The Freelance Blueprint

  • How to Manage Your Finances as a Freelancer

    How to Manage Your Finances as a Freelancer

    Finances are a very boring topic and most of the time people tend to avoid working on their finances because of that. Money also has a bad reputation: Those that have too much are “bad people” and those that don’t have enough are the “lazy” ones.

    But once you get to grips with your finances, you will gain so much more freedom. Getting started is very overwhelming. But it’s not as difficult as people think. Once you’ve put some systems in place, you can just sit back and let money do its thing and grow on its own.

    Coins in detailed view stacked

    Sorting out your finances will lead to financial freedom, better decisions and your future self being very grateful.

    Disclaimer

    I’m not a financial advisor, I’m just speaking from my own experience based on what I’ve learned in the last 4+ years as a freelance UX Designer. Use the information below to learn about money and how you can make the most of your finances from a business perspective. Nobody will be as eager to make you more money than yourself, so having a good foundation of financial knowledge will help you achieve your goals faster.

    Alright, so let’s start with the basics:

    Separate your private money from your company’s money

    Don’t think of the money you earn as a freelancer as “your money”. It’s your company’s money. You can pay yourself a salary and dividends from it. But keep that money in separate accounts.

    I’m using Starling for my business. The account was set up within minutes and I’ve not had any issues with Starling since the last 4 years I’ve had an account with them.

    Another reason why it’s good to keep those accounts separate is because you’ll think differently of how you spend it. If you consider investing in an online course or tickets to a networking event, paying for it from your private money might feel a lot. But using your company’s money for it (which then leads to tax deduction 💪 ) will make it easier for you to invest in what’s needed for your business.

    💩 Start to build a financial buffer - aka a ‘shit happens’ fund

    If we’ve learned one thing in the last few years, it’s that things can change out of nowhere. It’s good to have a safety net - ideally tied together with a mix of easily accessible cash and some money that you can only access in a certain amount of time in the future.

    ☔ How much money should I put into my rainy days bucket?

    I recommend to have a minimum of 3 months of what you’d spend on a normal basis in instantly accessible savings. 3 months is usually a good buffer until you find your next gig.

    ☝️ But keep in mind, if you’re like me and you send your invoices at the end of the month with 30 day payment terms, it means that you will likely see your money 2 months after you’ve worked for it. So keep an eye on your cashflow 👀

    Ideally, just for extra peace of mind, have 6 months worth of savings. What I do is I have 3 months worth of costs that I know I have to pay (things like food, accommodation, insurances, software subscriptions I need for the business) in a bank account in a separate savings bucket.

    On top of that, I have a “95 Day Notice” account. This means, to access the money, I have to give 3 months notice before I get it back to my account. Might sound odd to some, but this account pays me interest 🤑 and it makes me think twice before I withdraw anything. So far, I haven’t had to draw anything from it yet 🤞

    🤑 How do I start a financial buffer?

    The easy answer: You put the money into an easy-access account and don’t touch it!

    The tough answer: You need to get that money first. Do you already have some savings that you can put into a bucket separate from your main bank account? Monzo (this is an affiliate link, click to get £5 once you join – UK only) and Starling do that quite well. You can also round up your spending to go into your rainy days bucket.

    Pro tip: Open a separate bank account that you transfer the money into and don’t take that bank card with you. This way you will only touch that money when you really need it. Make sure that money sits in an easy-access account.

    What is an easy-access account?

    As the name suggests, it’s an account where you can easily access your money. For example the cash you have sitting in your main bank account.

    How to manage irregular income

    One of the things I hear a lot about why people are scared of going freelance is the irregular income. And every time I wonder: Why are you worried about irregularity when even your lowest income months will likely bring you more money than your last permanent job?

    Why are you worried about irregularity when even your lowest income months will likely bring you more money than your last permanent job?

    I’ve tripled my income since going freelance. And I’ve just had a catch up with my accountant today and just found that in the last financial year of my limited company, I’ve had a 6-figure revenue 🤯

    For transparency: revenue is not the same as profit! I’ve also hired a sub-contractor which was contributing to the higher revenue, but she got a big chunk of that too, which lead to more expenses. But that’s a different story for another article.

    👵🏻 Let’s talk about the future

    Nobody likes to talk about pensions, especially because we’re unlikely going to see much of it once we’re old. But it’s important to have some savings for retirement.

    Most freelancers I talk to don’t pay into a pension.

    If science and the knowledge in health care continues to grow, I bet we’re going to turn about 90+ years old if we’re not unfortunate enough to be hit by a bus before then. So let’s make sure we spend the winter time of our lives with a comfortable financial buffer.

