Being self-employed may mean being able to start work at 12pm and having a three-hour lunch break, but it may also mean work spilling over to the weekends and having an empty CPF account. So if you’re worried about your finances, here’s how you can manage them.
If you’ve succeeded in becoming your own boss or have decided to quit the nine-to-five life and switch to a more flexible job - congratulations, you’re now entirely in charge of your own time! But as someone who’s self-employed, you can no longer rely on the monthly CPF contributions made by yourself and your employer How, then, are you going to save enough money to sustain your lifestyle?
Though the funds stored in your CPF accounts are incredibly useful when it comes to paying off home loans, insurance premiums and medical bills, having close to no CPF funds isn’t the end of the world. From practices like voluntarily topping up your CPF account to staying on top of client payments, here’s how you can manage your savings and accumulate your wealth as a self-employed person.
What constitutes being self-employed?
Being self-employed simply means that you’re doing a job that doesn’t require any monthly contributions to your CPF accounts. From starting your own business and doing freelance work to being a Grab driver or choosing the financial advisor route, there are many ways to be considered self-employed.
How much should I save if I’m self-employed?
When it comes to savings, there is no universal figure set in stone to work towards - it all boils down to your salary, lifestyle and priorities. But if you need a rough guideline to follow, you can adopt the 50-30-20 rule: 50% on expenses, 20% on savings and 30% on other expenditures like insurance premiums and investments.
But of course, if your monthly financial commitments are lower, you can always save more to prep for rainy days. As a self-employed individual, you should be mindful that you won’t have much CPF funds in your OA and SA as retirement money, so it is important to either top up your CPF account or save up for retirement through other means.
How do I save money and build my wealth?
You don’t need to take extreme measures to save up enough money and sustain your lifestyle. As long as you’re disciplined enough to be in charge of your personal finances and adopt the following practices, you’ll be saving your way to success.
#1 Track your cash flow
Tracking your cash flow requires a tonne of discipline. And especially since you don’t receive a fixed monthly salary, losing track of your expenses may cause you to blow your budget without even realising it. If you need serious help in monitoring your cash flow, you can download an expense tracker or create an Excel sheet to easily keep tabs on your finances.
Aside from keeping an eye on what you’re spending on, it’s also important to take note of the money coming in. As a self-employed individual, your income fluctuates just like the market, so it is important to stay on top of your finances and create a manageable budget for yourself so you can tide over the rougher months when you’re tight on cash.
#2 Stay on top of client payments
If you’re a business owner or freelancer, you’re likely going to be dealing with a lot of clients. And unless you want to scratch your head each day wondering if a certain client has already paid you, it’s best to stay organised and keep track of client payments. You can consider fixing a monthly ‘admin day’ to follow up on all client payments and to chase outstanding payments that are far overdue.
The worst thing is having to deal with a client who constantly misses payment deadlines. The solution? Implement a late payment penalty fee to prevent late payments entirely. By keeping client payments in check, you’ll have an overview of how much you’re making for that month so you can plan your finances accordingly.
#3 Top up your CPF voluntarily
Though it might be nice to take the full paycheck home instead of having to account for the 20% ‘pay cut’ in the form of mandatory monthly CPF contributions, CPF funds are incredibly useful.
Not only can they be used to pay for expenses like home loans and medical bills and even be used for retirement, but the funds parked in your OA, SA and Medisave can accumulate a risk-free interest rate of 2.5%, 4% and 4% p.a. respectively (much higher than most savings accounts).
For the self-employed who want to still reap the benefits of CPF funds, you can simply make your own contributions to your OA and SA. Though there’s no ideal amount to be putting in every month, you can take reference from being a full-time employee who contributes 20% of their salary to CPF. But be sure that you have enough liquid cash for rainy days as the money that you park in your CPF accounts cannot be taken out.
#4 Use the right savings accounts
Everyone’s got to keep their savings somewhere, and it makes all the difference if you choose a savings account with a higher interest rate. Instead of letting your money sit idly in the bank and earn a measly 0.05% p.a., there is a host of savings accounts that can make your money work harder for you.
However, if you want to enjoy higher interest rates and don’t mind taking on some risk, you can consider cash management accounts or insurance savings plans that are generally low-risk but can earn you higher interest rates.
#5 Use investment vehicles that allow flexible commitment
With everyone becoming more investment literate, turning to investment as a way to supplement your income is all the hype these days, so don’t lose out in that aspect. However, without a fixed regular monthly income, it’s best not to opt for investment vehicles such as savings plans or endowment plans that require a fixed deposit every month to avoid incurring penalty fees for the slower months where you are unable to financially commit.
Instead, you can always go for those that give you more flexibility like robo advisors that allow you to control how much you want to invest, or even delve into DIY-investing with brokerage accounts. Consider the level of liquidity too: choosing an account that allows you to withdraw funds whenever you need it is important in case of emergencies.
#6 Make reminders to file personal income taxes regularly
One of the great things about working under a company is the stress-free income tax filing done for you by most companies. So if you’re self-employed, you’ll have to do the heavy lifting yourself. Since it’s an annual affair to file taxes, you should set yearly reminders on your phone so you don’t miss the deadline and end up incurring a penalty for tax evasion.
Be sure to submit your completed tax form by 15 April each year. (Individuals earning at least S$22,000 will have to pay taxes.) Though the process of filing can be quite pesky, we recommend getting started on it early so you don’t have to worry about scrambling the night before the tax form is due.
#7 Get insured
Aside from filing taxes, companies usually provide their employees with basic health insurance plans as well. But now that you’re on your own, you should start shopping around for insurance plans such as personal accident insurance, disability insurance, integrated shield plans to protect yourself from ailments or accidents. There are also insurance plans for freelancers too.
Though the insurance premiums will add on to your monthly costs, getting covered will save you a lot of money when you make claims in the future in times of need. On top of that, it also gives you a sense of security and peace of mind knowing that you have a financial safety net to fall on should the need arise.
#8 Start saving up for retirement
Retirement may seem like a pretty far off goal for now, but we cannot stress enough the importance of saving early for retirement. While most employees have their CPF RA to fall back on, you won’t have much funds stored there for a comfortable retirement.
That is why consciously saving up on your retirement fund is extremely important. One of the ways you can do so is to opt for the Supplementary Retirement Scheme (SRS) to generate interest, while also being able to enjoy income tax relief. However, it may not be the best option as there is a S$15,300 deposit cap annually for Singaporeans and PRs, which won’t amount to much for you.
#9 Take advantage of credit card cashback and discounts
Aside from the biggest draw of being able to spend ahead without real cash in your account, credit cards are also extremely useful as they offer a host of extra perks like cashback, points and discounts when you spend. So if you already own a credit card, make full use of them as they can save you money when you enjoy the cashback or redeem these points for rewards.
If you don’t have one credit card yet, there is a variety of credit cards for specific purposes like grocery shopping, paying utility bills, paying for petrol and even collecting air miles so you get the best deals on the things you spend the most on. One thing to be mindful of when you apply for a credit card is the minimum annual income required. Also, remember to spend within your means lest you end up with a huge credit card debt you’ll be struggling to pay off in the future.
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