I've been self-employed for most of my working life. There's freedom in running your own show, but there can also be financial insecurity.
Most people I know in salaried positions have benefits, retirement savings and tax payments subtracted from their regular paycheques. The same structure doesn't apply to the independent worker.
If you're one of the millions of self-employed workers in Canada trying to create financial security by following guidelines designed for traditional workers, you're going to get yourself into trouble, according to the authors of The Money Book for Freelancers, Part-Timers, and the Self-Employed.
Denise Kiernan and Joseph D'Agnese say that all independent workers should have three separate accounts: One for emergencies, one for taxes and one for retirement. This system, which they call the "Holy Trinity" for freelancers, is paramount to financial peace and growth.
Sunny day savings It's not just the self-employed who are slacking on emergency savings, but an emergency savings account is especially important for freelancers. If you as a freelancer run out of money, there is no guarantee that more is on the way with your next regular paycheque. Without savings, you are likely to turn to plastic in the lean months to fund your lifestyle.
Mrs. Kiernan and Mr. D'Agnese's advice is to start small. The authors, who are a married couple, started by tucking a mere 3 per cent a month into what they call a "sunny day" savings. (Sunny day because they wanted a cheerier nickname to pop up every time they transferred money into the account.)
Start at just 3 per cent and increase the amount a percentage point every month or two. In two months work your way up to 5 per cent. If you're a freelance photographer and receive a cheque for $1,200, 5 per cent is only $60. That's less than a night out with friends but more than enough to get going.
Experts recommend that you keep three to six months worth of living expenses in your emergency account, but independent works should have at least six, maybe more, for a secure cushion.
Tax time Setting money aside for your taxes is non-negotiable and your tax account should be funded monthly. You may never need to tap into your emergency savings but you'll definitely need your tax savings. Mrs. Kiernan and Mr. D'Agnese say the best thing you can do for yourself as a freelancer is to find a high-quality person to prepare your taxes. Building a relationship with a tax advisor is key. Instead of just dropping off your paperwork once a year, you will have the benefit of someone who knows your personal situation and can advise you accordingly throughout the year. A tax professional will help you maximize your benefits and deductions - which is important for the self-employed - and also help you with your savings. If you don't already have a trusted advisor, seek out referrals or search the Directory of Canadian Tax Professionals to find accounting, taxation, and financial planning professionals near you.
Rich in retirement Being linked to a company's plan and having money automatically withdrawn can make it easier to set up and fund your retirement savings. Therefore, setting up an account and habitually funding it should be a priority.
Ideally you're saving 20 per cent of your income for retirement, but starting with just 5 per cent is better than nothing, say Mrs. Kiernan and Mr. D'Agnese. According to their system, you should manually transfer money to each account. Setting up automatic dollar transfers doesn't work as well with irregular income. Transferring money manually works because it allows you to adapt to the lean months of low income when you will save less and the flush months of high income when you can save more.
Getting started is the first step in building these three savings accounts. Starting small will keep you motivated and allow you to increase by slowly in the coming months and years. If you start by putting just 3 per cent towards your emergency account, 4 per cent to your tax account and 3 per cent to your retirement account from each paycheque that comes in, you're still left with 90 per cent for other fixed expenses and discretionary spending.
Your ultimate goal is to work towards saving 30 per cent of all your take-home income, hopefully within the first few years. That will provide you with the peace, security and financial freedom you need to succeed as an independent worker.