    Problem is, most freelancers I talk to don’t worry about their pension. They’re so concentrated on the here and now, on finding the next client and getting the work done, that they don’t look into longer term finances.

    Make sure you have something in place for retirement

    I’m having a personal pension with Moneybox, one I pay into from my Ltd via Penfold (a pension specifically designed for freelancers). And another one with PensionBee (Because I wasn’t able to pay into either of the pensions I already had from the umbrella company).

    This is not the ideal way to do it. Consider accumulating all your pensions into one pot. But having several pots is better than not having any.

    Let’s talk about budgeting

    Oh my God, I said the B-word 🫢

    Before you get going with investing into a pension or outsource to sub-contractors, you have to look at the money currently coming in and what you can do with it. This whole section is a numbers game and could be a bit boring, so if you’re not interested in budgeting, scroll down until after the 3 dots.

    If you want to budget, then these ratios might help you

    There is the 20–30–50 rule you can use for your personal finances, which are:

    50% of your income to be spent for your essentials (rent, food etc.)

    30%for your nice to haves (new clothes, eating out)

    20% for your savings

    This budgeting rule works well for employees. But since going freelance, I learned that there’s more areas to consider.

    Now that I’m paying myself dividends through my limited company, I also have to pay personal income tax. My income is also much higher than when I was an employee - and I managed to maintain my lifestyle, which means I’m earning more but I’m not spending more 👉 Which means I have more money that I can put into my savings. So personally, I’m dividing my income like this:

    30% for essentials

    30% for savings

    20% for nice to haves

    20% for personal tax

    It might sound a lot to put 20% aside just for tax. But I’d rather have too much on the side than not enough.

    Because of one inside IR35 gig, I got a big tax rebate last year. So I didn’t have to spend the 20% I’ve put aside for tax initially. So that money went straight to my ISA and LISA (highly recommend opening both, you can do this very easily with the Moneybox app if you’re UK based).

    But normally, you have to pay part of this year’s tax upfront for the following tax year, which I didn’t have to do last year due to the tax rebate. So now I have to pay this year’s taxes PLUS the 50% for the next tax year PLUS the year after. So make sure you have some money aside for the taxman.

    If it turns out that you don’t have to pay as much tax as expected, you can always put that money into your savings. Which is always a pleasant surprise.

    But you just said to split personal and company money?

    That’s correct. I have a different budgeting rule for the money that comes in for my company. Once the money comes in, I split it into following buckets:

    30% for expenses (software, hardware, coffees, wifi, accommodation)

    20% for company tax

    20% to reinvest in my business (coaching, courses)

    16% for VAT

    14% for cash flow (to make sure I can pay the sub-contractor in case my client doesn’t pay on time)

    You don’t have to stick to the ratios I’ve picked for myself. I assume that if you’re reading this, you’re less than 2 years into your freelance business. So unless you’ve had a really great first year, chances are you won’t have to pay VAT just yet. So your split would look differently.

    At the beginning of your freelance career, I recommend to put most of your income aside to build a financial buffer. Once you’ve got that, invest more into developing your skillset. And I’m not just talking about the skillset for the freelance service you offer (in my case UX Design) but also in marketing, SEO, copywriting, public speaking.. anything that will help you communicate with clients and put your work out there.

    Want to learn more about freelance finances?

    I’ll be soon launching my first online course specifically for freelancers to cover all things you need to get started with a successful freelance career.

    The course won’t be a typical video course that you watch in your own time. Instead, it’ll be quick 30min zoom calls (because I know we can’t get enough of those) with a small group of other freelancers who are also at the beginning of their freelance journey.

    🗓 Each week, we’ll cover one of the finance topics (see below) where I’ll give you an overview of 10–15 minutes and we’ll end the session with a Q&A where you can ask your personal finance questions.

    The sessions will be recorded in case you can’t make it to the live class. But that also means you won’t be able to get your personal questions answered.

    This group will help you create a network with other freelancers at a similar stage, join a community and support one another.

    Why are you doing this?

    I realised that what I’ve learned about finances is quite useful for friends and people I’ve met at the beginning of their career. And I love seeing people thrive. But also, I want to stop trading my time for money and work on passive income. So this will - in the long run - turn into a video course people will be able to watch in their own time.

    Topics we cover in the Freelance Finance Course

    • Money mindset
    • Saving for your business
    • Taxes (UK focus)
    • Business structures (Ltd, sole trader & umbrella)
    • Defining and negotiating your rates
    • Pensions
    • Earning interest
    • and more

    Is this course for me?

    The course is focussed on how to manage your finances as a freelancer in the UK. You’ll still learn useful information even if you’re not based in the UK. It’s mainly the tax section that has a UK focus.

