One of the challenges of being freelance is that your earnings can be unpredictable. Maybe you’re on a long project with regular invoicing, maybe you’re jumping from one short project to another, or maybe you’re in a spell with very little work. Your earnings from one month to the next can fluctuate wildly, creating stressful financial challenges. Properly managing your money will allow you to reinstate a certain amount of control over your finances, removing a portion of the stress that can come with being a freelancer.
Just as a quick note before we begin, I live and work in London, so my knowledge of money and finances is understandably UK-centric. I’ve tried to talk about principles that will be useful to anyone, anywhere in the world, but I would encourage everybody to find out about tax regulations and financial services available in their own country of residence. The more you understand about managing your money, the less stressfull it will be.
Put Away Tax
If your employer is not deducting your tax out of what they pay you, then the first thing to do is to put away money for tax. This money is – unfortunately – not yours, you’re legally obliged to hand it over to your local or national tax authority. As painful as it is, it’s best to immediately move this money into some place you’re not going to touch it. Believe me, you do not want to be scrabbling around trying to get together the money for a big tax bill as a payment deadline approaches.
Obviously, tax bills will vary depending on the country, and on your individual circumstances, but in the UK and the US, putting 30% of your income away for tax (and in the UK, National Insurance) is a sensible place to start.
Build up an Emergency Fund
The second thing to do is to make sure you start creating a pot of money for emergencies. Exactly what type of emergency this covers is up to you. It can include medical bills, or car repairs, but the core of your emergency fund should be aiming to cover at least 3 months of your key recurring bills: rent/mortgage, utilities and food.
Periods without work are common, especially when you’re just starting out as a freelancer. Long periods without work also happen, whether through sickness, a quiet period in the industry, or the bad luck of a global pandemic. If you can keep at least three months of bills saved, and ideally six, you’ll be much better able to weather the storm of slow work periods.
Building up funds also allows you to exercise a certain amount of choice over the work you take. If you’re always chasing the next invoice in order to pay the next bill, then you’ll end up taking anything and everything that is offered to you. If you have funds built up, then you can be a little more selective about which jobs you take. This can be especially useful if you’re trying to transition between roles (from Assistant Editor to Editor for example), and decide to turn down jobs you would normally do in an attempt to target jobs in the new role.
Pay off High-Interest Loans
While good financial advice for anyone, not just freelancers, paying off expensive loans as quickly as possible should be under consideration for your third step in getting control of your finances.
It’s all very well putting money aside for this and that, but if you’re paying a high-interest rate on something like a credit card, then you’re paying out money just for the privilege of having borrowed money in the past. The sooner you get your high-interest loan paid off, the sooner you can put that money to better use.
Calculate Your Expenses
One of the biggest challenges of having a freelancer’s income is the difficulty in planning and budgeting your finances. Unless you’re on a long project, or you have regular client work, you won’t know what your income will be each month, making budgeting your monthly spending tricky.
In order to give yourself room to plan, and to find out if you’re unnecessarily spending money, you should look at your spending over the past year or two and work out how much money you need to earn in order to cover your annual expenses. This should also help when you’re deciding how much to charge for your work.
Once you know your minimum expenses, you can begin to see where your money will need to go. While you’ll already have a figure for things like monthly rent or mortgage payments, you probably don’t know how much you spend on food or travel in an average month. You’ll also spot expenditure which doesn’t give you value for money, or you can cut during a lean period, such as subscriptions you rarely use, or expensive lunches that could be replaced with food you prepare yourself. These costs may seem small, but they do add up over time.
Set up Separate Bank Accounts
One reasonably simple must-do for your money management is to have separate bank accounts for work and personal finance. Rather than having your invoices paid into your general expenses account, you should have them paid into an account dedicated to work payments. This way your income is sitting waiting for you to organise it before you start spending it, doing your accounts is easier, and it makes things a lot simpler if you ever get audited by the tax authorities.
There’s no need to just have two bank accounts though. I currently have almost 10. As well as a personal and a work account, I also have a personal and a work credit card. Any purchases I make that are for work I will put on the work credit card. Again, keeping this separate makes keeping track of what I’m spending much easier.
