The importance of building a financial buffer

A friend of mine works as an in-house designer. He emailed me the other day with a question that’s come up a few times recently. It’s a question I’m asked by people at various stages of their careers, from students to those, like my friend, who’ve worked for somebody else for a long time. The question? “What financial advice do I have for anyone who’s planning to go self-employed?” Rather than write that advice in an email, I thought it might be more useful if I wrote it as a short post.

First of all, let’s get one thing straight. I’ve worked for myself for almost fifteen years, so my view of what it’s like to have a job and work for someone else has definitely been coloured by that experience.

One of the most touted advantages of being employed is ‘job security,’ but let’s be clear about something. Job security, when you work for someone else, is a big fat lie. If you earn a wage, your destiny is in someone else’s hands. When their business takes a turn, for the worse or in a new direction, you could find yourself without an income. In reality, when you’re employed you have far less security than if you take care of yourself. If you want real security you should definitely be self-employed.

How can you be more secure when you’re self-employed? It’s a worry, I’ll give you that.

One piece of advice I often give is; When you decide to make the jump to self-employment it’s good to have a crash mat in the form of a cash buffer. How deep that buffer needs to be will vary from person to person, but an amount that equates to three months income should work for most people.

Decide how much money you’ll need to cover your personal outgoings for any three months, then put that money away somewhere safe. You should then feel secure that if your phone doesn’t ring or your inbox stays empty, you’ll be able to live for three months while you drum up new business.

(You’ll probably won’t need that three month buffer. If you’re good and people know you’re available, you’ll likely get work right away.)

For the first few months, work hard and spend only on the essentials you need to operate. Aim to increase your buffer to a minimum of six months during the first three months you’re self-employed. That’s easier than you might think. (At Stuff and Nonsense we maintain a twelve months buffer so that if disaster strikes, we know we’ll be safe for a whole year.)

Having a buffer does several things. It obviously gives you the confidence that if things don’t go exactly to plan you’ll have a period of time to put things right, but there’s more to it than that.

As a newly self-employed person, you’ll almost certainly feel compelled to take on every piece of work that presents itself, because you’ll think that for some reason your supply of work might dry up next month. Finding yourself with nothing to do would be bad, but it’s almost certainly not going to happen. Finding yourself with everything to do, because you were afraid to say “no,” can be much worse.

Having a financial buffer not only gives you the confidence to say “yes” to projects that are a good fit for you and your clients, it also allows you to spend time between projects working on developing yourself, your skills and the business itself.

It took me almost a decade of being self-employed to learn that working on my business and using my skills and experience to help it is every bit as important as using them to help clients. Having a financial buffer means that you can feel safe while working on something that may not directly bring in income or that income may be deferred. For example, having our twelve-month buffer allowed me to spend almost a year writing Hardboiled Web Design.

What it boils down to is this; building and maintaining a financial buffer gives you choices and that’s what being self-employed is all about. Isn’t it?


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