Investing spare cash when you're self employed

Kevin Okoroafor
Peronsal Finance Expert
31 August 2021
6 minute read

While becoming your own boss has many rewards – or so say the 5 million self-employed people in the UK – one of the most common challenges with running your own business is looking after its finances and paying yourself adequately.

Once you’ve paid yourself and your bills, how exactly should you make the most of your spare cash to achieve your life goals faster?

One of the answers is investing.

As a self-employed person who runs his own business, I can not only say that investing helped me achieve some of my biggest life goals – including becoming financially independent with the option of early retirement – but this experience means I understand the challenges you’re likely to face so can confidently share tips to help you invest wisely.

Why bother with investing money?

When I ask people in their 40s and 50s one thing they wish they started earlier, the answer is usually consistent:

“I wish I started investing my money a lot sooner”.

More people than ever have recently realised that they need to do something different with their money going forward.

The primary reason for investing money is so that you can achieve your financial goals a lot faster. Such goals might include buying your first property, saving for more financial security or preparing for retirement one day.

Whatever your goals are, it’s critical to know what they are specifically and why they matter to you.

For example, rather than have, “I want to improve my finances” as a goal, a more specific goal could be “I want to build up a £500,000 investment portfolio for my retirement in 20 years’ time”.

Gaining clarity on your goals comes from actually talking about them.

If you’ve got a partner, carve out an hour on a Saturday morning to dream together.

If you’re single, take some time out in a different environment, reflect and write down your answers to these questions:

“What do I want out of my life? And what does that look like in numbers?”

Investing money is then part of the strategy for getting you to that desired goal a lot faster simply because investing helps money work on money and activates the power of compounding.

How to invest money (step-by-step)

Now you have some clarity on why you’re investing, let’s look at the step-by-step process that you can follow to invest your spare cash.

1. Set financial goals

We’ve covered this above. If you’re unsure of your financial goals, diarise a slot in your calendar to answer the questions in the previous section.

2. Open an investing account

Before you open an investing account, you need to first choose an investing platform that’s suited to you specifically.

If you’re starting off with investing spare cash, then you’d want a low cost investing platform that gives you as much flexibility as possible.

You then want to open an investing account. There are various options such as opening a Stocks and Shares ISA, a Self-Invested Personal Pension (SIPP), or a Lifetime ISA.

Each type of account is driven by your personal goals.

For example, if you want to build a portfolio (pot of money) that you want access to anytime you want before retirement, then you want to open a Stocks and Shares ISA.

If you’re planning on purchasing your first property or saving for retirement, then you may want to open a Lifetime ISA (provided you’re below the age of 40). Note that if you’re using the money for retirement, you can’t access it from a LISA until you’re the age of 60.

If you’re investing exclusively for retirement, you can open a SIPP. You can access this money at 55 or 57 (from the year 2028).

Each of the above accounts also differs because of the various taxable benefits available.

E.g. A SIPP is highly tax efficient because any money you put into it is topped up by the government. If you put £80 in, you get back £20 from the government if you’re a basic rate tax payer.

If you run a limited company, you can also set up a company pension scheme and contribute up to £40,000 per year into it (for yourself) from the business and it would be treated as a tax deductible expense.

If you want maximum flexibility and access to your money whilst also being able to invest it and see it grow, then open a Stocks and Shares ISA. All gains in this account are tax-free and you have a £20,000 allowance per year.

3. Decide on an investing strategy

An investing strategy is the approach that you’ll take to invest your money.

You can either invest actively or passively.

With active investing, you’re timing the market and trying to make a profit, e.g. trading, etc.

With passive investing, you’re not interested in timing the market but instead having time in the market, e.g. investing in Index Funds and Exchange Traded Funds (ETFs). You simply want to invest and forget about it so that your investment can grow over time.

Passive investing is my preferred investing approach as it’s less risky and offers you a way to invest your money without worry.

4. Pick funds to invest in

To remove exposure to having your money over invested in one company, I’d suggest avoiding picking individual stocks as a beginner.

Instead, invest in funds, which is a basket of companies. This way, your money is spread out and diversified to reduce specific risk to each of those companies.

You should aim to select funds that are cheap to invest in (i.e. less than 0.5% annual fee) and have a global focus.

To learn more about how funds and stocks work, watch this stock market for beginners video.

5. Invest consistently

Although you might actually start off with investing spare cash today, the key to winning with investing is to do it consistently on autopilot, no matter the amount.

This is what makes compounding interest really kick in over the years and helps you build wealth.

I invest my money each month via a Direct Debit to my Stocks and Shares ISA and also contribute into a pension from our business.

A good action point would be to make a commitment to an amount that you can conveniently invest each month. This could be as little as £50 to start. This commitment is not only exciting but turns a switch on in your mind and over time will become a habit.

You’ve now become a regular investor and that’s worth celebrating!

6. Budget and gradually increase amount invested

In order to invest consistently, you need to become better at managing your money.

A practical way of doing this is to learn to budget without effort. A budget is a plan for how you’re going to distribute your income each month.

Although your income might be inconsistent each month, having a budget does something magical because it forces you to not only budget your expenses but also think about where your income will come from for the month.

It’s a forward looking process that also indirectly helps you to prioritise paying yourself first.

To make this journey of investing fun, I love to gamify it. May I challenge you with the rule of 1%?

This is where you aim to increase the amount that you’re investing each month by 1% for the next 12 months. Up for it?

Again, start small.

The thing I love about this gamifying aspect to investing is that it forces us as entrepreneurs to get creative. That extra 1% could come from cutting back on takeaways in a month or from taking the initiative to win more client work.

It forces us to produce more and consume less.

Work smarter, not harder

Investing is what enables our money to work for us rather than us working for money all the time.

Although it might seem insignificant to invest your spare cash, what it does for creating new habits and changing your money mindset is priceless.

You’ll not only feel like you’re in more control of your money, but you’ll also feel confident about your future life and goals.

The key is to get started with investing today and stay consistent.

This blog post has been written as part of our Business is Personal campaign, which explores what it's like to be your own boss at this moment in time.

If you’d like to find out what kind of boss you’d be, why not take our quiz and see what you get!

Financial advice note

The information contained in this article is provided for informational purposes only and should not be construed as financial advice on any matter. You should not rely on the information published in this article. The information in this article does not take account of individual circumstances and may not reflect recent changes in the law. Do not act or refrain from acting upon this information without seeking professional financial advice.

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