Canada’s self-employed sector, numbering around 2.7 million, accounts for 13% of the country’s total workforce, according to Statistics Canada. Many of these individuals have a strong entrepreneurial spirit, while others use technological advances to earn a living. Their work spans both traditional and modern roles in the professional world.
Gig workers and freelancers fall on the modern side. Small business owners, contractors, health professionals, consultants, traders, and other professionals make up the other end of the spectrum. Collectively, this sector contributes significantly to the economy each year.
If employees in the private and public sectors complain about rising living costs, self-employed individuals have to navigate the same economic conditions to make ends meet. However, the situation is harder without employee benefits and a predictable paycheque. You need to work double time to maintain your income.
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Baseline emergency cash buffer
Self-employed individuals are at a disadvantage, especially during emergencies. Income depends on market cycles and seasonal demand, so saving for a rainy day often takes a back seat. Still, an emergency cash buffer provides a safety net for unexpected or unbudgeted expenses. Moreover, it would prevent borrowing or increase credit card debt.
Unlike employed individuals, freelancers have unpredictable, irregular, fluctuating, or sometimes zero income. Because of this income volatility, financial experts suggest a cash buffer equal to 6 to 12 months of living expenses. However, medical practitioners and retainer-based consultants can make do with less, or about 3 to 6 months, but not project-based or seasonal workers.
Need for a larger reserve
Primary risks in the self-employment sector include client loss or retention issues, delayed payments, and economic downturns. You can’t take time off from work because there is no paid leave. Because of job instability, you need a larger emergency fund.
Business owners can use the emergency fund to cover operational and personal expenses while waiting for receivables. It also helps to keep a separate business operating buffer. For independent contractors and freelancers, expect some companies to cut third-party vendor contracts first or trim discretionary spending when recession hits.
Save to invest – leverage available financial tools
The mindset of “saving to invest” isn’t reserved for salaried employees. If finances allow, self-employed individuals can build an emergency buffer and set aside cash for investments. This is an essential strategy to manage fluctuating income or generate more.
Canadians can invest in stocks and leverage their Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA) contribution rooms to meet long- and short-term financial goals.
For example, a $5,000 investment in Diversified Royalty Corporation (TSX: DIV) is money well spent and will go a long way. The $777.7 million multi-royalty corporation collects royalties from prominent franchisors with established businesses. It owns Mr. Lube + Tires and has seven active royalty partners.
The industrial stock in the specialty business services industry trades at $4.12 per share and pays a generous 6.9% dividend. With its monthly payout schedule, your $5,000 will generate $28.75 per month. You can opt to reinvest the dividends to compound your principal and collect larger payouts down the road.
Maintain an adequate cash reserve
Creating and maintaining an adequate cash reserve buys financial security, especially if you’re not employment dependent. Also, saving to invest will boost financial resources. Align your target buffer with your income volatility.
