Over the last few months I have met a number of talented employees who were thinking of making the transition to contracting.  This of course was more prevalent in 2008 versus today but nonetheless contracting offers many professionals the type of career flexibility that they find very appealing.  The contractor gets to choose what they do, when they work, and how much work to take on.  I, having transitioned from an employee to the ranks of the self employed, have come to understand that each carries with it some benefits and risks.  While the benefits of self employment are often what I think about I believe it is critical to address the risks where it makes sense to maintain peace of mind and focus on business.

Financial security is one of those risks.

As an employee I got used to regular pay cheques and hence predictability in earnings.  There were also benefits and pension plans to help me mitigate costs and save for retirement.  With self employment/contracting these safety nets are not included in the package but they must be looked at and duplicated to the extent deemed important and relevant to the individual contractor.

How can this be done for common (and uncommon) expenses?

Mortgage payments and most other bills are periodic and therefore require regular cash outflow.  When a contractor is working this is not an issue however in between contracts and in a challenging environment as we have today I would suggest:

  • 3 months or more of liquid funds.  Cash in a bank account, while earning no interest is the safest.  A mix of cash with laddered GIC’s is also good.  You trade some flexibility for higher interest income.
  • Savings – I like to invest in a diversified group of low management fee, no-load index funds.  I buy automatically every month and never miss the money.  This is the old ‘pay yourself first’ principle’ and over time will add up to a sizeable lump sum which is very liquid.
  • Do not borrow on credit cards.  Hold the index funds recommended above within a discount brokerage margin account and you’ll be able to borrow against them at home equity LOC rates (currently 3.50%) without any setup fees.  You can then pay this loan back after the next contract begins.  Worst case scenario you can sell the funds at no cost and pay back the loan.  Fund sales are also taxed as capital gains (50% taxable).
  • I also like to setup RRSP investments within a discount brokerage account with a mix of stocks and fixed income investments.  One rule of thumb is to set stock allocation % as (100-age).  The remainder is invested in fixed income.  For fixed income in this low interest environment I prefer individual bonds rather than bond funds.  They are ideal from a tax standpoint and easy to purchase within a discount brokerage account.  They also throw off regular income in the form of coupon payments.


For benefits:

  • Assess the economics of benefit plans which provide medical, vision, & dental coverage.  Look at group plans within organizations you are already a part of such as the Chamber of Commerce.  Be sure to shop around and buy only what you may need.   
  • Investigate disability coverage through a group plan or with one of the large insurers. 
  • Save for a vacation from time to time and take it!


These are a few techniques I have used successfully to address the financial risks of self employment/contracting. 

Thanks for reading.  I’d love to hear about any particular strategies you have used successfully (or unsuccessfully) so please send comments!        

          Next Month:

Part 2 of 3 – Want to be a Contractor?  Skills and Keeping them Current.