How I protect my family from financial risk while being self employed
November 19, 2013
Last year something happened that I’d always dreaded—I got laid off. I’m a single parent, so this hit me hard. With the job market in bad shape, I thought the best way to replace my income would be to open up my own business. Plus, I liked that as my own boss I’d be able to fit work around caring for my children.
Six months after setting up my work-from-home business I was earning more than I had as an employee. I was thriving and life felt good. Then one night, after slipping in the shower, I dislocated my shoulder—and everything changed.
Business in a cast
The doctor put my arm in a cast. I wouldn’t be able to fully use it for months. Day-to-day life, such as cooking, cleaning and looking after the children was difficult. While friends and family helped as much as they could, it was still a struggle. But it was my business that suffered the most. The strong painkillers left my brain a bit foggy and I could only type with one finger, so I wasn’t able to produce as much work.
As soon as my work production slowed down, so did my income. My entitlement to government benefits was small—certainly not enough to even cover day-to-day expenses, let alone a mortgage.
By the time I was fully fit again, after four months of pain and extensive physiotherapy, my worries were mainly financial. Because my productivity had suffered for so long, business was slow and I had very little money coming in. On top of this, I was saddled with debt that I had built up on my credit cards.
As I gradually worked my way out of my financial mess, a friend advised me that I could have avoided my money problems had I done some financial planning. I was actually relieved to hear that, because I never wanted to go through again what I had just suffered. If I was ever unable to work, whether for a short or long period of time, I wanted to make sure that my family would survive financially. So I did some research and came up with three pillars for securing my family.
If you’re an employee of a company and you get sick, you’ll probably receive some form of benefits. But as a self-employed person, you’re on your own—something I found out the hard way. But that doesn’t mean you can’t obtain your own insurance coverage to provide an income in case you’re unable to work due to injury, illness or accident.
When I sat down with an independent financial advisor, I learned about the types of policies available to self-employed people. They generally pay out a pre-agreed monthly tax-free sum for a set period of time—typically 12-24 months or, with some policies, up until retirement age, or whenever you are fit enough to get back to work, whatever happens first.
My advisor also recommended I take out life coverage, which would ensure the financial future of my children should I die prematurely.
Once I had my policies in place—which I found quite affordable—I felt so much more secure.
When I was off sick I had very little savings. I had put most of my extra money into setting up my business, confident that I would pay them back once I was on my feet. Somehow, even after I had started to generate more income than I needed, replenishing my savings was off my radar and I hadn’t done this.
As part of my new approach to financial security, I set up a savings account that provides tax benefits, with a commitment to contribute a small sum every month. It wasn’t much, but it was a start, and knowing that any interest I earn on the savings will be paid back tax free is a bonus. Where I live, in the UK, this type of account is called an Individual Savings Account (ISA). Similar types of accounts with favorable tax status are available in the US and Canada—a Roth IRA (Individual Retirement Account) and a Tax-Free Savings Account (TFSA), respectively. Each has their own particular set of rules and limits, which a financial planner can advise you of.
I also set up a standing order to pay off all my credit cards, cutting up all of them, except one for emergencies.
Now that I was on a roll with my finances, I sat down and looked over my company books, to see how much I had earned and whether I was managing my business finances properly. Although I had worked for two decades for large corporations, I realized that managing my business finances needed a whole new skillset and discipline.
A friend suggested I see a forensic accountant he was acquainted with. At first I didn’t want to do it, because I didn’t like the idea of someone going through and dissecting the financial details of my business. But I knew I needed the help, so I eventually booked an appointment.
I was glad I did, because I learned a number of things that have helped me make better financial decisions. For example, an analysis of my business revealed some areas where I wasn’t making enough profit, which led to reviewing and altering my pricing structures. The analysis also showed me where I could make cutbacks to increase my profit margin—such as taking online subscriptions for trade magazines (saving me a surprising amount of cash!) and shopping around for cheaper business insurance.
I must admit, while having that accident was awful at the time, I have learned a lot about how to protect myself, my family, my finances and my business. Now that I have insurance in place, a savings account underway, and methods to better manage my business finances, I feel empowered in a way I never felt before. I can now focus my energies on working hard and bringing up my children, without financial worries weighing on me.
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about the author
This is a guest post for the FreshBooks blog. FreshBooks is the #1 accounting software in the cloud designed to make billing painless for small businesses and their teams. Today, over 10 million small businesses use FreshBooks to effortlessly send professional looking invoices, organize expenses and track their billable time.