You can either send invoices manually or automate them.
Let me show you how ⬇️
Manual vs automated invoices
When it comes to chose whether you do something manually or automate it, I usually suggest automating it: It’ll safe you time and you won’t have to think about it.
But: When it comes to invoices, I haven’t found a platform yet that works for me. Because each month, I invoice different rates. I don’t have retainer clients and there’s one client who never pays on time. They pay, but often weeks and sometimes even months late 🫠 So I send a new invoice with a late payment fee. And so far, I’ve not found an invoicing tool that automatically adds late payment fees. And it makes an automated system more exhausting and I’d still have to do things manually.
But if you mostly charge the same rate at the same time to the same clients: Definitely automate your invoices. If that is you, scroll down to the “Automate your invoices” section.
If you prefer sending invoices manually, keep reading.
How I send manual invoices
One reason why I started doing my invoices manually was because I wanted a clear visual identity across everything I send to my clients. Looking back at it, that was the wrong priority, once you’ve invoiced, you already convinced the client to work with you and invoices don’t have to be pretty.
If you want, you can work on creating an on brand invoice. But it’s not important to make them look nice, as long as the important information is displayed.
To give you a head start, here’s a default google sheets template that I’ve tweaked slightly so you can use it for your purposes. Feel free to change it to your preferred font and colours.
Send an email with the invoice attached to the client
If needed: send an email with a reminder 2 days before due dateBest case scenario: They pay the invoice before the due date and that’s it, you got cash in the bank for the work you delivered 🙌Bad case scenario: They pay late (follow steps 4+ onwards for that) Worst case scenario: They don’t pay ever. So far, I was lucky that this hasn’t happened. But there’s legal steps you can take in case this happens to you.
Send an “Action required” email once they’re past the due date
Depending on the relationship I have with the client, I might let them off with the late payment fee. If it’s been several times that they’ve missed the payment, I send them an updated invoice with an additional late payment fee.
In case you want to automate things, which I highly recommend, here’s a few platforms I’m currently looking into. They all offer free trials but I’ve still not figured out yet which one to use. ☝️ On that note: set yourself reminders for when the trials end so you don’t end up paying in case you don’t use it.
Heads up: Some of them have affiliate links, so if you choose to sign up with one of them, I might get a few cents 🤫
Bloom.io
I’ve signed up to trial this one and forgot to cancel before the free trial ended 🤦🏻♀️ but it was only about $150/year so it’s not a crazy investment. But remember to make sure you set up reminders to cancel your free trials! It’s a bit exhausting to set everything up but once it’s up and running it’s not too difficult to use.
Client Manager
This is a project from Kyle Prinsloo. Maybe you’ve come across him online, if not, he’s a good person to follow for freelance advice. You can also check out the podcast episode I’ve recorded with him. Client Manager is still in the Beta phase but I’m observing the tool and so far it looks very promising.
Full Scope Freelancer
Still trialling this one, but it also looks quite promising. One thing I quite like is the “Opportunity Value” chart on the dashboard to keep your eye on the goal. You normally get a 14-day free trial but with this link you’ll get a whole month to play around with it. Check it out for yourself.
Stripe & Paypal
If you’ve decided to use Stripe or Paypal in this blog, it’ll probably be easiest to use their invoicing systems to get you paid.
If you’re already using a platform that you recommend to use for invoices, please let me know what you use. I’m still looking for my ideal invoicing tool.
No matter if you decide to automate your invoices or do them manually, it’s about finding a way that works for you.
Sending invoices can be tricky if you have a sensitive relationship with your clients. Just like reading this blog’s subject line: You might have felt a bit unsettled (again, sorry 🙈) – but imagine your client receiving an invoice with a wrong amount or a service they didn’t book. So always communicate with your clients, send invoices on time and reminders if needed.
👩🏻💻 Free Guide
The exercise described in this blog article is one of the steps of my free guide for people who want to create a work life that works for them.
Money isn’t everything. The reason to go freelance is the freedom to choose where and when to work. But we also have to pay our bills, so let’s make sure you have a way to receive money.
Disclaimer: Some of these have referral links, but I wouldn’t recommend anything that I’ve not personally used myself.
PayPal
(international)
This is an easy way to send and receive money. Almost everyone has a PayPal account. But they charge quite a lot of fees! But they only deduct those once a transfer is made. If you want to make it easy for your customers to pay you, this can be a good option. But be aware that they’ll take quite a chunk.
Stripe
(international)
Stripe is similar to PayPal but much easier to use and it takes a smaller cut of each sale you make.
Wise
(international)
If you’re planning to trade with businesses in different currencies,this one is for you. I’ve only used Wise for my private finances, not for my business. But if it’s as good for business as it is for private purposes, it’s definitely worth looking into it.
