your earnings exceed your estimated (or actual) average, put the surplus into a savings account. Make sure this savings account is dedicated to this purpose – give it a name. Some accountants like to call it an “overhead account”. As you build up reserves in your overhead account, you’ll have funds to pay your monthly “salary” should you experience a period of reduced or (heaven forbid) zero earnings.
Because your income will fluctuate, when you budget for tax, retirement and other saving, it’s best to think in terms of percentages rather than fixed amounts. After all, tax is calculated as a percentage of income. So each month take a proportion of your income and allot it to three pots: tax, retirement and emergency savings. The tax proportion will generally be accurate for the reason stated, and while you may prefer to put, for example, R10,000 aside each month for retirement, it may not always be achievable. Working out a percentage you can manage means you will always be saving something for the future and still have enough to live on today. The same goes for emergency savings, which can be put in your overhead account. You want to avoid at all costs being lumbered with a tax bill you cannot afford, so get in the habit of filling these pots now. And in good months, if you work on a percentage basis, you’ll be putting away extra and building up reserves, both for the short term and the long term.
Don’t underestimate them! Many small businesses fail because of inadequate cash flow. As a contractor you shouldn’t have high expenses; after all, your commodity is your talent and experience. But when you build your spending plan, don’t forget expenses such as childcare, insurance, transport to and from sites, any equipment you provide (such as software specific to your area of expertise), etc. It is always the unexpected outgoings that catch us out, so try to anticipate everything. Then, if you don’t spend as much as you budgeted, you’ll be ahead.
In the long term
If you’re starting out, or if you’ve been contracting for a while but not yet done so, take a look at the employee benefits you previously enjoyed courtesy of your employer and consider how you will replace them. You will need to think about income protection, medical aid, life cover, disability and critical illness insurance, etc. There are many products on the market and it can be difficult to work out the most suitable policies for your circumstances. A few hours with a good financial adviser can be time and money well spent.
Then there is your pension. Perhaps you belonged to a company pension or provident scheme where your employer made contributions on your behalf, or you contributed directly from your pre-tax salary so you didn’t have to give it any thought. Retirement planning is now your responsibility and yours alone. Ironically, though we don’t all suffer injury or disability but we all get old, self-employed people often place a higher priority on income protection than on saving for retirement. This may be because retirement seems a long way off, but injury can happen at any time. While it may be tempting to prioritise today’s lifestyle over tomorrow’s, delaying or avoiding saving for retirement will have very real and unfortunate consequences in years to come.
A financial adviser will look at all your financial planning needs – protection and savings – and help you work out a plan that balances these needs with what’s affordable for you.
The good news
There are some advantages to being self-employed. You pay provisional tax twice a year. Hopefully you are putting money aside for it each month. There is nothing wrong with putting that money to work for you while you wait to pay SARS. Many banks have 32-day notice accounts paying a reasonable interest rate. Since you know in advance the dates on which you will pay your provisional tax, a 32-day notice account is a practical vehicle in which to store your tax money and put it to work for you at the same time. You won’t get rich, but every little bit helps. You can use the interest to either reduce your own liability or pay yourself a little bonus.
Highveld can help
Contracting holds many rewards for the entrepreneurial spirit, but it can be lonely. A professional contractor management service like Highveld provides a supportive network for contractors and can help you maximise your earning potential. Contracting through Highveld also gives you access to a range of benefits that may not otherwise be available to you, such as travel, insurance and training courses.
To get the most from your lifestyle choice as an independent contractor, contact Highveld on 012 367 5600 or email@example.com.
In the last post we looked at budgeting and the importance of reviewing your budget at least annually (preferably more regularly) to make sure you have factored in those pesky increases in levies, taxes, school fees, etc. Those are the costs you have little influence over (you could of course move to a smaller property or change your child’s school, but we’re assuming you don’t want to do that). There are many expenses households incur every month, however, that can be managed (to a certain extent). You may not be able to eliminate them completely, but you do have some influence over how much you spend. Let’s look at some of them:
Costs you can control:
- Insurance: do you automatically allow your home, contents and car insurance to renew? Or do you shop around and see if you can get a better deal? Many people save money by switching when policy renewals come due. There are various price comparison websites that allow you to scan the market for the best deal. Diarise your renewal dates and shop around beforehand. You may be able to make some savings. Be sure to put these into your budget.
- Food: everywhere we turn we’re advised to eat more healthily. This can save you money too. Cut out those large bottles of soft drinks and encourage your children to drink more water. You’ll soon see the difference in your food bills – not to mention in your dentist bills! Use the budgeting process to review your weekly food shop and swap expensive, unhealthy choices for healthier, cheaper options, like fresh fruit instead of sugary fruit drinks. You may even consider changing where you shop. We know someone who cut her produce bill in half by switching to a fruit and veg wholesaler instead of the supermarket for these items.
- Petrol: we all have to get to work and take our kids to their extracurricular activities, but can you lift-share or carpool? Set up a schedule with other parents whose children play the same sport or attend the same club. Find out which colleagues live near you. It’s not always convenient to synchronise schedules, but lift-sharing even a few days a week can save a lot of money. And you’ll be helping the environment.
- Cell phone costs: if your cell phone is on a contract, there’s probably not much you can do right now, but rather than letting it automatically renew, it’s worth reviewing how much of your allotted call time/sms/data you actually use each month to determine if you are on the most economical package for you. Many people have unused minutes and data every month which is just wasted, as the big networks don’t allow them to be carried over. Depending on your usage, you may be better off with a pre-paid arrangement or a different package. Conversely, if you regularly have to purchase airtime on top of your contract, you may need to upgrade to get your costs under control.
