People who start a business rarely do it just for the money. You want to make something you believe in, be your own boss, see an idea grow. That passion is a huge engine. It carries you through long days and difficult clients. But it also has a blind spot: it makes it easy to think things will “work out fine”, until a client doesn’t pay, a contract falls through or a bill for tax or compulsory contributions lands on your doormat.
A financial buffer is not a lack of faith in your business. It is precisely what protects your passion.
Passion as an engine, and as a risk
Melissa Cardon and colleagues (2009) described entrepreneurial passion as a powerful source of energy and perseverance that helps entrepreneurs overcome obstacles. At the same time, research in the tradition of Robert Vallerand shows that how you experience that passion matters. With harmonious passion, your business fits into your life and you can also switch off. With obsessive passion, your self-worth is tied to your business, resting becomes difficult and the risk of exhaustion and tension at home rises.
In a review study, Ute Stephan (2018) brought together the research on entrepreneurs’ mental health. The picture is mixed: entrepreneurs often experience a great deal of autonomy and meaning, but also specific sources of stress, with financial uncertainty coming up again and again. A buffer doesn’t remove that uncertainty completely, but it does make it more bearable.
Why a buffer is more than money
In Scarcity (2013), Sendhil Mullainathan and Eldar Shafir showed what shortages do to your thinking. If you constantly have to do the sums to make ends meet, you have less mental space for planning and creativity, and you are quicker to make decisions that help in the short term but prove costly later. For an entrepreneur, that can mean taking on a job that doesn’t really suit you, charging prices that are too low or postponing investments your business needs.
So a buffer also gives you something that is hard to put into figures: the freedom to say “no”, to sit out a bad month and to make decisions based on your vision rather than out of panic.
Wout and the summer without work
Wout (33) started out as a self-employed graphic designer three years ago. The first year went better than expected. He took on everything, worked many evenings and spent his income fairly freely: a new laptop, a more expensive flat. When two regular clients froze their budgets over the summer, his turnover almost came to a standstill. In the same period he received a bill for tax and contributions for his first year, because his income had been higher than the figure his advance payments were based on.
“There were nights I couldn’t sleep,” he says. “Not because I no longer enjoyed my work, but because I had no idea how I would get through the next few months.” He applied for a payment plan and got through the summer, but decided to do things differently from then on.
Today Wout works with three accounts. All his income comes into a business account. From every paid invoice he immediately sets aside a fixed percentage for taxes and compulsory contributions, in a separate savings account. On top of that he pays himself a fixed amount every month, even in good months, and whatever is left goes into a buffer for lean periods. “My income still fluctuates, but my life doesn’t as much any more.”
In many countries, self-employed people first pay their tax and compulsory contributions in advance, based on an estimated income. Once your actual income is known, a final bill follows: if your income was higher, you pay the difference. Exactly how this works differs from country to country. Find out about the rules in your country. An accountant can help you estimate what you need to set aside.
How to build a buffer that suits your business
- Keep business and personal separate. A separate account for your business gives you an overview and stops you spending the money for your taxes without noticing.
- Set money aside with every payment. From every paid invoice, immediately put part aside for taxes, compulsory contributions and VAT (if you are VAT-registered). The right percentage depends on your situation. Your accountant can give you a realistic estimate.
- Pay yourself a fixed salary. Choose an amount you can keep up even in leaner months. Whatever extra comes in during good months feeds your buffer.
- Set your buffer in months, not in euros. Work out what you need at a minimum each month, personally and for the business, and choose how many months you want to be able to bridge. If your work is seasonal or your turnover depends heavily on a few large clients, choose a wider margin. The Emergency buffer tool helps you turn that into a concrete amount.
- Know your safety nets. In many countries there are safety nets for self-employed people who have to stop or are in serious difficulty, such as a temporary benefit or support from specialist organisations. Find out about the rules in your country. Just knowing that this help exists brings peace of mind.
A buffer protects your passion
Drive and caution sometimes seem like opposites, but they reinforce each other. An entrepreneur with a buffer can sustain their passion for longer, because a single setback doesn’t immediately put everything at stake. That is financial self-care for the self-employed: making sure your business keeps giving you energy rather than costing you sleep.
Do you notice that money worries are spoiling your enjoyment of your work, or are you sleeping badly because of the uncertainty? Talk about it, with the people close to you, your GP or a professional. A Financial Well-Being coach can help you set out your income, reserves and personal budget clearly side by side, so that you can get back to doing what you are good at with peace of mind.