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Financial planning for self-employment

Money Matters

Financial planning for self-employment

Research shows that people who move easily and successfully into self-employment have plans in place to guarantee some form of positive cash flow or income stream during their initial start-up period. A good general rule of thumb is that people need a guaranteed lump sum that covers six months of living expenses.

Here are three key steps you can take if you’re thinking of starting-up on your own:

1. Calculate the personal expenses you need to cover

A good idea when becoming self-employed is to reduce your monthly living expenses as much as you reasonably can. This has to be an accurate calculation. You can’t reduce rent payments (although perhaps you could change your mortgage to a lower payment plan), but you can put off a holiday this year. You can’t reduce the heating bill, but you can eat out less often.

Start by completing a BID Survival Budget. BID stands for:

  • Basic needs e.g. mortgage payments or rent, house insurance, life insurance, gas, electricity, water, council tax, phone, car and housekeeping
  • Important needs e.g. TV, school fees, gym membership
  • Desirables e.g. holidays, presents, meals out

Most people are staggered to find out how little they really need to survive. Whether you are planning to jump, or expecting to be pushed, knowledge of your true financial situation can be very empowering and will allow you to identify the lowest monthly expenditure level that you (and your family) can reasonably commit to.

2. Calculate the business expenses you need to cover


A useful rule when starting out is never to spend until you have to. But equally you need to recognise that every business faces one-time start-up costs that you will need to bear. It is often easy to overlook these start-up costs, particularly if you have been working at a large company where they are part of the infrastructure. It is also important to plan for all monthly expenses, however minor.

Having carried out these first two steps you should now be in a position to determine how much money you need to manage for the first six months of self-employment.

3. Establish a fund for the first six months

To provide yourself with a financial cushion, you need to find enough money – guaranteed money, not future business or projections – to fund your personal and business expenses for at least the first six months when you should assume that you have outgoings but no extra income from earnings.

There are various options for funding your move to self-employment. For some it may involve savings and investments, and for others it may involve using a redundancy payment. Financial support from a partner might be an option or getting a part-time job may be the answer in the short-term.

Analyse your financial situation, slowly and carefully. Talk to people you trust. And most importantly, take advice. It is wise to seek professional financial advice for your particular circumstance.

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