Report after report, financial instability and uncertain income are cited among the top challenges reported by the self-employed. In fact, 50% report being concerned about the irregularity of income or unpredictable finances and 33% admit to not being able to get financial support due to their self-employed status. So basically, half of the self-employed admit that their irregular income presents financial issues, but they aren’t able to get the support that they need from banks. This is unfair and, quite frankly, stinks.
What is financial stability?
Financial stability is basically the difference between your income and your expenses. To have some level of financial stability your income should be more than your expenses. For the most part, the bigger the difference the more financially stable, and more resilient against unexpected expenses, you are.
In terms of your income and expenses, when you earn much more than you need to spend, it’s easy to deal with unexpected expenses and to put money away (for savings, emergencies or just a rainy day). The more financially stable you are, the easier and easier it is to hold onto that stability. You won’t need credit as badly, the cost of credit will keep getting lower and lower and your ability to handle emergencies will improve. When you are financially stable it means that you have breathing room. Instead of dealing with the stress of financial firefighting, you will likely have the flexibility to focus on the things in life that are important to you. This leads to a healthier, happier and more productive outlook.
But things happen
But unfortunately, the reverse is just the same. The less financially stable you are because your expenses are more than your income, the more likely you are to become even more unstable. And it doesn’t have to be from poor planning or budgeting. Maybe your car breaks down or you don’t get paid on time; unexpected expenses can throw you off track. And if you need time off sick you just don’t get paid for that time when you’re self-employed.
What causes financial instability
There are two main factors behind financial instability: unpredictable income and inability to manage this unpredictability.
As we mentioned earlier, to have some level of financial stability your income should be more than your expenses. Simple. But when you’re self-employed your income is unpredictable, despite the fact that your bills come with impressive regularity. More than 1 in 10 of UK adults say their income changes significantly from month to month and almost 50% of self-employed professionals in the UK admitting to being concerned about the irregularity of their income.
Now irregular incomes wouldn’t be such a big deal if more people were able to save; to build financial resilience for when work is quiet or to deal with unexpected expenses. But household saving is at a near-record low, meaning that many people have little or no financial buffer when things go wrong. This is because family budgets are stretched, with nearly 1 in 10 (9%) of households spending at least 80% of their income on essentials like food, housing and fuel. But unexpected events occur to us all at some time or another. The car breaks down. The computer crashes. The tax man sends a surprising letter you weren’t expecting… We’ve all been there.
So what can you do?
This can mean having to borrow money to get by. Borrowing can be a lifeline for the self-employed. In fact, a quarter of people with volatile incomes used an overdraft to pay for essential costs like food, utilities or rent in the 12 months.
But relying on credit comes with risks, particularly for those who can’t predict what or when their next pay cheque will be. The irregular nature of income for the self-employed means that it can be difficult to demonstrate credit-worthiness to financial institutions (banks just assume that you are riskier than someone employed), and even if you can get credit it’s likely more expensive. Pricier credit further reduces the gap between income and expenses which makes you even more financially unstable. This leads to even less breathing room, less time to make important financial decisions and fewer options in general.
Before you know it, the odds become stacked against you and the downward spiral of stress begins. And this isn’t just an issue for those on lower incomes. Even those on higher self-employed incomes find themselves having to manage income gaps and life events which can leave them ill-prepared. We’ve seen that people managing modest budgets can find themselves better off in terms of financial stability because they’ve got to be laser-focused on their finances all the time. However, when you’re not earning a lot, even small mistakes can be costly and push financial stability further away. If you’re in a financially stable position and can keep your expenses well below your income… small mistakes are just that, minor setbacks.
There’s a better way
You can’t just snap your fingers and become financially secure. We wish. But we believe that there are a few things can help you prepare for the unexpected and increase your financial resilience.
1. Smooth your income across busy and slow periods. This may mean bringing home less money when you’re really busy and business is going well, but averaging out your pay across the year can pay off when things are quiet.
2. Have credit work for you. Be prepared with a safety net before you need it. Look at affordable credit options so that you don’t find yourself having to rely on predatory payday lenders or unarranged overdrafts when push comes to shove.
3. Build a savings buffer. Try saving a portion of your income towards savings. Even better if you can save it in different pots so that you can save for different objectives, like end of year tax, holidays or a rainy day. Every little bit helps, and differentiating your savings objectives means that you may not need to use up all your holiday savings if you find yourself needing to take a couple days off work.
At Trezeo, we recognise that the self-employed need a better deal. You shouldn’t be punished with financial instability just because you work in a different way. So we offer affordable credit to provide peace of mind, help you automatically build savings buffers to build your financial resilience and smooth your income so that you don’t need to stress when work is a bit quiet. Our customers see us as a type of insurance against the unexpected. If you’re self-employed in the UK, we’re here to help.