- Home internet: with fibre being rolled out widely, the cost of home internet has come down and become much more competitive. Many ISPs offer a month-to-month contract, so you can upgrade or downgrade at any time…or leave for a better offer. Don’t pay for speeds you don’t need; analyse your usage patterns and make sure you’re on the most efficient package for you.
- Pets: do you know how much you spent on vet’s bills last year? Did you budget for them? Unexpected expenses like this are often overlooked in budget planning, and can put a big dent in disposable income. Dig out the bills and add them up. Then budget for them; taking an average per month. Every month you have no expenses, carry the amount forward, so that when Rover does need veterinary attention, you have a contingency fund. Better still, consider a pet insurance plan. That way you will know exactly what your monthly outgoing will be. And don’t forget to include the cost of Rover’s food and other necessities (worming tablets, flea soap, etc.) in your budget. While you’re at it, make sure you’re not paying over the odds for these items – shop around. Buying non-veterinary supplies from your vet may be convenient but may not offer the best value.
- Travel/holidays: plan ahead. If you leave booking your family holiday until later in the year, you will have fewer options and may miss out on specials. Thinking about your next holiday can help to beat the January back-to-work blues, and lock in a good deal.
- Christmas and other major events: the problem with many budgets is that they concentrate on a typical month and miss huge costs such as Christmas, summer holidays, and even family birthdays, so make sure you include these, by setting aside an amount each month so you’ll have the cash when you need it. But don’t just set the money aside in the budget; move that amount into a savings account or other means of making sure you won’t spend it.
(Don’t) sweat the small stuff
One of the reasons many budgets fail is that people only include the major expenses, such as the ones listed above. They overlook the daily coffee on the way to work, tips to car guards and petrol attendants (these really add up over a week), the weekly car wash, children’s pocket money. But if you’re on a tight budget the total of these small outlays can throw your budget into the red. We’re not saying don’t tip the car guard (that’s up to you), but include miscellaneous and sundry expenses in a line item so they are accounted for. If your budget doesn’t balance, and you can’t reduce these costs, you may have to find savings somewhere else.
Are there any expenses you should increase? We’re thinking about things like contributions to a retirement annuity, or perhaps you’ve vowed to donate to a particular charity this year. Is your domestic worker due a pay rise? If your income has gone up, it’s worth reviewing your retirement savings plan to ensure it’s on track to meet your long-term financial plans (see [insert hyperlink to article on retirement planning] for more information).
Remember, budgeting is not just about reducing costs; it’s about making sure you spend your hard-earned income in the most efficient way to meet your short-, medium- and long-term goals…in all areas of your life.
Send us your tips
We’d like to hear from you. We’ve tried to cover the major areas of expenditure in this blog post and the previous one. But we’re sure there are cost savings we haven’t thought of. What are your hints and tips for saving money in 2017? Share your budget suggestions with other Highveld followers and you may also get some useful advice in return.
Are you in good financial shape for the new year?
This time last year we wrote about budgeting. We said, “There is no point in creating a budget if you never look at it again. It is important to review your expenditure against your budget every month.” But we’re willing to bet very few people actually reviewed their budgets every month. This is understandable. Life gets in the way; and things don’t change that much month to month. But it is important to review your household budget at least annually. We were chatting with someone recently who said the levies at her complex had gone up considerably for 2017, causing her to signficantly revise her budget. That prompted us to write this blog post.
You have a budget, right?
We’re presuming you have something that passes for a budget. Maybe you have a detailed spreadsheet, or a word document with a list of expenses. Or possibly it’s just in your head. But you know what you earn each month and you know what your major expenses are: your rent or bond payment, levies, insurance, medical aid, food, school fees, etc. Even if you don’t keep your household books as fastidiously as you manage your business accounts, you have a handle on your income and expenditure. If you don’t, you probably find yourself getting into financial trouble from time to time.
So, whichever category you fall into (and we won’t tell!), January is a good time to take stock and get those figures out of your head, off the back of an envelope, and into a system you can manage easily. You might have an idea of how much you spend each month, but without doing the sums, you don’t have an accurate indication of how much money is really going out. There are many free online tools. If you google ‘household budgeting tools’ you’ll see a range of options. We really do recommend formalising your system, if you haven’t already. Worry over finances is a major cause of stress for many people and a source of tension in relationships. Often people underestimate how much they spend, which can be dangerous when it comes to keeping cash flow under control. Having a budget and sticking to it is a big step toward managing your finances in a sustainable manner.
Keep it current
We’re not going to tell you how to set up your budget. If you don’t have one, and aren’t sure where to start, see [insert hyperlink to last year’s article]. There you’ll find all you need to know to get your budgeting under way.
But if you have a system that works for you, go through your expenditure categories and make sure they reflect your current circumstances. These are some of the items that might have changed:
Costs you can’t control:
- Rent: if your lease was renewed midway through the year and your rent increased, did you update your budget?
- Levies: have they gone up for 2017? Are there any special levies being collected this year?
- Bond costs: any increase?
- School fees: have you inserted this year’s figure in your budget?
- Medical aid costs: if you didn’t review your plan at the end of last year and change it, have you noted any fee increase for 2017 on your budget?
- Utilities: gas, electricity and water just seem to keep going up
- Rates and taxes: not much you can do about these except pay them, so make sure you have the correct figures included on your budget
- Loans/car payments: these should be fixed for the period of the loan, but if your payment plan includes a ‘balloon payment’ due this year, make sure you capture it in your budget
These are the major outgoings for most households that tend to increase with inflation each year. For the most part the price hikes are out of your control, and unless your salary has also gone up, they may require you to make savings elsewhere so that your budget balances.
In the next blog post we’ll look at some aspects of your household finances that you can control, and how you can make some savings in 2017.