Budgeting for Time Off When You’re Self-Employed
By Guli Fager, MPH
Being your own boss is a dream for many people. The flexibility to set your schedule, no supervisor to answer to, and freedom to do things the way you want to are compelling reasons to pursue self-employment. But one of the trade-offs that people make when leaving a job with a benefits package is that they must create—and pay for—those benefits on their own.
In our webinar series on Financial Self-Care, we described how self-employed people can structure personal income, retirement savings, and insurance, which are critical pieces of the “benefits package” you want to provide for yourself. Another piece of the puzzle, one that can seem intimidating, is figuring out how to actually “budget” for time off. Whether you want to be able to attend conferences, go on vacation, or take time off if you get sick, ensuring you have enough income to cover time away from work is especially important.
Many jobs offer paid time off for federal and other holidays, sick days, vacation, continuing education or professional development events, bereavement, family leave, any number of situations that allow you to continue to get paid even if you don’t come to work. How do you create that safety net if you’re the employer? Here are a couple of strategies.
Figure out how much time off you want each year. Is your favorite conference 5 days? A weeklong vacation at the beach with the kids? Do you reliably get a cold that keeps you in bed for a few days each winter? Think about the last 12 months and how much time off you took, and whether those events are likely to happen again. Let’s imagine that you want to budget for 4 weeks away from work. That means your business needs to generate 12 months of revenue in 11 months.
How do you create an additional month of revenue? There are two ways to approach this. One is to assess your fees and ensure they are set appropriately to cover time off. This isn’t greedy—whatever business you’re in, your clients want you to be at your best, and time off to relax, heal and learn is critical to that. I’ve managed budgets for organizations and “fringe” benefits—the amount allocated over and above staff salaries—is typically 20-30% of each person’s salary, to cover time off, insurance and retirement benefits.
If you don’t think you can change or increase your fees (if, for example, you’re in network with insurance companies and have a contracted rate) and don’t want to see more clients, the second approach is to review your business and personal living expenses and see if you can reduce them so that 11 months of revenue will pay for 12 months of expenses. If you can reduce business expenses, you can pay yourself more in profit. If you can reduce personal expenses, the income you take from the business will cover the time you aren’t working.
The last piece of the puzzle is protect yourself in situations that may lead to extended periods of reduced or no work due to illness or disability. While many of us may plan to take sick day here and there throughout the year due to a minor illness, serious illness can occur unexpectedly and make you unable to work for an extended period.
What if you are too hurt or sick to work for months or years? The loss of income can be devastating to your personal finances. Disability insurance is a critical part of your safety net as a self-employed professional – it would supplement any Social Security disability you might qualify for to leave you with a reduced, but manageable, income to live on. The leading causes of expended time away from work are neuro-muscular and auto-immune illnesses, though cancer and other diseases certainly come into play. Women are more likely than men to experience a disability that hampers their ability to work, and if you are self-employed, you don’t get paid for time away from clients.
Financial planning with self-employed clients allows us to figure out together the best way for business revenue to flow to your personal cash flow, accounting for time off as desired. Included in our financial planning is an independent insurance analysis, with a search of carriers to find the best disability insurance policy to protect them. We are committed to our self-employed clients having a great benefits package! We would be happy to meet with you for a free consultation to discuss any questions you may have.
Frequently Asked Questions About Paid Time Off and Benefits for Self-Employed Professionals
How do self-employed people budget for time off?
Self-employed professionals often budget for time off by building vacation, sick leave, and personal time into their annual income goals and pricing structure. This helps ensure income continues to support personal expenses even when not actively working.
Can freelancers and business owners take paid vacation time?
Yes. While self-employed people do not receive traditional paid vacation benefits, they can create their own system by setting rates, savings goals, and business revenue targets that account for planned time away from work.
How much time off should self-employed professionals plan for?
The amount varies by individual, but many self-employed professionals budget for vacation time, sick days, conferences, continuing education, holidays, and unexpected personal leave throughout the year.
How do I replace lost income when taking time off from self-employment?
Many business owners account for time off by increasing pricing, building larger profit margins, maintaining savings reserves, or reducing expenses so fewer working months can still support annual living costs.
Should freelancers charge more to cover benefits and vacation time?
Often, yes. Self-employed professionals are responsible for funding their own benefits, retirement savings, insurance, taxes, and paid time off, which may require higher pricing than traditional hourly wage calculations alone.
Why is pricing important for self-employed financial planning?
Proper pricing helps ensure your business generates enough revenue to support taxes, retirement savings, healthcare, insurance, emergency savings, and time away from work.
How can self-employed people create a financial safety net?
A strong financial safety net may include emergency savings, retirement contributions, disability insurance, life insurance, and budgeting strategies that prepare for fluctuating income and unexpected events.
What is disability insurance for self-employed professionals?
Disability insurance provides income replacement if illness or injury prevents you from working for an extended period. It can be especially important for freelancers, consultants, therapists, creatives, and other self-employed professionals without employer benefits.
Why is disability insurance important for freelancers?
Freelancers and self-employed workers often rely entirely on their ability to work for income. Disability insurance helps protect personal finances if a medical condition prevents them from earning income temporarily or permanently.
What illnesses most commonly lead to long-term disability?
Long-term disabilities are commonly caused by neurological, musculoskeletal, autoimmune, and chronic health conditions, though cancer and other serious illnesses can also result in extended time away from work.
Are women more likely to experience a disability during working years?
Statistically, women are more likely than men to experience disabilities that affect their ability to work, making disability insurance an especially important consideration for many women business owners and professionals.
How much emergency savings should self-employed people have?
Because self-employment income can fluctuate, many financial professionals recommend maintaining larger emergency savings reserves to cover both personal and business expenses during slow periods or illness.
How do self-employed professionals create their own benefits package?
Self-employed benefits packages often include retirement savings, health insurance, disability insurance, life insurance, emergency savings, and planned paid time off funded directly through business revenue.
Should self-employed people work with a financial advisor?
A financial advisor can help self-employed individuals structure cash flow, budget for taxes and time off, evaluate insurance needs, plan retirement savings, and build long-term financial stability.
How can self-employed people reduce financial stress?
Creating predictable cash flow systems, budgeting intentionally, building savings reserves, protecting income with insurance, and planning ahead for time off can all help reduce financial stress for self-employed professionals.
