Entrepreneurship arguably offers one of the best ways to attain financial independence. However, it takes more than a luck to be successful as an entrepreneur nowadays.
And again, going into self-employment can be appealing to many. It offers the opportunity to follow your passion and to decide your own working hours.
But the fact is that self-employment can easily take a toll on your finances if proper care is not taken.
This is particularly true during the early months (or even years) when income can be sporadic as you build your client base and your reputation.
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There is more to self-employment than meets the eye because there are lots of stuff you need to take care of. In short, it’s simply not as straightforward as most people think.
So, are you planning to become self-employed? Planning is one of the most essential stuff you must first consider before making the move.
If you’re considering going self-employed, remember to incorporate these hidden and often forgotten-about costs to help you plan your finances.
#1]. Sickness and Holiday Pay
Being self-employed can offer a lot of flexibility and freedom. However, it does mean giving up some of the financial security you may have become used to. This includes two large hidden costs: sickness and holiday pay.
No longer can you put in a request for two paid weeks off or receive sick pay when you’re ill. Instead, you may have to reschedule work. Because of this, many self-employed people take out critical illness insurance to provide financial security if they become too sick to work.
#2]. Provision for Pension
In your salaried role, your pension is automatically deducted from your wages, with your employer adding their contribution. When you’re self-employed, you become responsible for organising your pension.
Worryingly, up to 45% of self-employed people don’t pay into a pension, according to the ONS. The research by the ONS shows that 30% out of the 45% that don’t pay into a pension are over 55. While contributing to a pension is a cost that many self-employed people don’t account for, it’s vital to plan for your retirement.
#3]. Tax and Accounting
You may be used to seeing your tax and national insurance amounts on your payslip, but when you go self-employed, this is down to you. This means you need to keep accurate records so that you can complete your annual tax return.
You can easily use accounting tools such as FreshBooks or other great alternatives tools for your small business accounting. Also, you can pay for an accountant to do this for you.
Either way, remember to factor in any national insurance and tax that will need to be paid at the end of the year. Setting aside money for this will avoid you facing hidden costs later down the line.
#4]. Office and Equipment
Depending on your plans, when you begin your self-employed venture, you may be able to work from home. While this can be cheaper, it does still carry costs. This could include equipment and stationery, higher utility bills, as well as monthly subscriptions for software, cloud storage or website hosting.
Alternatively, if you decide to opt for business premises, you may have to budget for service fees and bills, in addition to rent. Other hidden costs may include meeting rooms and travelling to see clients.
Without a doubt, being your own boss can offer numerous perks, including doing what you love, the ability to negotiate your rates and the opportunity to cherry-pick your clients. As such, when deciding to go self-employed, many are excited to be able to design their own working lives.
However, if you are going solo, you will need to make sure you are still able to commit to any existing financial commitments including loans, credit cards, and mortgage repayments.