There are numerous routes to securing your financial future as an independent or limited company contractor. As well as taking out the right insurance as a contractor, building a cash buffer will give you the financial confidence you need to ride the highs and lows of contract life. Contractors face many challenges, particularly during those early days. Whilst one of the many rewards of contract work is getting paid considerably more than permanent employees, the lack of security can be troubling. This is particularly true if you don’t secure the work you need and/or don’t get paid on time by clients.
It’s recommended that UK contractors have a minimum of three to six months’ pay stored away as a cash buffer. With a buffer you have the cash reserves you require to settle business and personal costs during periods where work is thin on the ground. In addition, a cash buffer gives you the backing you need to be more selective with contracts. This benefit alone will be a breath of fresh air to those who are used to doing jobs they dislike.
There are a range of reasons why saving a healthy cash buffer is important. Building one whilst managing the expenses you face as a contractor isn’t the easiest task. Here we share our top tips for building a cash buffer so you can become the master of not just your career but your cash flow.
Set savings aside with every payment
You may not have the certainty of a regular, monthly salary with contract work but when you do get paid, putting aside your savings first is a great route to a bigger cash buffer. Known as the ‘pay yourself first’ budgeting method, this tactic is recommended by financial advisors everywhere. Unlike traditional means of saving, where you deduct living expenses first and save what’s left over, this method sets aside savings first so you can realistically hit those savings goals.
You can also automate your savings contributions, if you are receiving regular payments from your contract work. This ‘set it and forget it’ approach is perfect for growing your fund for the long term.
Cut back on spending
As well as prioritising your savings, analysing what you spend now and figuring out whether it can be reduced is another great way to push for a bigger and better cash buffer. Working more after all isn’t an option for many contractors who are already at capacity. By cutting back you can free up cash that can go straight into your savings pot. You don’t have to budget all the time, but by cutting back your spending on certain days you can put away cash quickly.
Budgeting isn’t the only option for building a solid buffer. With spring on its way, it’s a good time to cash in on any clutter that you’ve accumulated over the years. It all adds up.
Take out income protection
Income protection insurance is an excellent investment, whichever stage you are at in the cash buffer building process. Permanent employees have access to the benefits that income protection brings for at least three months should sickness or injury mean they cannot work. Unfortunately, contractors have no such cover.
Income protection gives you the means to safeguard yourself against financial hardship as Contractor UK’s guide to income protection insurance reveals:
“A provider of Income Protection can replace a large portion of your earnings after a waiting period of your choice (you may come across a term used to describe this waiting period – as a deferred period). The longer the waiting period the cheaper the premium but the longer you must wait before benefits come into payment. The waiting periods can typically be 4,13,26 or 52 weeks. Your Adviser will discuss which period suits your needs best.”
Want further advice on reducing the risk of personal financial loss as a contractor? Read this essential contracting guide or get in touch with our team for support.