I read an interesting report today published by the debt charity Consumer Credit Counselling Services (CCCS) that showed that self-employed workers are far less able to repay their debts than those who do not work for themselves.
Overall, of the 10,000 self-employed people who approached CCCS for debt help last year, only 17 per cent were able to be recommended a debt management plan, as opposed to 27 per cent for CCCS clients overall.
The charity commented on the figures, saying that part of the problem is that as increasing numbers of people are let go by their employers, more and more people are choosing to set up their own business as opposed to finding a new job elsewhere. And as a result, more people are unable to repay existing debts, nor even cover their day-to-day living expenses due to their loss in earnings when working for themselves.
What’s the problem?
Being self-employed means your income can vary greatly from month to month, and this can put a great deal of stress on your finances, particularly for regular expenses, such as your rent/mortgage, food and travel costs that have to be paid out on a monthly basis.
What’s the solution?
Here are a few tips on the financial side of being self-employed:
- Before deciding to go into self-employment the most important thing is to have a significant amount of money put aside to help manage your cash flow. This money should be separate from your regular emergency fund or other savings, and will act as a cushion, helping you regulate money coming in and going out. A safe bet is to have six month’s worth of expenses in the account, so you can pay out your bills on time, without being stressed about when you will be getting paid by your clients. This means you won’t have to be reaching for the credit card to cover short-falls if money going out becomes greater than money coming in every now and then (which may happen from time to time, for example during the summer when your clients will be on holidays and no invoices will be getting processed).
- You should also think carefully before going into business for yourself and workout how much you will realistically be able to earn. When setting your rates, remember that as a self-employed worker it’s possible that you will not work full time all the time, especially in the beginning. This means you can’t charge the hourly rate you may have been earning previously as a full-time employee – you have to charge more in order to make up for the times when you’re not working. If the rate you will have to charge becomes too high, you may not get any work, so do your research before setting up your new business – talk to people in the industry and ask for advice.
- Seek independent financial advice before you start out to get a grip on the financial realities of running your own business. The tax process is different, and you will have to put money aside throughout the year to meet your tax bill at the end of the year – putting 20 per cent of everything you earn into a dedicated savings account is a good idea.
- Don’t be afraid to ask for advice if things take a turn for the worse and you need help. Burying your head in the sand won’t make your money issues disappear – a good first step if you are dealing with debt worries is to speak to a debt charity such as CCCS.