Starling
(UK only)
I’ve used Starling since I started freelancing in 2019 and never had an issue with it. I’m quite happy with how their app is set up. You don’t have to go to a bank branch to open a business account. Actually, it took me only a few minutes to set up an account and I was able to use the card online instantly.
Here’s a referral link, you won’t get much out of it other than a day pass to a National Trust venue.
Monzo
(UK only)
When I launched my freelance UX business, I couldn’t open a Monzo business account. Maybe because I registered as a Ltd.
But I’ve managed to open a business account as a sole trader for the Freelance Blueprint brand to make sure mentees won’t have to pay VAT.
So far, I’ve not used it much for the business because most payments are through my UX account where I use my Starling account.
But if you’re interested in opening a bank account with Monzo, here’s a referral link that will give you £5 to get started (Wohoo! Free money 🙌)
Why you need a separate bank account
When you start to work for yourself, it’s good to separate your personal finances from your business finances. And the easiest way to do that is to have a separate bank account for your freelance business.
Find an account that works for you
Depending on where you are in the world or which companies you’re planning to get into business with (just within your country or international), there might be other accounts that work better for you.
Just because I gave a list of accounts that worked for me doesn’t mean that it’ll be the best for your circumstances. So find a payment method that you trust, that protects you in case there are any scams and where you have a fast customer service if you have any doubts about payments.
👩🏻💻 Free Guide
The exercise described in this blog article is one of the steps of my free guide for people who want to create a work life that works for them.
Going freelance will teach you a lot, not just certain skillsets that you accumulate when you jump into the cold water, but also valuable learnings about yourself - and finances.
In this article, I’m sharing with you what I learned about money in my last 3 years of freelancing. I know finances can be overwhelming, especially when you just get started, but it’s not that difficult. Let me break it down for you.
My background
I always had an interest in money, because let’s be honest, life is so much easier when you have it, than when you don’t. I’m now earning a very comfortable income for my age, but it wasn’t always like this. There was a time when I had 3 jobs, so I could afford my full time studies and rent in Vienna. One of those jobs was an unpaid internship at an advertising agency.
When I moved to London, my first job paid minimum wage. I earned about £1,100 a month after tax. My rent was £650 for a small room in a flat share. Commuting would eat up another £150, so I had £300 left for food and whatever else I wanted to do in life.
In hindsight, I’m glad that I went through years of living pay check to pay check. It taught me to appreciate the income I have now. And most of all, I appreciate the moments when I sit in a restaurant and can order what I want, not what my budget tells me to.
1. You need the right money mindset
Most people just skim-read, so let me give you the most important information first: The way you think and feel about money will massively impact how you act with your money.
Do you have a scarcity mindset? Do you think you have to work hard for money and once you have it, that you can’t spend it? Or do you splurge and spend it as soon as you have it?
When you think that money is difficult to get, you will actually struggle to receive it. It’s like a self-fulfilling prophecy. Money comes and goes. To get money, you have to spend it. It sounds odd, but once you understand this it will make your life easier. The question is: where to invest it in and how much?
This is not about bitcoins and shares
I’m not getting into shares and bitcoins in this article. I’m not a financial advisor and I’m a lazy investor, which means I invest in something and am planing to let it sit there for 10+ years. Historically, if you put your eggs in all kinds of baskets, and let it sit, there’s almost no chance for you to lose the money you invested.
2. Invest in yourself
One thing I do think everyone should invest in is themselves. Invest in therapy, invest in coaches, invest in education. If you asked me what the best thing was that I ever invested in, the answer might surprise you.
I went to film school for editing and filming but we had the opportunity to join a one-week long acting course. They encouraged us to take it, because if we wanted to be a director one day, it’ll be good to know how it feels to be in front of the camera, so we can give actors the right cues. Even though I was very uncomfortable by the thought of being filmed and having to act, this was enough motivation for me to give it a try.
That acting course I took over 10 years ago was the best thing I ever invested in. It helped with public speaking, giving less of a shit of how I might come across on camera (although I still struggle with that) and most importantly: understanding other people.
Invest in your education and personal growth
I wish I would’ve had a different attitude towards investing money in growth and education sooner. I would be further ahead in my career if I did. I now pay for a coach and they’re not cheap but if it helps to shift my mindset and self perspective to feel worthy of increasing my rates and working on my goals, then it’s worth the money in the long run.
3. Remember your privilege
If you’re reading this article, you’re probably quite privileged. You might have had parents that invested in your education and helped you pay for your first laptop or university.
I had the privilege that my parents saved money for me during my teenage years. It was actually some kind of life insurance but paid out in your early twenties. My dad said it was a fund just in case I was going to get married.
