Here are a few tips to help you make effective investments as a self-employed person, as well as how you can ensure the financial security of your business.
1. Set financial goals
This is the first tip we give all our clients at Impulse Plan. You need to have an idea of where you want to be financially. This could be you wanting to buy a house in the next 3 years, or a car or maybe go on holiday. What matters the most is that you be able to specify the amount you will need and the amount of time you need to save for it, known as the investment term. It is also important whilst you are setting your goals to be realistic about your goals. Being realistic means comparing your financial goal to your financial means and ensuring that you reach those goals. Our goal setting tool allows you enter your goal amount and investment term and factors in inflation and gives you a projection of how your investment could grow based on the performance of our investment portfolios. In addition, our app gives you an estimate of how much you need to invest as a lump sum or as monthly contributions to reach your financial goal.
2. Put aside extra revenue from your business and invest for future low season revenue
Running your own business has many benefits, amongst them deciding your working hours, being your own boss and no ceiling on your income earning potential. However, it also carries significant risks in that your income is not guaranteed and fluctuates from month to month. It is important to realise that you need to be prepared for months when your business revenue falls below your break-even point. The best way to do this is to put aside revenue in months or even weeks with high revenue in a separate bank account. You can do this by transferring into a savings bank account so that the money you put aside earns interest in anticipation for use in the low revenue periods.
3. Create a budget and plan for taxes
Day to day running of a business can take up most if not all your time. This leaves you with very little time during a trading period to keep track of business costs that may arise unplanned for. It therefore becomes very important for you to have made a budget at the beginning of every trading period. Whilst it may be difficult to get this budget 100% accurate, but just the exercise of setting aside a budget as a guideline will force you to account for every little expense you may have. There are several apps available for you to keep track of your expenditure on a business card. At Impulse Plan, we offer a personal finance add on with our investment app which automatically tracks and categorises your expenses as they occur. In addition, our personal finance add on allows you to set a budget for each category of expenses and automatically saves any excess left on your budget per category. We are pretty proud of our app and have made an additional effort to allow you to analyse your weekly, monthly or yearly expenditure in one place with the help of interactive graphs.
It is also important for you to plan for the taxes that you may be liable for. Part of that includes keeping track of business revenue as well as associated expenditure. You also need to keep good records of all expense invoices and receipts as business expenses are deductible for tax purposes. This will significantly reduce the amount of tax you would need to pay on any business revenue.
4. Take advantage of tax-free investments
You may have heard of something called an ISA, short for Individual Savings Account. This works more like your regular bank savings account, except you can hold stocks and shares and other investments within the account. The main benefit of this it allows you to have a better chance for return than the low interest rates offered by most banks due to the variety of possible investments in the account. You can invest up to £20,000 this tax year. The benefit is that you do not have to pay tax on any interest or income you receive from this investment. In addition, you do not have to pay any tax on any gains on the account should you decide to cash out.
There are other variations of this such as the Lifetime ISA (LISA). The purpose of this is to help you buy your first home or save for later in life. You can invest up until £4,000 each year. This is different from the general ISA in that you are topped up with a 25% bonus to your savings until you turn 50. The one downside though, is that you are not allowed to withdraw any of these funds until you either turn 60, buy your first home or become terminally ill with less than 12 months to live.
Make use of your pension allowances
Did you know that the government tops up your pension contributions depending on the rate of tax you pay? If you are a basic rate tax payer (that is, if you earn between £11,850 and £46350) you get an extra 20% of your pension contribution. If you earn between £46,351 and £150,000 per year you get 40% top-up. If you earn above £150,000 you get an additional 45% on your contribution. To find out more about this, please see our blog “Pension planning for the self-employed”.
Review your borrowing
It is not uncommon for people who run their own businesses to have some level of debt. This may have been taken up when you started your business or during the course of your business for upgrades, purchasing additional machinery or bailing out your business out of a bad month or two. It is of great importance to always review your borrowings and to have a set plan as to how you plan to keep up as well as repay your debt. It is also possible for you to renegotiate the terms of your borrowings so as to ease the burden on cash flow. Most banks would be willing to relook at your debt terms and find ways to ensure that you pay it on time.
Diversify your investment portfolio
Don’t put all your eggs in one basket. This saying has its roots in ensuring that you reduce the level of risk associated with any investment that you make. Your business is your investment and that is great way to start investing. However, as much as most business owners want to admit, your business may fail, or when it comes for time for you to retire, it may be difficult to sell to realise that investment. It is therefore so important to keep an objective and open mind when it comes to your investments. Always be on the lookout for new and different investment opportunities. This may mean a part investment in another business as a shareholder, or opening a general investment account with a financial advisory firm. At Impulse Plan we offer general investment accounts with underlying portfolios that are constructed from advanced diversification. Within any one of our 10 portfolios, you are able to invest in the following as a percentage of your total investment;
- Shares: UK, North America, Europe, Japan, Asia Pacific, Emerging Markets
- Bonds: Global, Inflation linked, market bonds, high yield
- Gilts: these are government issued bonds
- Property
- Commodities
Regularly review your progress against your goals
When you have followed the tips above, it is important that you regularly review your progress on each point. This helps you keep track of how much effort you need to put within each trading period to reach your investment goals. With Impulse Plan, this is easy as explained earlier under goal setting. You would be able to track your progress against your goal and also have suggestions for how much you need to save or put away to ensure that you reach your investment goals (inflation factored in too)
