Going it alone? How to make it work

Iona Bain

Why are so many young people I know making the leap into self-employment? It may seem totally counter-intuitive; in a brave new world of Brexiteers and BLEEP-grabbing presidents, surely the temptation would be to play safe, stick to the certainties of regular income, keep your head down and wait for this to all blow over (and maybe have a pint or 13 in the Winchester while you’re at it…)

Jumping off the salary cliff into the unknown seems like a risk too far in this age of austerity. I would argue that for many young people, it could be a calculated risk worth taking.

Think about it. This generation of graduates has starting salaries lower than the last and is starting to feel the full blowback from degree inflation, making the jobs market an unseemly competition for the best opportunities. In my experience, those that scoop the pool in traditional sectors tend to be those with good connections and rich families who can support them through unpaid internships & starter jobs.

Should we overcome these obstacles, we still face significantly higher commuting and living costs as a percentage of income than what our parents were used to. Full-time work in places like London and the South East, despite their reputation as the land of milk and honey, is increasingly unviable if you’re having to pay most of your salary to a smug landlord every month.

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That’s why many young people shake their heads in disbelief when they’re told to save more for retirement. “Thanks,” they’re thinking. “And where exactly does this magical pot of money come from in our monthly pay packet?” Of course, auto enrolment is supposed to be the invisible magic pot of money, and so far it has been for most young people, but it is nowhere near enough to fund our retirement (particularly the way the state pension is going) and I wouldn’t be surprised if opt-out rates rose pretty starkly once contributions rose from a laughable minimum of 2 per cent to a still laughable but also much more real 8 per cent over time.

It’s mostly down to our housing emergency (sorry, it’s not a crisis anymore, it’s a full-blown emergency) that many young people are considering whether there is a way to beat the system. Working remotely in a cheaper part of the country, with access into the city as and when it’s needed, is fast becoming the answer for those who have the knowledge skills – and laptop – to do it. By living away from packed cities, grubby tube lines and expensive commuter belts, they avoid so many of the costs now associated with working full-time, and the expensive renting trap that comes alongside that, and can therefore wrestle back some control of their lives (and finances).

There is a reason why Margate, situated just an hour away from London but economic light-years behind the capital, has been dubbed “Shoreditch-on-Sea”. The seaside town in Kent is becoming the new spiritual home of go-getting creatives and entrepreneurs who want a better quality of life and (shock horror!) quite a nice family home for under £300k. They once flocked to Hackney and Camden, but those are out of the question now. If they want an economically safe space to develop their careers and businesses, Kent is seemingly the place to do it, and they get to enjoy some bloody nice vintage shops and the Turner gallery whilst they’re at it (and why not?)

Yes, climbing the corporate ladder will pay off  handsomely for some. For many, many others? Not so much. Particularly in an age where soft skills, branding and multiple income streams will take you (surprisingly) far on your own.

The Young Money Blog has long been vocal about the benefits of going self-employed. We’re also alarmed to see that this group is being readily exploited by businesses like Uber and Deliveroo that blurs the lines when it comes to workers rights. This new demographic is being heavily championed by Theresa May and could feature heavily in the Autumn Statement, delivered tomorrow.

However, young people who are about to take a jump into the unknown would be forgiven for feeling daunted. So here are some tips for making it work.

1. In the months leading up to your move, pay off existing, non-essential debt.

Draw up a timetable. Ideally, you want to be financially self-sufficient before making your move so how long do you think it might take you to pay off your existing debts? You really don’t want to be grappling with a salary plunge AND paying hand over fist to lenders.

Start with store cards & any payday loans you might have as these will have the most eye watering rates imaginable. Then write down the following on a piece of paper and request that it is tattooed on your forehead. “I WILL NEVER TAKE OUT A STORE CARD OR PAYDAY LOAN EVER AGAIN.” Good stuff.

Then move your credit-card debts on to a 0 per cent balance transfer card with a LONG interest-free period. Do you have more than one credit card? If so, say to yourself “ah, the days of having multiple credit cards were good while they lasted!” For it is doubtful that you will even need one, and there may be some repairs needed to your credit rating if you want to qualify for mortgages and the like in the future.