I also have an account called Tax, which I put 30% of my income into ready for those times of the year when tax payments need to be made. My Rent account is where I keep the money for rent and council tax (this is a UK tax to pay for local services), and I try to keep several month’s worth in there. I have a general savings account where I keep additional emergency funds. Plus I have a couple of ISA’s (these are tax-free savings accounts available in the UK), and a retirement savings account.
Divide up Your Income
Having seperate accounts also makes if easier to divide my income into chunks. This makes it far easier to see where I am with my finances, and makes it less likely that I will use a chunk of money intended for one thing for something completely different.
After moving 30% into my tax account, I currently put 25% of any invoice into the rent account, 20% goes into savings, 5% into paying off my credit card, and the remaining 20% into my general account. This means that it’s more difficult for me to avoid putting money into certain things (savings for instance).
An alternative approach is to treat your work income account more like a regular business, and draw down a salary of a set amount a month, leaving whatever is left to either come out in a slower month, or to build up over time. This regular income obviously removes a lot of the drawbacks of a freelancer’s often irregular income.
Start Saving for Retirement
One thing that it’s very easy to do, especially in your 20s, and especially when you’re earning an irregular income, is to keep putting off planning for your retirement. While some people plan their lives decades ahead, many do not, and it’s easy for something like retirement savings to sit on your to-do list for years. However, like many things, earlier is better when it comes to retirement savings. The earlier you start saving, the more time your money has to grow.
In the UK, there are also tax benefits of paying into a pension. Not only will you get a reduction on your tax bill based on what you’ve paid in, the government will also pay into your pension. While you’ll not benefit from employer payments in the same way as a full-time employee will, getting into the habit of paying into retirement savings early will only prove a benefit.
Spending time researching whatever retirement saving opportunities are available to you in your own country WILL be time well-spent. Some will be government-supported (like a pension and a Lifetime ISA in the UK), while others will simply allow your money to work for you.
Research Investment Opportunities
Speaking of your money working for you, you should aim to ensure that your financial literacy doesn’t end at retirement savings. There are many other ways to use your money well. The stock market for instance is not just for rich people. While you may not have the time or energy to try and find the next Apple, Amazon, or Tesla to invest in, and you’ll almost certainly want to avoid high-risk investments like Crypto and NFTS’s, buying into something like an index fund can be a good way to put your savings to work generating further income through growth and dividends.
While this will be a long-term investment rather than a way to make a fast buck, unlike retirement savings it gives you a flexible way to use your savings without tying them up in a package that you won’t be able to access until you’re older.
Claim Expenses
Although you won’t be able to claim expenses in the same way you would while working for an employer, you should investigate what you’re able to claim as legitimate business expenses. In some countries (including the UK), you can deduct what you’ve spent on conducting business from your profits, in order to reduce your tax bill. Again, research how the tax system works in your country of residence in order to understand what legal avenues are open for your own money management.
Record Your Income and Expenses
I personally use a spreadsheet for most of my accounts, but I know that plenty of freelancers use accounting software and services. As ever, I’d recommend looking at your own needs and researching what’s out there. Your aim should be to reduce how much time you need to spend doing unpaid work in order to run your business, and ensure you can plan/budget/record your income and expenditure.
Find an Accountant
Your finances and accounts may be straightforward, but if they start to get more complicated, or if you’d rather avoid doing your own accounts, then it may be worth hiring an accountant. This may seem like it’s an additional expense, but a good accountant should be able to provide advice and suggestions to save you money, plus they’ll deal with a lot of the headaches you may encounter.
I would however recommend finding an accountant who specialises in your industry, as that means you’ll be far more likely to find someone who understands what you should and shouldn’t be doing in your specific circumstances. While you may partly be hiring an accountant to avoid having to deal with your accounts, doing some basic organisation will make handing material over to them and meeting deadlines easier. Make sure you number and collate your invoices, collect bank statements for your work accounts, and collect either paper and digital receipts for any expenses.
For advice on other aspects of working as an Editor and Assistant Editor, check out the site’s Advice category.