5 Steps To Financial Security For Contractors

 In Budgeting, Goal setting

In the Australian workforce and increasing number of employees are contractors. The more flexible and temporary type of work is the norm in some industries such as IT but this trend has also spread to some of the more traditional areas such as teaching and nursing.

There are many women who enjoy the flexibility that contract work brings, it can allow them to build a wide range of skills; work around children or allow them substantial blocks of time for travel. The downsides are well recognised, often featuring little or no employment benefits such as superannuation, annual leave and sick leave, unpredictability of income and difficulty obtaining lending.

For good or bad contracting is here to stay. Many of us will face these flexible and fluid employment conditions at some point in our careers whether through choice or necessity, so how do you arrange your finances around contract work?

Building the cash buffer

The first is the easiest to identify, but not necessarily easy to achieve. If your employment income faces significant uncertainty whether you are a freelancer, a contractor or a casual employee, then building and maintaining a cash buffer is critical. As a general rule I suggest that people maintain a buffer, whether in cash or redraw in a home loan of about 3 months wages. When you are a contractor you probably want to extend this to around 6 months. This may seem out of reach and unachievable, but take it one step at a time. This is a target to work towards, not something that will happen overnight. This cash buffer helps smooth your income, is there for your emergencies and helps bring you peace of mind that you can be financially resilience in the face of the unexpected.

Ask for what you are worth

When you are in a highly unionised or regulated workplace then your hourly rate is probably set. However some workers, particularly free lancers or contract workers may have the ability to negotiate a salary. Women as a general rule don’t fare quite as well as their male counterparts in these negotiations. The reasons for this is complex and multifaceted, it involves systemic bias, confidence and cultural norms. Eliminating the pay gap is beyond the remit of this article but there are a few things you can do to give yourself a better chance if you do have some role in the negotiation process?

Most contractors and freelancers who set their own rates start from the assumption of an hourly rate of pay, perhaps using the rate of pay they got as an employee as a guide. If this is you then ask yourself:

  1. Am I basing my hourly rate on what I was getting as an employee recently or is this hourly rate 2, 5 or 10 years out of date?
  2. Does the hourly rate cover an allowance for holidays, sick leave, long service leave and superannuation if I’m going to be responsible for these myself?
  3. Does my freelancing hourly rate build in a premium to cover the uncertainty in my income and the reduced costs and obligations that the employer bares? Are we both getting some benefit from these cost savings?
  4. Does my rate cover additional costs such as professional indemnity cover if required.
  5. Do I know what the going rate is in the industry? Can I confirm that I’m not underselling myself by talking to a trusted colleagues, talking to recruiters or by seeking out salary data.
  6. Know your minimum viable pay, based upon the next best alternative, you don’t disclose this in the negotiations but knowing your fall back position may help you to tough it out when negotiations get to the pointy end, you’ll be in a better position to know whether to accept a less than ideal contract or whether to walk away

Make the most of tax deductions

Have you thought through the potential tax deductions available to you as a contractor or freelancer?

It’s never a good idea to spend for the sole purpose of claiming a tax deduction. If you spend $1, save 30c in tax, you are still 70c worse off. However, if it’s money you were going to spend anyway or it’s a good investment in your long term financial security, then it’s certainly worth thinking about the tax implications. For instance, if you’re intending to head overseas could you incorporate a study tour or conference which is relevant to your income? You might be able to build some valuable networks, refresh your skills and get a tax deduction on some of the costs. Keeping receipts for home office supplies or for a laptop that you need for work may be a valid tax deduction. Depending upon how you are paid and where you regularly work, some of your travel costs may even be tax deductible. There’s no point being silly about it, the last thing you want is to be caught out in a tax audit, but have a chat to your accountant or consult the ATO website for the range of costs that might be tax deductible to you.

Get your timing right

It’s an unfortunate fact of life that some things are just a little more difficult when you are a contractor, such as taking out a loan. When a company needs to assess whether you are a financial risk to them, being a contractor makes it a little more complicated than your run-of-the-mill employee. It’s true that loan applications do tend to take longer, and require more work but it’s not impossible. You just need to make sure you allow yourself more lead time to complete these steps, allow them more time to consider your application and be prepared for a bit of strong negotiation. Having said that timing is everything. If you just finished up on a contract and are between gigs, then without a miracle (or a sizeable existing asset base) it’s unlikely the bank is going to give you a new loan. One month into a 12 month contract, the bank will probably feel rather differently. It is ironic that it’s between gigs that you have the time to follow things up, but it’s the time when you are less likely to be successful. Having said that, being able to demonstrate a consistent pattern of earnings and getting help from a company experienced in helping self-employed and contractors can make a big difference to the final result.

Keep your networks and skills fresh

It’s important for all workers to keep their networks and skills fresh, but the natural cycle of contracting makes it critical. You will probably need to invest your own money in the occasional course to make sure you are up-to-date or you may find that you can get some of your skills polished by judiciously choosing your next assignment, to fill a gap or extend your repertoire. Like a sales person you need have one eye on the job you’re doing and one trained on where the next contract may come from.

LinkedIn (like it or hate it) has made the job of keeping in touch and extending your professional network much more straightforward. Employers and headhunters are increasingly using LinkedIn to search for new candidates and at the very least check your online credibility (so make sure your LinkedIn profile doesn’t contradict your CV). The benefits of LinkedIn however go beyond the electronic CV aspect. LinkedIn allows you to stay connected with colleagues and associates long after they leave their current employer, it will give you the prompt to congratulate them when they get a new job, receive industry recognition or publish an article. Taking a few moments out of your week to say congratulations, it keeps you front of mind when they hear of a new contract that you suit you. The other aspect of LinkedIn is that you can take the opportunity to follow some of the key thought leaders in your industry, hear their views and keep up to date with the latest themes and news. As a contractor you will probably go to a lot more interviews than the average employee, being seen as well-connected and up-to-date may make a significant difference to your ability to get the plum assignments and negotiate better rates.


Contracting, like any form of self-employment has its ups and downs. The flexibility and freedom does come with some barriers and uncertainty, but that doesn’t mean you have to forego your financial security and independence. Some things that are worth going after, may take a little more work and planning.

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