In the event of a crisis, everybody should have a Cushion – By Laurence Taylor, Chair and Founder, Easy as 123
Without delivering the millionth article on ‘why the world won’t ever be the same after COVID-19’, I want to explore how those of us who are self-employed or have a portfolio of incomes might better prepare for the next inevitable crisis – possibly a second wave, maybe a different virus.
This government offers so many illustrations of what not to do (e.g. forgetting to download the 2016 document titled ‘Pandemic Response Plan’) that it’s probably best not to wait for its belated advice and crack on ourselves as we did in lockdown.
Putting fingers in our ears and going ‘la la la’, hoping ‘something will turn up’, or doing something/anything, even if it’s the wrong thing (sound familiar Boris?) rarely delivers a constructive response to a crisis.
But what I know is that self-employed people and small businesses start by cutting what we perceive to be unnecessary expenditure: marketing, new stock, and mostly any reserve we’ve created for tax/emergencies/investments.
We know we should be on top of our finances, so that we can see clearly what’s coming up in the next 3-6 months and make tough choices (including one that the current crisis has raised: is it worth even continuing?). But so very few of us are; confidence in our financial management skills is low, anxiety is high, and it’s tempting to say, ‘oh, that money will come in’ when we secretly know it won’t.
I believe the best solution is to create a ‘Cushion’ – a separate place where we build up a sum and can move funds flexibly between different kinds of savings & investment accounts – traditional savings, Flexible ISAs, SIPPs, ITs.
The most important thing in our Cushion is the tax we estimate that we need to set-aside every month/quarter/year. HMRC is often our largest creditor, but too often we forget, or put aside too much or too little, or raid the funds when we’re short.
It is vital to change those habits as HMRC moves towards quarterly tax returns and monthly payments; best to play it safe with the tax element of these funds – it’s not our money.
In addition to tax, set-aside amount for emergencies (e.g. 2-3 month’s survival take-home or 2 month’s worth of stock), plus any surpluses to invest; here we have an opportunity to make more of our funds – but be careful of the tax implications of making dividends from business surpluses, for instance.
We all start with best intentions which then whither and fall away under everyday pressures; the question is: how to maintain transferring to our Cushion as a habit in reality (and in a crisis)? I see three ways to start:
- build the Cushion into our pricing as a non-moveable/negotiable item – evaluate the costs we’ve previously seen as ‘vital’ that we can change (e.g. rent or staffing) or remove entirely if, for example, it’s better to trade online rather than in expensive premises.
- use some of the Cushion to invest, so that the funds are locked in and less easy to take out than savings.
- look at things as they are, not as we wish them to be – challenge old behaviours; keep asking ‘why?’.
I believe this is a realistic and achievable habit to get into with our financial management, which will really help us in the long-run, and help us to more easily survive in the inevitable downturns and crises slung at us by outrageous fortune.
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