Five Tips on How To Be Financially Secure as a Freelancer

Entering the world of self-employment can be a daunting task, especially when you’re not confident with money management. Many within the creative realm gravitate towards those types of artistic, work-when-you-want jobs because they don’t require the mathematical analysis or economic skills that occur during the admin side of a full-time role. And while the freelance lifestyle has a lot of perks, one downside is that your tax becomes your responsibility to pay.

But how are you meant to know how much tax to pay when your earnings change monthly? Do I need to think about paying into a pension pot? How can you prepare for that dreaded tax bill? FMR, with the help of economic whizz and accountant Maria Adamou, list below the ways to gain financial stability while freelancing.

Learn to budget

This seems like an obvious starting point, but you’d be surprised how easy it is to not carve out the time to budget. Maria notes that this is key for understanding what your outgoings and ingoings are. “What are your monthly living costs? E.g. Rent, food, bills etc. Once you know your living costs you can begin to plan your target income from there – what sales/hours do you need to achieve each month to ensure these vital costs are covered?” She explains. “When you break it down this way it becomes less overwhelming and more manageable.” Having a birds-eye view of your finances allows you to figure out if you have any expendable income that could go towards savings, and instantly makes you feel more secure. Should you do it manually or digitally? Maria says; “Many banking apps have the function to categorise your incoming and outgoing transactions. However, I would recommend a more manual analysis to really take control of your finances. You want to tell your money where to go, not the other way round. If you find yourself saying ‘I don’t know where it all goes’ then you need to start giving your finances more time and attention.”

Separate money into segments

As part of your budgeting, get into the habit of separating your money into segments. This includes an amount for your tax. “Banking apps such as Monzo and Starling have tax pot options which move 20% of your payments straight over! If your bank doesn’t have this option, total your income on a monthly basis and move over at least 20% each month into a separate bank account,” says Maria. “I do quarterly tax calculation with my clients, so they have a more accurate idea of their tax throughout the year, allowing for a more accurate tax saving plan as well as avoiding any nasty surprises in January!” You can also apply this method to your pension. “Within employment, a standard 5% is deducted from your salary for your pension and an employer tops it up with a mandatory 3% of your pay. As a freelancer, I would recommend aiming to match this with a 5-10% pension pot pay in each month,” shares Maria. While retirement may feel a while away, there are added benefits to saving while you’re self-employed. “You would also be entitled to tax relief on your pension, so it’s worth exploring,” explains Maria. It’s about putting away little amounts often with a pension, and the sooner you start the better – set up a direct debit for at least 5% into your pot at the end of each month. Your older self will thank you one day!”

Have a personal and a business bank account

This will make it a lot easier to track what you’re earning and which clients are paying on time. “Aim to have 3 months’ worth of living expenses in this account at all times,” says Maria. “This is a good safety net if one of your contractors were to drop off.”

While this may not be possible for every freelancer, if you can, try to diversify your income as much as possible, shares Maria. “If one contractor is paying you 80% of your total income and they were to stop working with you, that would leave you in a difficult financial position. But if they were only paying you 20% of your total income, it wouldn’t affect you as much – you need to know exactly where your money is coming from and where it is going.”

Don’t leave your Self Assessment to the last minute

This avoids any nasty surprises when you have to pay in January – a month that’s bleak enough as it is. “Every year, submit your Self-Assessment tax return soon after the tax year end date in April,” says Maria. “This will give you the exact amount of tax due for payment in January, giving you ten months to save/top up your pot towards your bill.”

Habitually go on “money dates”

Get into the habit of making time for your financial money tasks, by going on, what Maria likes to call, a “money date”. “Go somewhere with a high vibe and look over your bank statements, categorising all your income and expenses on a spreadsheet sheet. This will allow you to notice your spending habits and where you can possibly create more healthy money habits. It’s also very useful to break down your income to see exactly which percentage is from which client, so you can then work on maximising and diversifying this amount.” Do this regularly, says Maria. “The more you face your finances, the less frightening they become. Money isn’t something we are taught at school so be kind to yourself – reach out for support when needed.”

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