Moving to Self-Employment: A Few Tips to Manage Your Finances

Updated: Jan 29

We know a lot about two things; mortgages and being self-employed. The mortgage thing is obvious, but being self-employed? Well, not only do we help a lot of clients who are business-for-self, but all of our brokers are self-employed as well.


Being your own boss can be rewarding and scary especially in terms of finances. You regularly ask questions like, “will I make enough to pay the bills?”, “what if there isn’t a lot of work at times?” and “how much money do I need to get started?”


Don’t worry. We’ve got you covered when it comes to answering your biggest questions about moving to self-employment.


How Much Money Should I Save Before Going Solo?


No matter how you’re approaching self-employment—expanding a current side-hustle or making the jump from a full-time job—having a safety cushion is a good idea.


You may not get enough work at the beginning to start paying yourself a salary. While there’s no hard and fast rule, we recommend having enough saved to cover at least three months of living expenses (mortgage or rent payment, food, and utilities).


The ultimate goal would be to have six months of living expenses saved, but we’re realistic...it’s hard to save that much money. Three months is a good baseline but the more money saved, the better.


Expert Tip: When you’re planning on how much to save, incorporate business expenses too. Program subscriptions, new computers, tools, insurance etc. All the costs that were covered by a previous company will now become yours. When you’re setting your new self-employed budget, those should be included too.

Should I Keep Personal and Business Expenses Separate?


Open a bank account for your business income and pay your business expenses out of that account. This will make it easier to keep personal expenses separate from business ones, especially come tax time.


Now, what type of account you open is up to you and your bank. Most will come with fees, so look for accounts with minimum fees for maintenance, transfers, and spending.


And remember, keep all your business receipts.


Do I Take Out More Credit?


This is probably the most challenging part about moving to self-employment; using credit. Depending on what type of business you’re opening, you’ll likely need to use credit to purchase tools and equipment to get started.


Before you go solo, ask your mortgage broker or talk to your bank about setting up a line of credit. Once you move to self-employment, securing a line of credit will be harder, especially if you don’t have a consistent income yet so doing this work beforehand will save you a lot of stress later.


A line of credit will also have a lower interest rate than a business credit card. For example, most credit cards have an interest rate of 19.99 percent or higher whereas (depending on the lender) a line of credit often hover around +1-2 percent of Canada’s Prime Rate, which is currently 2.45% as of November 23, 2020.


Expert Tip: If you can, make sure you set up pre-authorized payments on your line of credit to pay at least the minimum monthly payment. If you can pay more, even better.

Do I Need More Insurance?

If you thought credit was fun, now we get to talk about insurance.


The type of business you have will determine the type of insurance you will need. Types of insurance include:

  • Errors & Omissions,

  • Privacy/Data Breach,

  • Property & Liability and,

  • Loss of business income in the event of a claim

Your business insurance will also be another monthly payment to consider in your budgeting and planning.


Additionally, you’ll most likely need to restructure your personal insurance since it will be no longer covered by your traditional employer. If you aren’t included under a significant others’ plan, you’ll need to secure a plan or plans for health and dental, accidental death and dismemberment, and life insurance.


Expert Tip: Luckily, we’ve got the inside scoop when it comes to insurance. Our sister company, Home Auto Life can help you figure out what kind of plan and how much coverage you need, all for free. And when your business for self, free is good.

When Do I Start Charging GST?


There’s nothing like getting that first cheque. Hopefully, those cheques continue to come in and soon you’ll be earning profit. But, if your bank account is doing well, that’s usually a sign you’ll be paying taxes.


In Canada, you don’t need to pay GST until you’ve earned over $30,000. There are some parameters as to when this $30,000 was made, so we recommend verifying with Canada Revenue Agency (CRA), but keep the $30,000 in mind. As you come up to that amount, you’ll need to register for a GST number. And yes, there’s a fee to set up this number.


The Government of Canada has a handy chart to help you determine if you need to register. Once you have a GST number and have reached the thresholds outlined, you will need to start charging your customers GST.


When you start charging GST, open another bank account just for putting money aside for paying your taxes. As each invoice is paid, move money to your GST account and don’t touch it until tax time. How much should you save? Generally, saving 30% of your total income is a good place to start.


Expert Tip: Remember all those receipts we told you to save? These are going to be handy when lowering your tax bill. Any expenses that went towards your business—client coffees, computers, office maintenance, fuel—you’ll be able to deduct portions of those expenses. Programs like Quickbooks or Freshbooks can help you track these expenses, invoices, and GST so you’ll have an idea of what you’ll be paying come tax time.

You’re Self-Employed Now. Time To Be Smart(er)


Becoming self-employed is exciting, and landing that first paying client feels like hugging an armful of puppies...ok, maybe not that exciting, but you get the picture.


Our top tips are to prepare as much as you can before moving to solo and to set a budget and stay within it. While the saying, “you need to spend a little to make a little” is true, you don’t want to spend a lot and only make a little.


You will face highs and lows in your business, but with the right strategy and smart planning, you’ll be able to ride the wave and come out stronger on the other side. If you’re thinking about moving to self-employment or are already there, we’re here to help, even if it’s to complain about the woes of self-employment.