Thank God I didn’t (not to shame anyone who did, but it’s not something that would’ve made me happy). Instead, I was planning to use that money to study abroad. I asked my dad how he’d feel if I were to spend the money that he saved for over 20 years in just one year abroad. The tuition fee for that university was quite a big chunk of the savings and for once I didn’t want to have 2–3 part time jobs. I just wanted to concentrate on my studies, so the remaining money of the savings budget would be spent on rent and food. He just said “I’m so glad you decide to spend it on your education” and with that peace of mind, I moved to wonderful Stoke-on-Trent and started my life abroad.
Be grateful for the support you have and the head start
If I wouldn’t have gone to university and gotten that education, I wouldn’t be where I am now. But of course you don’t have to spend that much money on university. Looking back at it, I would’ve done one UX bootcamp, struggled a few months to get a junior role and would’ve likely also gotten to where I am today. But I didn’t even know back then what UX was and how to acquire the skills.
4. Know your value
Know how much to charge for your services. No matter if you’re employed or a freelancer. Find out how much other people earn/charge for the same services you provide. There’s plenty of platforms like glassdoor which shows you the average salary or day rates in your field.
I recently started a new freelance contract. They have sent me some documentation to review on the first day. I’m not sure if they were meant to share everything with me, but one of the documents contained a file which showed what the previous UX Designer charged. They earned almost twice of what I was charging. And they handed over their designs in power point. Not saying that they aren’t worth their money, they were very specialised and niched down. But if I had known before, I would’ve asked for a higher day rate.
Of course, it’s difficult to find the sweet spot, especially at the beginning. Figure out your rate and know your value.
5. Always negotiate
If you’re negotiating your salary and they have a set budget, try to negotiate for extra days of annual leave. Or you can get other benefits like have them pay for your transportation, ask if you get a budget for training. Maybe you can get equity. See what’s possible.
It’s not common, but some companies are very transparent and have income brackets. Those that don’t might not pay equally. You don’t want your male counterpart to earn more than you, just because he negotiated a higher salary when he joined and you didn’t.
This one is not just important for work. See if you can negotiate with accommodations like booking.com. Reach out to hotels directly and see if you can get a discount, because booking.com takes an extra share of what you pay the hotel. So you can pay less and they can get more than what they’d get through booking, win-win!
6. Be aware of the tax you have to pay
I usually transfer 20% of all the income I make through my company into an easy access account which pays interest. I know I won’t have to pay all of that because of expenses, which will reduce the amount of taxes I have to pay. But putting all of that aside gives me reassurance that I don’t have to worry about the tax man. And everything that’s left is a nice bonus. It’s a good feeling when you know you can definitely cover the tax bill.
They’ll increase the taxes in the UK soon, so from this year, I’ll increase that share to 25%. Stings a little, but that’s how it is when a country has to find ways to make up for the whole in the pocket after paying out a lot of furlough money. Overall, I’m not against paying taxes, I see it as a luxury. The more I earn, the more taxes I pay, but as long as that money gets to support people, I’m fine with that.
7. Have a backup you can fall on
Emergency fund, fuck off fund, call it however you want to call it. But make sure you have some savings in case things go downhill. I think we all learned since covid that things can change very unexpectedly and very quickly. So be prepared.
Look at how much money you’d need to live somewhat comfortably for three months. This should cover rent, groceries, insurances etc. Try to put that aside into an easy access account. Once you’ve accumulated that, you can invest the remaining money you have in longer term investments. But make sure you have that backup.
Some people recommend having 6 months of savings. I have 3 months in my bank account that accumulates interest and another 95 days access account with a fixed interest rate. So if I notice that my 3 months of instant access might not be enough, I can give notice so I can access my 95 day access in 3 months from then.
Luckily, I didn’t need it so far, but it’s very comforting to know that I can technically live 6+ months from just my savings and won’t have to worry.
Since freelancing, I managed to build quite a good back up fund. Money just came to me. Which is also why I keep telling everyone to go freelance.
8. Let your money work for you
Don’t just leave your money in a bank account. Make sure you put it somewhere where you earn interest. Especially now that interest rates have gone up - thanks recession, at least you’re good for something. Invest in fixed savings accounts if you’re very risk averse. If you can live with your money not being accessible instantly, put it into a longer term fixed savings account. Or better, put your money in a stocks and shares ISA. If you don’t invest in stocks (and now is probably a good time to invest, because the economy isn’t doing so well, but again, I’m not a financial advisor, so take that info with a grain of salt) you will end up having less spending power. Because your money will lose value thanks to inflation.
9. Yes, you can get free money!
I have the luxury problem of now being VAT registered, which means I now have to charge VAT on my invoices. That VAT technically has to go straight to HMRC, which means it’s not my money, i’m just collecting money from others for the government. BUT in my first VAT year I can use a flat rate to pay and I’ll get a 1% discount. Meaning that of the 20% VAT that I collect, I only give 19% to the government, so the 1% is something I can keep in my Limited company.
