Unlike salaried employees, self-employed Canadians must plan for irregular income, unexpected expenses, and retirement largely on their own. Building a substantial cash reserve should be a financial priority before investing in the stock market.
Aim for six to nine months of essential expenses
Self-employment comes with financial trade-offs. You do not receive employer-paid vacation or sick leave, workplace health benefits, or a company pension. Sole proprietors also typically lack access to regular Employment Insurance (EI) benefits when work slows, although eligible individuals can opt into EI special benefits for circumstances such as sickness, maternity, and caregiving.
You must also cover both the employee and employer portions of Canada Pension Plan (CPP) contributions. Meanwhile, clients can pay late, contracts can disappear, and business expenses can pop up without warning.
That is why a practical target is an emergency fund covering six to nine months of essential living expenses. Depending on your household size, housing costs, and location, that could mean approximately $21,000 to $72,000.
Calculate your target using necessities such as mortgage or rent payments, utilities, groceries, transportation, and insurance. If your income fluctuates significantly, you support dependants, or your industry faces seasonal downturns, consider aiming toward the higher end.
Keep this money in a safe, accessible high-interest savings account. An emergency fund helps prevent you from selling investments at a loss or borrowing at expensive interest rates during difficult times.
Also remember to budget separately for income taxes, GST/HST remittances where applicable, and upcoming business expenses. Your emergency fund should not be money you have already committed to the government or your business.
Invest for long-term wealth
Once your cash reserve and near-term obligations are covered, you can put additional savings to work. A diversified portfolio of established Canadian dividend stocks could provide a combination of income and long-term capital appreciation.
One company worth looking into is Intact Financial (TSX: IFC), Canada’s largest property and casualty insurer and a leading provider of specialty insurance internationally. Its business generates underwriting profits when premiums exceed claims and expenses, while its investment portfolio contributes additional income.
The company’s historical performance is noteworthy. Over the past decade, its average return on equity exceeded that of its peers by 6.7%, while net operating income per share grew by approximately 12% annually. Intact has also demonstrated a commitment to dividend growth, with a reported 20-year dividend growth rate of roughly 11%.
At $261.50 per share at the time of writing, the stock offered a dividend yield of roughly 2.2% and traded at a 15% discount to the analyst consensus price target.
Interested investors can research the company until next week,k when Intact Financial will be reporting its third-quarter results on November 4.
Foolish takeaway: Build a cash reserve before investing
Self-employed Canadians should prioritize liquidity before pursuing investment income. Aim to save six to nine months of essential expenses, keep tax obligations separate, and maintain sufficient business cash flow. Then invest additional savings in a diversified portfolio suited for your risk tolerance and investment horizon.
