Contracting is brilliant. Contracting gives you flexibility. Contracting allows you work in companies where you might otherwise not get a PAYE role. If you’re contracting, then you’re probably earning more money than an employee doing the same job. These are all positive things which Contractors tell you all combine to lead to a better life-style.
But for those of you who are new to contracting, for those of you who up until recently knew little about Umbrella Companies and Personal Limited Companies, here’s some financial advice for contractors which might be useful.
One of the reasons you are paid more money is to balance the trade-off of not having a holiday pay entitlement or matching pension contributions. The reality is, with the right advice, even when you factor these things into your monthly spending, you’re still better off working as a Contractor. These days, finding your next Contract is not an issue. More and more companies are investing in their contingent workers. When the economy fails, it’s the employees who get laid off, but Contractors typically don’t suffer the same fate. Building up a good relationship with your Contract Recruiter will help ensure you always have your next contract lined up before your current contract ends.
So, what’s the best way to budget so you can enjoy your holidays and not be worried that you’re not getting paid for the next two weeks?
When I had my own Accountancy Practice and was self-employed I worked from a 50% / 30% / 20% rule. This covered Living Expenses (50%), Savings (30%) and Discretionary Spending (20%).
Don’t worry too much about the actual split. They’re likely to adjust depending on what stage of life you’re at. Find the right split for you and stick to it.
Living Expenses are straight forward. This is your rent/mortgage, food, bills, insurance, car running costs – basically everything you’re going to spend on a monthly basis whether you like it or not. These are essentially your fixed costs (and it’s these that you should be covered for with Income Protection).
Savings of 20% should be easily made and this is a limit you should try and never drop below. If your personal circumstances allow try to hit 30%. At least 8% of your income should go to your pension. Making pension contributions through a limited company structure gives a tax saving of up to 52%. That means for every €500 contribution made, you only see a dent of €250 in what you take home. If you can afford to contribute more, do. However, if you’re at the stage of your life where money is tight, then still get into the habit of paying into a pension. A €200 payment each month (before tax is deducted) will set you back just €100. In thirty years with an average interest rate of 5% that would be worth about 160k.
If you put that €100 (after tax) into a savings account you’re likely to see little or no interest and in the same amount of time would be worth about €40,000. Pensions…a no brainer.
The rest of your saving goes into a Credit Union. Out of sight is out of mind. Figure out what you’ll need to have to cover holidays and to cover the Living Expenses you need to pay in the month you’re not working (20 days holidays over the year is essentially a working month). Take this figure, divide it by 11, and that’s the amount you need to save in the months you are working.
If you have your own Personal Limited Company (as opposed to an Umbrella Company), then budgeting can be a little easier if you plan to take longer periods off.
For example, if you want to take 2 months off in the summer (a lot of parents in contracting do this), then we would advise you to not take the full amount of your earnings every month. Keep some back and this will allow you to ‘pay yourself’ even in the months you’re not working.
We all need a night out, or to pay for that unexpected event. Discretionary spending is the money that gives you the freedom to do this. If you don’t need it – add it to your savings. This is the pot that should decrease when Living Expenses increase. Always save for a rainy day. Try and have at least three months of Living Expenses put aside for those ‘just in case’ moments.
The best thing to do is make a plan, set your percentages and then stick to it. There’s no thinking each month. Set up Standing Orders through internet banking (they’re easily cancelled). Once your habit is formed you can reassess every year to see if your percentages are still relevant for your lifestyle.
Now, enjoy your summer holidays!
Would you like to be redirected to our Indian website?