That’s what you call efficient tax planning. It’s all legal. At least that’s what my accountant told me.
Another way of free money is putting it somewhere where you get interest. Please do, otherwise your money will become less valuable over time. Again, inflation.
10. Keep track of your money
Make sure you know how much money you have and how much you will need to spend in the near future. Put it in a spreadsheet, yes I know, those are fun. Maybe try using notion instead of excel to make it more interesting. I keep track of my personal accounts (I got accounts with some challenger banks, a traditional bank and a credit card with cashback for each purchase as well as an Euro account) and my company accounts for my freelance work (Paypal, Starling, Aldermore).
The money I earn isn’t technically mine, it’s my company’s money. Working with a limited company means I can access that money. But additionally to the 25% tax I have to pay on the income of my company, I have to pay personal tax on the money I draw from it. So it’s tricky to know how much money I actually have access to. This is why I have a spreadsheet to keep track and review each month to see if I spent too much, how much I can put into savings or investments and if I can cover any upcoming payments.
11. Have financial goals
Especially as a freelancer, it’s important to have goals. This includes financial goals. Make sure you put money in a pension. You won’t believe the amount of other freelancers I meet who tell me they have no plan for the future. Please don’t be one of them.
If you think the government will make sure you get a good enough pension, they won’t. Unless maybe you’re in Norway. Pensions nowadays are calculated with the idea that you’ll have your own property that is paid off and won’t have to pay rent. We’re not in the generation our parents and grandparents were. So unless we inherit something (hello inheritance tax) this might not be the case for you. So make sure you know how much you’ll need and see if you will get that. There are plenty of pension calculators out there.
Chances are, you won’t get a good enough pension through state pension alone. If you’re employed, ask your employer to increase his contribution or if you can increase yours. It’s also very tax efficient. If you’re a freelancer, I personally find Penfold quite good. It’s specifically targeted at freelancers and therefore, unlike other private pensions, you can add as much or as little as I want. You don’t have to pay the same amount each month.
Of course, only invest money where you feel like it’s good to be stored, be aware of compound interest, so the earlier you invest, the better.
12. Balance your income
I’ve had quite a consistent stream of income since freelancing. Maybe I’m just one of the lucky ones. But even though money keeps coming in, the amount I get still fluctuates. For example, December is usually a bad month for me. Since I’m being paid on a day rate, I won’t be hired over the Christmas period, which means that I will only earn half as much compared to the rest of the year.
What I do is I calculate a certain amount as my ‘average income’. If I earn above that, I put that money aside, into fixed savings or investments. If I earn below it or have clients who tend to pay late, I can draw from those buckets in the meantime. This way I don’t have to worry if I can pay my upcoming expenses.
13. Money is power
You can use your money as leverage. Would you rather invest in an oil fund or in renewable energy? Do you want to buy from brands that exploit their workers or buy from an independent local store where the owner is doing a little dance after each purchase because you help them make their dream come true?
Once you understand how money works and how to make it work for you, it will keep growing.
14. Get expert advice
I’m not a financial advisor. But I’ve done my own reasearch. We’re lucky to live in the times of the internet where we can quickly google something. But also be careful who’s advice you take on. Anyone can put information online (just look at me writing this article).
But there’s another big thing financial experts won’t do: they won’t be as keen to grow your money as much as you are. They will give you recommendations based on where they earn the best commissions, not on what’s actually best for you. So do your own research, compare offers, negotiate and most importantly: get started on sorting out your finances.
Here’s my recommendations for you
Again, I’m not a financial adviser, this is all just from personal experience and research. But here are the basic things I think anyone should do:
• Invest in a pension • Build a fuck off fund or back up • Have all the money you don’t need accessible in the next 3–6 months into longer term investments • If you’re in the UK open a LISA and ISA (I have mine with moneybox) • Educate yourself on money. I cannot emphasise how much Money: A user’s guide by Laura Whatley has helped me. It doesn’t just explain money and how to make it work for you but also the relationship you have with money
One thing I never understood was why we weren’t taught about money at school. I wish little 10yo me would have known about long term investments and just put her pocket money into a stocks and shares account. But better late than never.
Money is just money. That’s easy to say when you have it, but if you don’t it’s difficult to get hold of it. But once you leave your scarcity mindset (see learning #1) it’ll be easier to get money coming in. It’s like a switch. Once you don’t occupy your mind with “I don’t have” but with “I will get” things will happen for you.
Useful links
One book I cannot recommend enough is Money: A user’s guide by Laura Whatley. It has taught me so much about money and how you can make it work for you.
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.
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.
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
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
Separate your company and your personal finances
Start building a buffer
Analyse your income
Analyse your expenses
Put your money into buckets
Calculate how much you need
Set automated payments to your personal bank account
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.
