How to Budget for Time Off When You’re Self-Employed
By: Guli Fager, Associate Financial Advisor
Being your own boss is a dream for many people. The flexibility to set your schedule, no supervisor to answer to, and freedom to do things the way you want to are compelling reasons to pursue self-employment. But one of the tradeoffs that people make when leaving a job with a benefits package is that they must create—and pay for—those benefits on their own.
In our webinar series on Financial Self-Care, we described how self-employed people can structure personal income, retirement savings, and insurance, which are critical pieces of the “benefits package” you want to provide for yourself. Another piece of the puzzle, one that can seem intimidating, is figuring out how to actually “budget” for time off. Whether you want to be able to attend conferences, go on vacation, or take time off if you get sick, ensuring you have enough income to cover time away from work is especially important.
Many jobs offer paid time off for federal and other holidays, sick days, vacation, continuing education or professional development events, bereavement, family leave, any number of situations that allow you to continue to get paid even if you don’t come to work. How do you create that safety net if you’re the employer? Here are a couple of strategies.
Figure out how much time off you want each year. Is your favorite conference 5 days? A weeklong vacation at the beach with the kids? Do you reliably get a cold that keeps you in bed for a few days each winter? Think about the last 12 months and how much time off you took, and whether those events are likely to happen again. Let’s imagine that you want to budget for 4 weeks away from work. That means your business needs to generate 12 months of revenue in 11 months.
How do you create an additional month of revenue? There are two ways to approach this. One is to assess your fees and ensure they are set appropriately to cover time off. This isn’t greedy—whatever business you’re in, your clients want you to be at your best, and time off to relax, heal and learn is critical to that. I’ve managed budgets for organizations and “fringe” benefits—the amount allocated over and above staff salaries—is typically 20-30% of each person’s salary, to cover time off, insurance and retirement benefits.
If you don’t think you can change or increase your fees (if, for example, you’re in network with insurance companies and have a contracted rate) and don’t want to see more clients, the second approach is to review your business and personal living expenses and see if you can reduce them so that 11 months of revenue will pay for 12 months of expenses. If you can reduce business expenses, you can pay yourself more in profit. If you can reduce personal expenses, the income you take from the business will cover the time you aren’t working.
The last piece of the puzzle is protect yourself in situations that may lead to extended periods of reduced or no work due to illness or disability. While many of us may plan to take sick day here and there throughout the year due to a minor illness, serious illness can occur unexpectedly and make you unable to work for an extended period.
What if you are too hurt or sick to work for months or years? The loss of income can be devastating to your personal finances. Disability insurance is a critical part of your safety net as a self-employed professional – it would supplement any Social Security disability you might qualify for to leave you with a reduced, but manageable, income to live on. The leading causes of expended time away from work are neuro-muscular and auto-immune illnesses, though cancer and other diseases certainly come into play. Women are more likely than men to experience a disability that hampers their ability to work, and if you are self-employed, you don’t get paid for time away from clients.
Financial planning with self-employed clients allows us to figure out together the best way for business revenue to flow to your personal cash flow, accounting for time off as desired. Included in our financial planning is an independent insurance analysis, with a search of carriers to find the best disability insurance policy to protect them. We are committed to our self-employed clients having a great benefits package! We would be happy to meet with you for a free consultation to discuss any questions you may have. You can schedule here.
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