    Anything else?

    Again, I’m not a financial advisor. So I recommend that once you have a good understanding of what you need and what’s possible, to book a session with a financial advisor.

    The first session is oftem free. You can then see if you want to continue taking more sessions from there. I’ve had 2–3 of those calls and at the end, all the advisors said i’m already set up with what they’d normally put in place for people, which is:

    • Pension plan
    • Insurances for when you get ill/sudden death/income protection
    • Savings plan

    If you made it this far

    Thanks for reading. If you want to learn more about freelancing, give me a follow. You can also read more on my blog or instagram. You can also sign up to my Freelance Blueprint Newsletter.

  • How to manage irregular income as a freelancer

    How to manage irregular income as a freelancer

    Irregular income is one of the most common reasons why people are scared of going freelance. And each time someone asks me about it I wonder why they are worried about irregularity when even their lowest income months will likely bring them more money than their last permanent job?

    Why are you worried about irregularity when even your lowest income months will likely bring you more money than your last permanent job?

    Managing your money as a freelancer can be very overwhelming. But if you put the right systems in place, you do a bit of work once and everything else happens automatically.

    Irregular income isn’t the problem

    If you think of big companies like Amazon or Facebook, they also deal with irregular income. And despite their revenue fluctuating each month, they still manage to pay their staff and cover company bills.

    Why is that? Because they have several income streams and know how much money is definitely coming in and how much is likely coming in. And they also know how much things cost them.

    If we look again at Amazon: Subscriptions like Amazon Prime allow them to know a definite income. Yes, the people that sign up each month, or unsubscribe will vary. But they have data from previous years, so they can make good guesses of when people sign up (I assume just before Christmas) So there is certain revenue coming in from that business model.

    And on top of that, they also have additional revenue based on the amount of items people order.

    How to control your income

    So if big companies and other freelancers manage irregular income on a regular basis (see what I did here 🙃) you can do it too.

    By now you have probably realised that irregular income isn’t really the problem. The problem is when there is no income or if there’s cashflow issues and you can’t cover your expenses. 

    In this article, you will learn a few techniques to help you manage irregular income.

    The real problem is cashflow

    What is cashflow? It’s basically the money that comes in versus the money that goes out of your company. If you don’t have enough money coming in to cover the costs of everything that goes out, that’s where the problem lies.

    The problem isn’t irregular income, it’s cashflow

    The same way you might have irregular payments coming in each month, you will have different expenses to pay for too. Some will be fixed, like your Adobe or Figma subscription if you’re a designer. And other costs will depend on circumstances, like sub-contractor costs which only accumulate when hiring a sub contractor.

    The problem starts when you can’t cover your expenses because one of your clients hasn’t paid their invoices or you didn’t consider upcoming payments like your taxes.

    Here’s what you can do to make your irregular income regular

    1. Separate your company and your personal finances
    2. Start building a buffer
    3. Analyse your income
    4. Analyse your expenses
    5. Put your money into buckets
    6. Calculate how much you need
    7. Set automated payments to your personal bank account
    8. Put money aside for taxes for your personal account.

    1. Separate your company and your personal finances

    If you haven’t set it up already, I highly recommend to set up a separate bank account for your business. It’s mandatory to have a business account when you work with a limited company, but if you work as a sole-trader, I still highly recommend to have a separate bank account for all the money coming in.

    This way you will think of your company money differently. If you personally pay £500 for an online course, it might sound like a lot. But if you pay for it from your company, expense it as training (and therefore pay less tax) you will also see it as an investment with a good return of investment (ROI).

    2. Start building a buffer

    This is especially hard when you just get started. But once you got a few invoices cleared and covered your company’s costs (software, hardware, accountant) set money aside for your ‘shit happens’ fund. Don’t spend all the money that comes into your account. Keep a buffer, you never know when you need it.

    I currently leave about 3 months worth of revenue in my bank account for cash flow. This way I can be certain that once my salary, dividends and sub-contractor costs as well as expenses (hosting, software etc.) are covered. 

    When shit hit the fan

    Only a few months ago, I had a little scare. One of my clients hasn’t cleared their invoices for 2 months but I’ve already paid my sub-contractor which caused issues with cash flow and I was in a bit of a wobble. 

    I do have a bunch of money in my company account but it’s in a fixed savings account (the money I set aside for taxes) so I couldn’t access it.

    Luckily, I have one client that usually pays within a week, even though they have a months time. So it turned out okay in the end. But if they would’ve just paid one day later, I would’ve been in trouble.

