While owning your own trade business comes with many perks, one of the biggest drawbacks can be financial security. When you’re managing fluctuating supply costs, ensuring your team is looked after and bringing in the customers to build a profitable business, the last thing on your mind is building your own financial security.
However, financial security is an important issue, especially for self-employed individuals. Current research shows that financial insecurity is a big concern. If work ended for self-employed individuals:
- 30% of individuals would run out of money after a month
- One-third would face financial insecurity
- 48% wouldn’t want to turn to family or friends for financial help
- One-tenth would need to dip into long-term savings straightaway
- The majority of self-employed people don’t have a safety net fund.
Are you a tradesperson looking for advice on referral sites? Don’t worry, you can check out our ULTIMATE INDUSTRY GUIDE TO TRADESPERSON REFERRAL SITES which has advice for every industry!
If building future financial security is important to you, here are ten steps to take as a self-employed tradesperson to build your future financial safety.
1. Plan Your Pension
While auto-enrolment may mean you’re looking after employees’ pensions, it is important to manage your own retirement finances too. In most cases, a pension will be a traditional pension plan, but you may choose your own investments or properties to pay for your retirement. However you want your pension to be, make sure you’re putting enough by to keep you living comfortably when it’s time to hang up your toolbox.
2. Build An Emergency Fund
A rule of thumb is to ensure you have a safety net that covers at least three months of outgoings in case of unforeseen events. It is well worth creating a separate savings pot and having a goal to create an emergency fund of three-to-six months of expenses.
3. Consider Your Business Valuation
Succession planning is often something that small businesses and tradespeople don’t consider, but knowing having an idea of how you might sell your business is wise when it comes to planning your personal financial future. Even if you have no intention of selling for years, understanding the best way to manage your business to ensure a high valuation can really help to create long-term plans for your business.
4. Create Business And Personal Goals
You may already have turnover or profit goals for your business, but have you thought about your own financial goals? Many business owners keep all of their funds in their business, but having personal financial goals helps to make your finances more tangible and offers you ways to diversify your finances and build wealth in different ways.
Perhaps you want to open up an ISA for your children or buy a holiday home; maybe you’ve got your eye on a football season ticket? Having some separate personal financial goals ensures you’re not compromising your personal life for the sake of your business.
5. Consider Profit First Method
The Profit First method is a way of ensuring you’re prioritising your profit in your business. So often, businesses look at profit as revenue – expenses = profit. The Profit First method switches this to revenue – profit = expenses. By doing this, you make sure you’re not spending too much on expenses that you’re not leaving enough profit. You can read more about the approach in the book Profit First by Mike Michalowitz.
6. Budget, Budget, Budget
Do you know how much money you need each month to cover your personal expenses? It is tempting for business owners to just take a dividend when needed but keep everything else in the business. But knowing how much you need to budget for each month and living on less than your monthly salary can help create financial stability.
7. Eliminate Debt
If you have debt, it can feel impossible to ever get out of it. A good way to tackle debt is with the snowball method. List all your debts and the minimum payments needed for each and rank them from the smallest to largest debt. Then, while meeting the required minimum payments for all debts, really focus your effort on clearing the smallest debt. When you pay it off, it should feel so good that it motivates you to clear the next one on the list!
8. Automate Everything
It is well worth looking at creating automated payments for retainer clients to ensure you’re always paid on time. It can also be a good idea to put in place late fees to ensure your clients pay on time. As well as automating client payments in your business, having automated payments for your personal finances such as bills, investments and saving accounts can make managing your money easier.
9. Consider Passive Income
As a tradesperson and business owner, you have a wealth of skills that could offer several income streams. It may be that you create training videos, a membership, a subscription or skills classes. Consider what people always ask you, can you monetise this somehow?
10. Invest Wisely
While auto-enrolment may mean you’re looking after employees’ pensions, it is important to manage your own retirement finances too. In most cases, a pension will be a traditional pension plan, but you may choose your own investments or properties to pay for your retirement. However you want your pension to be, make sure you’re putting enough by to keep you living comfortably when it’s time to hang up your toolbox.
The long and winding road…
There are many things to think about on the path to financial security, and being self-employed makes this much more complicated. It is an ongoing project that needs constant attention! But with these 10 tips on your side, you will be well on your way. Can you think of any that we are missing?