
For all the benefits that come with being self-employed, managing your finances can be challenging. Having an irregular working schedule can mean a less predictable irregular income. This in turn can make saving for the future trickier.
But challenges are there to be overcome, and there’s no reason why you can’t build yourself a great financial nest egg as a self-employed worker. Here are some steps to take to ensure you’re saving for your future, even if you have an unpredictable income.
1. Create an adaptable savings plan
The first step to saving on a fluctuating income is understanding your cash flow. If you’ve been self-employed for a while, analyse your income over previous years to see your peaks and troughs. Which months do you tend to bring in more money than usual, and which months are a bit slower?
As well as income, you need to work out your baseline expenses like rent or mortgage payments, utilities and food. These are the things that you absolutely have to pay each month, no matter what your income’s like.
Once you have these numbers, you can get an idea of how much spare cash is potentially available to save each month. Put this into a savings account, making sure to put more in during your peak months, to cover the slower times.
2. Focus on flexible pensions
A pension is one of the most tax-efficient ways to save for retirement. While pensions may have traditionally been seen to benefit PAYE (pay as you earn) employees because of Auto-Enrolment, there are flexible options which suit self-employed workers too.
For example, PensionBee’s self-employed pension allows you to contribute flexibly and make adjustments based on your income levels. This means during high-earning months, you can contribute more. While during leaner times you can reduce or even pause them - all without any penalties.
Use the cashflow you put together earlier to get an idea of how much you can contribute. Rather than a specific cash amount, it could be a percentage of your income each month - which can be adjusted up or down based on your earnings. This way, your contributions are always in line with your earnings, and it also protects your pension pot from the impact of inflation.
It’s important to think about adding to your pot when you receive any windfalls or lucrative contracts. Of course, you need to make sure your main expenses and any debts are covered first. But if you’re lucky enough to have a chunk of excess cash in a particular month, a one-time pension top up is ideal. Your future self will thank you.
3. Combine new tech with old-fashioned research
Being self-employed means you’ll already have lots of admin on your plate, so when it comes to the process of saving money, you’ll want to minimise this. At the same time, you’ll want to maximise the returns of your savings given the sometimes unpredictable nature of your earnings.
A good option is to combine the power of tech with the occasional bit of manual research. There are a number of mobile apps that can link with your bank and ‘sweep’ money aside into a virtual savings account each month. Some can also work out when your income is higher and automatically put more aside.
You should always check whether the app provider is authorised before giving it access to your accounts. You can do so on the Financial Conduct Authority’s (FCA) Register or the Open Banking register.
While the apps are good, many don’t offer the interest rates you’d get with traditional savings accounts or ISAs. That’s why it’s worth shopping around every few months for accounts with the best rates. Some even pay interest on a daily or monthly basis, so you can see your money working harder for you.
4. Create a separate emergency fund
We’ve mostly been speaking about saving money for the future, but it’s worth touching on emergency funds as well. This is a financial buffer that protects you should the unexpected occur. Examples could include health issues, urgent house or car repairs, or a sudden loss of contracts. Most people need one, but if you’re self-employed, it’s a must-have. Having this financial safety net means you won’t have to dip into your regular savings or take on any expensive debt when unforeseen costs come up.
Ideally, you’d want three-to-six months of essential expenses saved up. Keep this separate from your regular spending account, and maybe even from the long-term savings we mentioned earlier. This is because some savings accounts penalise you for withdrawing money, and ideally this emergency fund needs to be easy to access.
Saving with an unpredictable income might sound like a tough task, but it’s definitely manageable. There are lots of great tools out there now that can help you - from flexible pensions to automated savings apps and a whole lot more. By combining these with discipline and adaptability on your part, you can save towards a comfortable retirement.
Nilesh Pandey is a Freelance Writer who’s been trusted by businesses and entrepreneurs across the globe. Over the last decade, he’s worked with companies in industries such as tech, private equity and pharmaceuticals, while seeing his words appear in national newspapers and international speeches. Nilesh is also a regular Writer for Your Business magazine.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.