This is the 10th article in a 10 part series covering all aspects of getting paid as a business.
Read more: Starting A Business, Professional Payment Procedures, Ways For People To Give You Money, Late Payments & Not Getting Paid, Getting Paid Faster & On Time, Profit & Tax, Maintaining A Money Mindset, Getting Paid As A Sole Trader, Getting Paid As A Limited Company
You made a good profit, you’re on your way to ticking off your professional payment procedures action list, you’ve paid yourself, now what?
Why do you need to save?
The utter bliss and joy when you have the money to pay your tax bill. It’s a beautiful feeling.
The higher your tax bill, the more profit you made, so congratulations! (Obviously, you’ve claimed all the tax relief you can as well. If you’re not sure about that, ask for help from me or another professional).
Saving for your tax bill is an essential business action.
It’s not about how much money you make, it’s about you and your relationship to money and respecting it.
Having a tax bill you can’t pay is some serious stress and you don’t need that in your life. It takes your energy, it blocks money coming in, and it’s not fun at all.
How much is ideal?
OMG, are you crazeeeee, I can’t save that much!
Put down your custard pie aimed at my face, it’s ok. I appreciate this isn’t always possible. It’s good to start where you want to be, so that’s why I’ve begun there.
How much you need to save for tax depends a lot on your individual circumstances. For example:
Look at your numbers, consider what income you have and need, and what your likely tax bill is going to be, and then decide how much you can save. It’s often more that you feel you can afford, and affordability or not, a tax bill is a tax bill.
Put the money away every time you’re paid and it’s a lot easier. If you like, you can pretend that money isn’t there.
Even if it’s £1 a week, save. It’s the principle of saving for tax. Even if you have no tax bill yet, save, so you are used to saving for tax and it becomes a normal part of your business.
You can open a business savings account (sole trader or limited company) or a personal savings account (sole trader).
I have a standing order from my business current account to my business savings account and I move money over in lump sums when my business current account reaches an amount I decided.
There really isn’t any right or wrong here, it’s what works for you, so have a play around different options.
If you aren’t well, you don’t get paid.
Even with a diversified income stream (e.g. several ways of making money in your business), if you become ill unexpectedly for months, it can cause problems.
Having savings you can instantly access as a buffer gives real peace of mind, that if it does happen to you, you can pay your bills.
It may not even be you being ill, it could be a loved one with a short term illness.
Like with saving for tax, do your numbers and decide an amount you’re comfortable with. Then start saving, even if it is a small amount. It’s the principle, and you can increase the amount and add money as you can.
Your illness savings fund is a great place to put tax refunds.
What are you going to live on when you’re old and you can’t work, or really don’t want to?
I’m not going to go into details of pensions etc here, as that’s not my area, but you need to consider it and take action, even if it’s a small action.
If you’re a limited company, ask your accountant for how a pension is a fabulously tax efficient way of saving, for now as well as in the future.
If you’re sole trader, you can open a pension without needing an employer. Legal rules mean I can’t mention what the options are as I’m not a financial advisor, but I can share that I have a SIPP as a starting point for your research.
At the very minimum, learn about pensions, annuities etc, even if you’re ranting at the jargon through most of it. It’s important to take your responsibility seriously for your future financial health (and it sucks goat balls to be skint and old).
You are never too young to have a pension as my student 21 year old step son knows, as he has one.
The Wealth Chef Ann Wilson’s Financial Freedom University (and other resources) guides you to take responsibility for your financial health, now and for the future, and the practical stuff for how to get there. I’m a member and it’s been transformational.
Regular readers will know I cared for my father in law for 2 years. I was 6 months into my business, it was unexpected, and it hit my income like a road train over a possum.
Having your own business is a wonderful thing when you can choose to care for a loved one, for children, for your unborn child or newborn.
You can choose to have your working hours around what they need, and not a boss. For that matter, you can choose to have your working hours around what you need and not a boss!
Sometimes life happens and you need to do the best you can.
Having been there though, planning to have available funds so basic bills are paid as a minimum means a huge amount of peace of mind when your energy is being dragged in multiple directions at once and you really don’t have the focus you’d like.
If we’re getting really personal (skip this if you’re squeamish), when you’ve worked a full day on little sleep, your loved one comes home taught as a wire from caring all day (aka cleaning up wee, cleaning poo off hands and saying every 10 minutes he wasn’t trying to poison his father because his dad wasn’t thinking clearly because of the antibiotics), and you get a call at midnight from the police because his father has been returned by a neighbour having tried to get the bus to Morrisons at 11pm in his pajamas with no coat in January… even Twitter needs too many brain cells.
Whether it’s adults, children, your unborn child or newborn, having savings there makes a lot of difference. Even if you don’t use them.
Again, run your numbers and save if you want children in the next few years or have parents who are getting older. Or even a family member who you would want to care for if they became ill.
It’s beautiful to be able to care for someone you love and planning to be financially healthy is worth it. Just a small amount can make all the difference.
Travelling is a big draw for freelancers and can be one of the reasons for going self-employed.
I’m not talking about paying the bills of travelling, more you need to consider how travelling when you have a business is a bit different.
You need to keep more money in your business as you may not be able to move money in and out to meet bills as easily as you can at home. The same applies to personal bills and that takes more organisation.
Look at your bank accounts and keep money in them for emergencies (business and personal) while you’re away in a format that’ll be accessible while you’re away. For example, a lot of security is postal-system based which is no help to you if you’re in India.
Like other forms of saving, it’s really about essential bills first, then saving, then other bills. It’s so easy to spend otherwise. If it feels difficult, remember that saving is spending delayed 🙂
Taking a work break can be needed for those of us who are particularly creative. If you know you may want to take a work break in the next few years, put some money aside. Another way is diversifying your income and outsourcing most of the basics of your business, so you’re not needed for your business to run.
Saving with an irregular income can feel challenging.
How do you run your numbers about how much you can afford to save when you don’t know how much you have coming in each month?
This is about owning your financial responsibility, having a healthy money mindset and being organised with your accounts and tax.
It’s a good idea to review your payment processes so invoices are issued on time, payments noted quickly, non-payments followed up etc.
It can make all the difference. Have a look at the other articles in this series for help (scroll down for links) and in the resources below.
Being paid as a sole trader or employee is very different to being paid as a limited company.
When you’re a sole trader you can take money when you want to. When you’re an employee of someone else, you know how much and when you’ll be paid.
It’s not as simple with a limited company and transitioning your personal finances is often the biggest adjustment.
It’s perfectly do-able and it’s not nearly as hard or complicated as you may be worried about.
Saving is what you do no matter what your profit is. Whether it be £1 a month or £1000, it’s the habit and paying yourself forward that counts.
It’s the way to avoid having a tax bill you can’t pay, no money when you’re ill, no money when you’re old, no money when you need to care for children or a loved one, no money when you want to travel. No money when you just need to take a break or want to upgrade to a limited company from employment or sole trader.
Peace of mind is worth a lot and the most important action you can take is to get started.
If you want easy to understand courses and guides with printable checklists and a sense of humour and mentions of cake, have a look in my shop.
This article is part of a series about getting paid as a business.