Mastering Financial Wellness for Self-Employed Professionals

Achieve Financial Wellness

Staying on top of personal or family finances is crucial for self-employed professionals and contractors. It reduces money worries and creates less stressful lives. Achieving true financial wellness, however, demands more engagement in the fundamentals of financial literacy, leading to greater control over finances and signposting the path to financial security.

Sensible personal finance involves keeping an eye on daily outgoings and monthly income to build towards future financial freedom. As a self-employed professional, you want a stable income in retirement and the ability to handle life’s setbacks, whether it’s a recession, illness, separation, losing a major client, or a failed business venture.

Financial literacy implies more planned and proactive money management, often with targets for savings or debt control. It’s empowering, involving effective control of income, assets, and debt. It’s also about maintaining a budget, putting savings to work, safeguarding against unforeseen challenges, and planning for long-term goals like college funds or retirement.

Financial Literacy for the Self-Employed

The ‘financially literate’ tend to create a budget aligned with specific financial goals, making money management more tangible. The 50:30:20 rule can be applied: 50% of income to necessities like household bills and groceries, 30% to discretionary spending, and 20% to savings. For self-employed individuals, adapting this rule to account for business expenses and fluctuating income is essential.

Ideally, at least 10% of the savings allocation should go towards retirement income, typically in the form of a pension. The other 10% can be an emergency fund or saved to meet long-term financial goals. Even with limited funds, budgeting is crucial. Start small and increase savings by at least 1% annually.

Having at least six to twelve months’ worth of emergency funds for essential expenses is a minimum goal for readily accessible savings. This is especially important for those with irregular income streams.

Managing Risk

Taking a proactive approach to finances means managing risk. Investing in insurance offers security, mitigating the impact of events like job loss, serious illness, or the death of a key business partner. It’s wise to take expert advice, as the vast array of policy options can be misunderstood.

For instance, term insurance often provides cover only until children become self-sufficient, as opposed to whole-of-life cover. Mortgage protection secures a home in the event of a mortgage holder’s death but does not provide a cash income to the family. Some life insurance products also provide annual yields, and there are various investment products for longer-term goals.

Borrowing

Borrowing can help financial standing by facilitating savings elsewhere, such as reducing rental expenses versus paying a mortgage, and building credit rating if properly repaid. Financial literacy means managing debt and loan obligations effectively. Banks ‘stress-test’ borrowers’ ability to repay loans, especially mortgages, assessing if monthly repayments can still be made if interest rates rise or income diminishes.

For financial wellness, aim for a 25-30% debt-to-income (DTI) ratio. This is a benchmark when applying for a loan. Calculate your DTI by adding all monthly debt payments and dividing by your gross monthly income. For example, if your income is €2,500 a month and you have €1,000 in debt repayments, your DTI is 40%, which is a red flag. Knowing your DTI helps with setting goals to reduce debt or become debt-free.

Investing

Growing wealth allows for investments. Financial literacy aims to keep the gap between income and spending wide, allowing capital for investments. Financial markets deliver better returns than bank deposits over time, especially with low-interest deposit accounts. If you have a nest egg or inheritance, talk to an advisor about suitable investments.

Options include investing in businesses and property via stock markets or life assurance companies. Compounding returns by reinvesting income from investments drives growth. You can set your own acceptable level of risk and investment horizon, and a good advisor will explain different types of funds and securities.

Accumulating Wealth

Apart from investments to drive wealth, earnings and returns from different enterprises often come down to the extent to which you invest in yourself. Investing in your own talent, studying, networking, and being the best at what you do improves your income and demand for your skills. Bulk up your CV with different experiences and constantly take on further learning and training.

If it is an ambition, assess the potential to leave the PAYE world and set up your own business, freelance, or work as a consultant. Ensure there is a market for your product or service and ideally sign up a couple of clients before leaving your job.

An accountant can advise on the sole trader versus company director approach and tax implications. Get a user-friendly software system to account for your income and expenditure daily, and consider insurance like professional indemnity cover. Replacing employee benefits like a pension, income protection, and death in service (life cover) is important for the self-employed too.

Empowering Financial Wellness

Mastering the fundamentals of financial literacy creates a roadmap to reach life goals in a fixed timeframe. Money facilitates a clear vision of where you want to go in life and a plan to get there. Understanding budgeting, saving, investing, risk, and debt management is the foundation of good money habits that build a stable future. If you’re not confident in your understanding, take advice!

You wouldn’t sell your house without an estate agent, extract a tooth yourself, or take on a legal challenge alone; so, managing finances that need to last a lifetime needs professional advice. Most financial advisors will talk to you without any obligation. Controlling personal finances is empowering because it gives you choice. It’s not even a choice to be rich or reckless, but simply the choice to live the kind of life you want.

Article by Carol Brick
Managing Director at Contracting PLUS Financial