Financial Advice for the Self-Employed
It’s a new financial year which marks a fresh start for all small businesses and self-employed hustlers. Although it has been a challenging last few months due to COVID-19, we have been so inspired by all the creative solutions business owners have come up with to adjust their services for these unprecedented times.
For some, this means embracing the digital age and taking their offering online, while others have managed to create new products or introduce home delivery. Here at Pursue Wealth, we have also used this time to strengthen team bonds and make business processes more efficient so that our members can continue receiving a stellar service when they need it most.
With restrictions around Australia slowly easing, business owners are gradually beginning to open and expand operations again. If you haven’t had an opportunity to review your personal finances yet, it’s important that you do this before you deep dive into your business. We know all too well that as a self-employed person it can be difficult to find time for “life admin” once the ball starts rolling with your business, however, if you neglect your own finances this can block you from building wealth in your business too.
In this article, we’ll be focusing on five areas of personal finance you should be thinking about if you are a small business owner.
Although we have covered this topic extensively on our blogpost ‘Building Good Habits for Everyday Financial Success’ which includes Pursue Wealth’s blueprint for an effective banking structure, we realise that small business owners tend to receive inconsistent or “chunky” income.
In your case, the key to success is to ensure you have a sufficient bills buffer (constant balance in your bills account) to offset the months which you receive a lower income. Generally, we recommend an employee to have 1 month of bills saved, however, if you are self-employed, you may wish to have 3-6 months saved depending on how chunky your income is.
Alternatively, you can look at your business income, work out a suitable average monthly amount, and pay yourself a consistent monthly income as if you were an employee.
Another vital action step if you are self-employed, is to separate your personal banking from your business banking.
Different expenses are tax-deductible for business than for personal use and it will be easier to track your revenue if you have different accounts for each.
Likewise, you can set up a banking structure for your business, and ensure there are bill buffers and emergency accounts for your business too! That way, if sh*t hits the fan with your business, you don’t have to dip into your personal emergency fund to patch things up.
You need to start thinking about taxes early on. Separating your personal money from your business money is one thing you and your accountant will be grateful for come tax time.
Additionally, we have mentioned that businesses are generally eligible for more tax-deductible expenses than individuals because your business generates income. For more information on eligible expenses, you can check out our recent post on ‘Frequently Asked Tax Questions & New Covid-19 Tax Rule’.
As a self-employed person, you need to be setting aside a percentage of your income for tax throughout the year. You can do this by opening a new bank account for tax, and keeping it off-limits for all other spending. This avoids having a huge lump sum owed to the Australian Taxation Office (ATO) and not having funds to pay it!
As your business grows, the ATO may require your business to pay income tax in quarterly instalments called ‘pay as you go’ (PAYG). There is a nifty ATO calculator that can help you estimate your quarterly instalments and help with planning your business finances.
In Australia, businesses that earn over $75,000 per year are also required to register for Goods and Services Tax (GST), and you must lodge a Business Activity Statement to report how much GST your business has collected and is claiming.
This broad-based tax of 10% is applied on most goods and services sold in Australia, and you can learn more about when it applies and how to claim your GST credits on this government website. For more tax-related questions, it is best to seek out an accountant who are experts in tax strategy.
This area is often forgotten by our members because retirement can feel so far away for millennials!
It’s even more likely to be neglected by self-employed individuals who can get away with not paying themselves any super guarantee contributions. It is important to still contribute to super as the sale of your business cannot be your only retirement asset!
Although it may not be at the forefront of your mind as you run your business, it is crucial that you set yourself up properly for retirement to ensure the last 15-20 years of your life are financially comfortable.
As the employee and boss, you need to make it your responsibility to consider superannuation contributions for your future self. Each year you are eligible for up to $25,000 in concessional contributions (only taxed at 15%) which can save you a significant amount of tax, and also up to $100,000 in non-concessional contributions (taxed at your marginal tax rate).
Protecting your income and business
Is insurance like the big elephant in the room for you?
It’s obvious why you need it, but for various reasons, you procrastinate putting it in place, and avoid even thinking about anything bad happening to yourself or your business. Unfortunately, sheer willpower can only take you so far and sometimes it’s important to face the fact that bad stuff can happen to you too.
Nobody wants to gamble on their capacity to earn a living, especially if you have financial responsibilities and family members that rely on your income.
Income protection is a form of life insurance that will replicate 75% of your salary (paid monthly) should you suffer from a condition that prevents you from returning to work. This insurance will help cover your main expenses while you focus on recovering and provide peace of mind until you can start working on your business again.
You can also consider public liability insurance to protect your business against claims resulting from accident or injuries that occur as a result of your business activities.
If you work in a partnership, it may also be worthwhile considering a buy-sell agreement and key person insurance to protect your business from loss of revenue, profit, or capital value should your business partner suffer a major illness, injury or death.
Although it can feel like a waste of money to pay for insurance when life and business are going well, in extreme circumstances like these the last thing you want to be worried about it is money.
Do you have a Will and is it up to date with your wishes and circumstances?
Have you nominated Powers of Attorney and do they still reflect the people you wish to look after your decisions making?
In acknowledging that there is a likelihood you can be affected by unfortunate events, it is important for you to think about what you would like to do with your possessions and how you are going to pass on your business should you become seriously ill or pass away.
We know that for many self- employed people, your goal may be to turn your business into a legacy that continues thriving many years after you are gone. As such, key decisions such as business ownership should not be left until the last minute, or worst, undocumented, because this can cause a lot of issues for your family and business partners later on.
Similarly, Powers of Attorney (PoAs) are the people you give decision making power to, (whether that be medical, financial or general) in the event you lose the capacity to make sound decisions yourself.
The people you have nominated should be people you trust to have the expertise for said decision making or have a deep understanding of your wishes and preferences. Your quality of life may largely depend on them, so it is vital you review and update your PoAs accordingly to reflect what you want.
We hope this article has helped all the self-employed hustlers out there who are ready to make the most of the 2020/2021 financial year!! If you would like to learn more about any of the above areas please feel free to click here to book in for a 15-minute conversation with one of our advisers.
Make the most of the 2020/2021 financial year!
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Information is current at the date of issue and may change.