How self-employed workers can create financial security

As a self-employed worker, it can be more difficult to manage your finances. Your income may vary or not be as reliable as those who are employed.

According to a study from Scottish Widows , almost half of self-employed workers said their income fluctuates.

The research suggests that self-employed people could be more susceptible to income shocks, such as an unexpected bill or the need to take time off work due to illness.

That doesn’t mean you should change your work, but taking extra steps to create financial security could be beneficial. This is particularly true in the current economic climate.

In the 12 months to July 2022, inflation was 10.1%. As the cost of living rises, your outgoings may have increased, which could affect both your personal and work expenses.

Uncertainty means that consumers and businesses are more likely to reduce their spending. In turn, this could have a knock-on effect on your income.

If you’re worried about your long-term financial security, here are five important steps you can take.

1. Build up your emergency savings

The Scottish Widows research highlighted how important savings are for self-employed workers.

57% of people said they’d rely on their savings if they could not work. Creating an emergency fund means you have a safety net to fall back on if you experience an income shock.

Despite this, 24% said they only had enough money to cover the cost of essentials for three months.

Creating a substantial emergency fund can seem like a huge task, but contributing regularly when your income is stable can provide peace of mind.

As interest rates are beginning to rise, it’s worth shopping around for a competitive cash account for your savings to make your money work as hard as possible.

2. Take out appropriate financial protection

Your emergency fund is valuable when you need to cover short-term income gaps or unexpected outgoings. However, if you need to take an extended period off work, it’s unlikely to provide the security you want.

This is when financial protection can be useful.

Critical illness cover would provide you with a lump sum if you were diagnosed with a serious illness covered by the policy, such as serious types of cancer. It could mean you have the financial security to take time off work to recover or even retire.

If you have a family, you may also want to consider life insurance, which would pay out a lump sum if you passed away during the term.

Financial protection can provide a cash injection when you need it most.

However, many self-employed workers are overlooking financial protection. According to the Scottish Widows research, 31% don’t consider financial protection a priority and 25% said they were prepared to risk not being covered.

3. Don’t neglect your long-term plan

If your income is uncertain, it can be easy to focus on your financial needs now. However, neglecting your long-term plans could mean you face much larger challenges in the future.

Whether you want to buy a house in the next five years or retire at age 65, you should have a plan for reaching these goals.

Understanding your goals and the steps you need to take now means you can look forward to the future with more confidence.

4. Make the most of allowances

Making your money go further means you’re in a better position to create financial security.

There may be allowances and other incentives you could use to boost your finances. For example, are you adding retirement savings to a pension so you can claim tax relief? Or are you claiming back expenses to reduce your Income Tax liability?

Which allowances are right for you will depend on your circumstances and goals. We’re here to offer advice about the steps you can take to reduce your tax burden.

5. Work with a financial planner

As a self-employed worker, your financial situation may be more complex. Yet, the research found that 81% of self-employed workers aren’t seeking financial advice.

Effective financial planning can help you put a long-term plan in place that will consider a range of things, like what your goals are, how to make the most of tax breaks, and how to create security in case you face an income shock.

Financial planning doesn’t just help you make the most of your assets. It can provide an emotional boost by giving you confidence about your future.

If you’d like to talk about the steps you can take to improve your financial security and reach your goals, please give us a call.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.

Note that financial protection typically has no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.