Make credit card payments sacrosanct by scheduling them as direct debits to leave your account straight after your salary is paid in.

2. Sit down with your most recent bank statement and list all your outgoings last month.

Now divide them into essential and non-essential categories with different coloured markers. “What are you on about, grandma?”, you’re probably thinking. “Don’t you know we have fancy apps for that sort of thing?” By all means, go crazy with a budgeting app if your digital navitism is too strong to be ignored. My personal fave is Money Dashboard. However, there is something to be said for splashing out on serious stationery porn and writing this stuff down in a notebook (look up stationery on Pinterest and rejoice/weep). The thing about writing stuff in this way is that it really forces you to fess up about your spending.

Compare your outgoings (all categorised with different colours, drool) with your new projected monthly income – whether it’s taking that lower-paid job, going freelance or setting up your new business. Do you have enough savings or a loan in place to cover these expenses while you set yourself up? This exercise should show you exactly what needs to be cut, and forces you to ask yourself if you’re really
ready to make this sacrifice.

3. Going self-employed? Let HMRC know.

You must also register to pay Class 2 National Insurance Contributions. Keep all receipts for business expenses, as they are tax deductible, and remember that your self-assessment form is due yearly. One of the joys is freelance is that you can claim tax on work-related expenses, so now is the time to get in the habit of keeping all your receipts. Again, get a lovely big box and shove them all in there.

4. Hold off quitting if you can until you have saved at least three months wages.

Put this into an easy access account. I would normally recommend an Isa because then you get the interest tax-free but there’s no point; the interest on Isas is so crap now, you may as well try and get a better rate on a non-Isa account. Also, there is no harm in investigating ‘soft’ investing. You have a whacking great Isa allowance – £15k a year – and putting all that into savings accounts will get you peanuts. By all means, have the emergency savings pot you can quickly access, and accept you won’t get any meaningful interest on that whatsoever, but a regular savings plan might get you some respectable funds if you can keep them in the market for at least a few years. If you’re nervous about moving up the risk scale (because there is always a chance you won’t get back what you put in), peer-to-peer lending is quite a good little hybrid between bog standard saving and racy investing. This is also defo one for the can’t-be-boverred school of investors. If you want to be a little more hands-on, there are ways to do this, and I’ll be returning to this subject in future blogs…

5. Shop around for a low-interest, fixed-rate, five-year mortgage.

If you already have a mortgage, I salute you. However, we’re in an uncertain universe now and you’ve gotta fix your rates if you want to make sure you don’t get caught out by a rate rise. Looking around for a competitive fixed-rate, five year mortgage to keep your payments steady while you get your new career set up.

6. If you want to buy a house, don’t give in your notice until you’ve secured your first mortgage.

Wait…there are exceptions to this very broad-brush guidance. For instance, maybe you can get a guarantor mortgage with the help of your parents? (This is what I did despite being self-employed).  Also, you may have a partner willing to buy with you who has a fairly steady income to balance things out. However, the sad truth remains that getting a mortgage is a lot harder once you’re self employed (boo). That doesn’t mean you should stay in a job for the sake of getting a mortgage, of course. You may be nearing your goal within months or a year, however, and it may well be worth staying on not just to get the deal done but also to help yourself keep payments steady in the first instance. Save as much as possible for the deposit and work out if you can afford the payments once you make the leap. I have to say that speaking to a broker nearly always pays off in terms of getting the best possible deal, whether you’re self-employed or not.

7. Treat the maxi hours job with kid gloves

There may be an employer out there who seems wonderfully willing to take you on as much as your timetable will allow it, seemingly giving you enough work to feed you and all the children of the world forever more. There ain’t nothing wrong with accepting this work for a period of time but be aware that a) you’re almost certainly being underpaid for it and b) it may not last. This is the maxi hours phenomenon I’ve spoken about before and the biggest danger is to throw yourself into this work while neglecting all your other possible opportunities. The best balance for self-employed is current “live” work plus time spent on reconnaissance (i.e. researching opportunities, self-promotion, networking), which is seldom wasted. Neglecting one avenue or the other is sure to create problems further down the line.

Iona Bain is the author of Spare Change, A Beautiful Guide to Bossing Your Finances. You can buy it here as the perfect Crimbo pressie!

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