An entrepreneur’s guide to paying your future self first

How often have you promised yourself you’ll try to save more and then, before you know it, another month has rolled by, and you haven’t saved a penny? Although you may have bought yourself some new clothes, meals out, or even booked a holiday.

And the cycle continues. With every month that passes, you fail to pay your most valuable asset – you.

This happens to everyone, irrespective of income level.

If you’re an entrepreneur and are in the cycle of failing to save for your future self, this guide is for you. Read on and get ready to change your mindset and pay yourself first.

Make paying yourself first an intention

When you’re running your own business, it isn’t always going to be easy to put money aside for your future self when you have expenses that seem more pressing. Therefore, it is important to be intentional about saving for your future.

First, make sure you have an emergency fund with cash you can use if you suddenly face unexpected cash flow problems or which you can use towards new opportunities for your business. This way, any money you save will be money you can afford to “lock away” for the long term.

“Obviously, you need emergency cash. But if you’re sitting on a lot of capital, why is it not doing anything for you? I always try to highlight the importance of making money work for you now. And if you need it, you can take it.” Top 3 ways to save and pay your future self

While you may save money into a bank account, this isn’t the ideal way to save for your future over the long term. The interest rates on high street bank accounts are pitiful right now and don’t protect you against inflation.

“Saving for your future self is all about the flow. So, move from one product to the next and make sure you use all the tax advantages.” – Tim Ross

Make sure you’re paying into a vehicle that will serve you and protect your wealth over the long term using these three solutions:

Set up a Stocks and Shares ISA

Everyone over 18 and resident in the UK can invest up to £20,000 in a Stocks and Shares ISA (for the tax year 2021/22).

The beauty of investing in an ISA is that your money can grow tax-free. When you want to withdraw money from your ISA, you can do so without incurring Income Tax or Capital Gains Tax.

The tax benefits of investments held in an ISA mean they can also end up being more tax-efficient than your pension.

“It’s a good idea to top up your ISA every year before paying into your pension because that’s liquid. As an entrepreneur, you’re going to want to use that tax advantage annually.”

Arrange a pension

If you aren’t already paying into a pension, now is a good time to start.

Each tax year, you can save up to the Annual Allowance of £40,000 or 100% of your earnings, whichever is lower.

If you have a high income, you may be subject to the Tapered Annual Allowance. If your adjusted income is more than £240,000, your Annual Allowance is reduced by £1 for every £2 your income is above the threshold.

When your income exceeds £312,000 a year, you might only be able to save £4,000 into your pension each year without tax consequences.

We can help make sure you optimise all the tax relief available on your contributions and that your pension savings are well invested.

The investment performance of your pension savings can make a big difference to the amount of money you may have to spend in retirement, so it’s worth taking the time to invest your money in the right way.

“Make sure that if you put money into a pension, you’re not going to come back and say I need that money.”

Use Venture Capital Trusts or the Enterprise Investment Scheme

Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS) both carry healthy tax incentives. This makes them a good option for saving for your future self if you have already optimised your ISA allowance and pension contributions.

VCTs allow you to invest in small or early phase businesses that are unquoted or listed on AIM, the London Stock Exchange’s market for growth companies. Because the government is keen to encourage support for these small, developing businesses, they offer generous tax benefits.

EIS is a government-backed initiative offering tax relief when you buy new shares in qualifying companies. This can be a good option as it allows you to invest in shares in small companies with the potential to grow to many times their current value.

This often makes them a good option for entrepreneurs who are more comfortable with the risks involved in backing early stage businesses and are prepared to stay invested for the long run.

Investing through EIS also comes with valuable tax reliefs. These include upfront Income Tax relief, tax-free capital gains, loss relief, Capital Gains Tax deferral, and Inheritance Tax relief.

Take the time to imagine your future self

Many of us are so focused on the here and now that it’s hard to imagine what our future lives may look like. But if you keep delaying thinking and planning for the future, you could miss out on valuable opportunities to ensure life is comfortable once you retire.

Many of the clients we talk to have only a vague notion of what they’d like to do when they retire. Often when they meet with us, it’s the first time anyone has specifically asked them about their long-term future goals and aspirations.

One thing entrepreneurs find useful with financial planning is its ability to give clarity to their financial situation now, and how that might map onto their future finances.

“With a cashflow model, we’ll be able to show you your future in a bit more clarity.”

The single biggest advantage of working with an expert financial planner is that you can delegate the task of looking after your wealth. They will take a holistic approach to your financial health by optimising tax savings and planning for the future you desire.

Working with the right expert will also free up your time and mental capacity, allowing you to focus on what matters most to you now – growing your business.

If you do only one thing, set up a regular payment to an ISA

It’s not always easy to prioritise where your money should go. Your business may still require regular investment, or you may have other outgoings that seem more pressing than saving for the future.

But doing nothing is the worst thing you can do.

If you’re limited to how much you can afford to put away each month, start small.

If you do only one thing, set up a Stocks and Shares ISA with a direct debit to send a regular amount you can afford every month. Even if it’s only £50, it’s a step in the right direction.

“Start with an ISA. Even if it’s a small monthly amount, you need to start to build capital. This is something I recommend to anyone who wants to start investing.”

Saving for your future self is a mindset

Warren Buffett famously said: “Do not save what is left after spending, but spend what is left after saving.”

This is what paying your future self first is all about.

“Investing for your future often requires a fundamental change of mindset. You pay your mortgage every month, pay off your credit card, and pay for your car. You need to save towards your future too.”

Think of the money you save as an expense. This can be helpful, as it means you’ll mentally add it to your regular monthly outgoings. The advantage is that it isn’t an expense, but an investment you’re paying forward.

If you’re looking for a financial planner who can help you find the best ways to save and plan for the future you desire, please get in touch. Email hello@firstwealth.co.uk or call 020 7467 2700.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.