    3. Analyse your income

    If your income fluctuates, that is fine. Celebrate the good months. Learn from the low months. But also, see why those months are good or bad. Did you do something differently? Where did those clients/projects come from? Can you create more of those leads in the future?

    Try to find patterns. In the last 4 years of freelancing I noticed that demand fluctuates, especially in the UX freelance market. Christmas and summer is usually quiet, likely because people are on holiday. Things pick up around March/April when the new financial year starts and people receive their budgets.

    But also, the last few years are probably not the best ones to use as a foundation, because demand has been extremly high over lockdown.

    4. Analyse your expenses

    Review your expenses regularly. I usually do a clean out over the Christmas holidays where I analyse what subscriptions I’ve used in the past year and if there are any cheaper/better alternatives.

    It’s probably better to review those expenses more than once per month.

    Consider your time out of office

    When you analyse your expenses, have a look if you find any irregularities. There might be some months where you earn a bit less. For me, that’s the case when I’m going on holiday, since us freelancers only get paid if we work.

    I miss paid annual leave, but hey, this is why we have a higher day rate, to cover for things like that.

    Some months you might have more expenses than usual. My situation varies a lot because I’m a digital nomad. So I’m not having the same costs each month. If I’m staying in Thailand, rent, food, gym memberships etc. might accumulate to about £800/month. While I stayed in Lisbon, that quickly added up to around £3,000 (yes, Lisbon accommodation prices have skyrocketed and booking a separate coworking hasn’t helped 😅) but across the year, there’s a good balance and I’m not spending that much.

    Make sure you have enough of a buffer (see above) to cover for the months where you have higher expenses.

    5. Put your money into buckets

    Organising your money to make sure everything is covered (expenses, taxes, salary etc.) is important.

    Some bank accounts make this quite easy, like Starling and Monzo. Highly recommending those. Personally, I use Starling for my Limited company account and their customer services is very fast to respond, you can do everything on the app and it’s very straight forward to use.

    How much should I put aside into each bucket?

    This varies based on your needs and goals. But 20% of your revenue should go straight into a bucket for the tax bill. Do not withdraw that. You don’t want to face a situation where the tax bill arrives and you realise you can’t cover it. You only have to pay 20% on the income, not on your revenue, but putting 20% of your revenue aside means that you’re definitely covered and anything that’s left over is a little bonus.

    If you want to learn more on how to budget your freelance income (both from your company account as well as your personal account), have a look halfway through this article.

    6. Calculate how much you need

    How much do you want to earn per month? And how much do you actually need? This is about your personal costs, not your company’s costs. Have a look at your fixed costs, like rent, food and everything you need. Then double that. This should pay you enough to cover the minimum as well as nice to haves (eating out, holiday money etc.) and some extra cash to add to your personal savings (ideally you’ll have an ISA or LISA or both).

    Once you know how much you want to earn per month, we can look into how to turn that into “regular income”.

    7. Set automated payments to your personal bank account

    Once you’ve finished the step above, schedule those payments from your company’s bank account to your personal bank account.

    Consider your business structure

    If you’re working as a sole-trader, you can pay yourself a set salary. If you’re like me and work with a limited company, you will be better of paying yourself a mix of salary and the rest in dividends.

    Currently, I’m paying myself a salary of £xxxx which is the most tax efficient amount according to my accountant (I highly recommend her, if you’re looking for someone, just contact me and I’ll give you her details. We’d both get a month for free as well once you onboard.)

    And if I need anything more than that salary — and if you’re based in the UK chances are you will — set up automated payments from your dividends.

    Make sure you’re aware of the different tax brackets. If you pay yourself more than xxxx dividends you’ll have to pay more tax. And if you get any dividends outside of your own Ltd, this counts towards the same amount.

    8. Put money aside for taxes for your personal account

    This one is only relevant if you’re working with a limited company, so skip this paragraph if you don’t.

    But you might ask yourself: “I’ve already paid taxes, why do I need to put more money aside for taxes?”

    Well, the sad thing is, the taxes you paid are your company’s taxes. The salary and dividends you draw will be taxed personally. So there’ll be another 8.75% (if you’re in the basic rate) on dividend income to pay and depending on how much salary or dividends you draw, that will add up too.

    Talk to a financial advisor

    I’m not a financial adviser, I’m just a freelancer who is talking about her own personal experience and learnings. Please seek financial advice or ask your accountant for more information.

    Arlight, this is it. This is how you manage your irregular freelance income, even when it’s different each month.

    If you made it this far, thanks for reading, I hope you got some value out of it. If you want to learn more about freelance finances, check out Financial Freedom for Freelancers (FFF), the 7 buckets you need to fill to make the most of your finances.

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