No matter how long we’ve been in business – no matter how much we try to keep ourselves fully booked, and no matter how good our marketing is, or how successful we are – there may be times when we as freelancers still experience being strapped for cash.
The fact is, no freelancer is able to sustain a full working week (that is, actual fee-earning, billable time) in the same way as a salaried person – not without putting in additional hours.
A good 10–20% of self-employed time is taken up with admin, marketing and strategy, as well as other necessary general tasks such as training and professional development, meetings and networking.
It’s simply the nature of the beast. As for finance, we might be caught short for a number of reasons:
- losing a client due to outsourcing or service migration to other suppliers
- our client contact moves company and either no longer requires, or cannot use, our services
- a new contact joins the company we’re supplying, bringing their own roster of suppliers
- late or non-payment
- a slew of bills landing at the same time
- a hefty tax and national insurance bill
- unexpected expenses – house repairs, vehicle breakdown and repairs, special events, medical or veterinary bills, travel costs
- utility bill hikes – in winter, these are higher if you work from home
- unforeseen personal matters – illness, accident, bereavement, relationship breakdown, carer responsibilities, resulting in reduced hours or time off work
- holidays
- industry or sector downturn
- international crisis – Covid-19, cost of living and fuel price hikes being current examples.
The first few months of the year are a particularly tough time of year for UK freelancers. Still reeling from expenditure at Christmas, the self-employed then have to meet their annual tax obligation.
The rough part is having to pay forward on account for a projected half-year’s income, before we’ve even begun to earn that money!
Finding the coffers nearly empty can be seriously scary – which is all the more reason why we need to be financially savvy and plan for rainy days.
Here’s how to do it.
1. Keep a contingency fund
Every freelancer should have some savings put by for emergencies.
If you don’t already have one, start now: work out how much you need from your earnings. Squirrel it away each month, and consider it strictly non-existent except in the event of genuine need.
Generally, three to six months’ equivalent income is a good range; if you’re able to save even more, great.
Create a buffer
Having a financial buffer is crucial, as there may well be periods when you’re taken by surprise and need to dip into it. Late or non-payment being a typical example, particularly on large projects when you’re banking on a certain amount coming in, and it doesn’t arrive.
What happens is your projected income for that month is shot, and you need to make up the shortfall.
If you already have a pre-arranged overdraft as part of your banking, fine – but overdrafts are no longer the most cost-effective solution.
In the UK, banks now operate a default of around 40% interest on overdrafts. It’s wise to look at other short-term solutions, such as shifting any existing debt or spending to 0% interest credit cards instead.
It’s a good idea to make your fund earn for you by saving well. Look at interest-earning accounts, ISAs or other financial products that keep your money safe, but at least some of which can be accessed fast if you need it.
Currently, interest rates are so low that putting your money away isn’t yielding much of a return. Still, check your tax position, your funds and the difference between saving and investing. Your own risk-averseness is key here.
And, of course, always seek proper advice from a qualified independent financial adviser or brokerage, if you do plan to invest.
2. Budget, budget, budget
The key to financing freelance life successfully is to be across your personal expenditure and business balance sheet.
Even if you’re making it rain right now, you never know when darker clouds might appear on the horizon. To continue mixing metaphors(!), cutting our coat according to our cloth is sound practice.
If you don’t already have a breakdown of your monthly and annual outgoings, now’s the time to create one.
Analyse your outgoings
Analyse where your money needs to go, and ask yourself: where is it actually ending up?
- Can you cut back, make savings, purchase more cheaply, or stop spending on certain things?
- Are there certain times of year when your outgoings will be higher?
- How can you plan for them?
3. Find better deals
A good money-saving tip is to reassess your utility, transport and media bills (phone, broadband, TV) regularly to see if switching suppliers can save you anything, and of course insurance and any other policies to see if better deals are available, both for your personal and business needs.
Online comparison sites are a great way to do this. But it’s worth noting that they don’t necessarily contain all the information.
For example, utility companies only give these sites the tariffs they choose to release. Before the fuel crisis, it was possible to drill down into the tariffs on a utility company’s site to find much better ones than the ones openly offered when renewing a fix.
This may not be the case right now, but it may be again in the future when prices come down.
Always do your homework to find the best tariff for you. It will take time, but it’s worth the investment of a few hours and some number crunching to save precious pounds over the course of a year or 18 months.
Also, check your direct debits and standing orders: are you shelling out for anything you no longer need?
Do you have any Continuous Payment Authorities going out of your bank account when you’re no longer using the product or service they were set up for?
Some people have found that money’s still leaking out for things they’re long past using!
4. Save for your tax bill
This is an essential strategy, as so many freelancers find themselves in shock each year on opening that dreaded statement from the revenue service.
Let’s be honest: having to pay tax is never a pleasure; even less so if we’re up against it and have to beg or borrow.
If you’ve had a good year and know that your national insurance (Class 4, calculated from annual profits) and tax bill will be high – or even if you haven’t – be sure to get your tax return done in good time.
If you leave it to the last minute, you can’t project easily what you’ll need to pay.
Get your books to your accountant well before filing is due – and if you don’t have an accountant, it’s definitely a good idea to consider hiring one.
Apart from the fact that they take the strain of preparing your annual accounts and tax return, accountants can advise you on deductible expenses and other legitimate ways to make your business finances work for you.
In the past, some self-employed people used to arrange a direct debit and pay the revenue monthly in advance so that when the bill came in, their account would be already in credit.
That method isn’t advisable. For one, it doesn’t earn any interest: the Exchequer gets to play with your hard-earned at leisure, when it could be sitting in a savings account and working for you instead.
5. Reassess excess
Ask yourself:
- How well am I living?
- Do I really need expensive products or services, when I could downshift my lifestyle and be just as happy?
This doesn’t mean deprivation, simply being canny around what we buy and possess. When financial hardship strikes it can be a sharp reality check, recognising just how much we’re spending on non-essential or luxury items.
Be canny
A classic example is coffee or food on the go. Just as a fun exercise, try working out how much you spend on takeout food, drinks, lunches and snacks in an average week, then see how much all of this is costing you over the course of a year.
You may find the total annual figure is surprising! Then, think of what you could do with that money instead if you regularly prepare packed lunches, stock up on snacks during your regular grocery shop, or get a reusable thermal cup for your beverage of choice – and commit to filling it before leaving the house rather than falling back on coffee chains.
If you love smoothies, a good, basic kitchen blender does the job just as well – it’s incredibly easy to prepare your favourite drinks.
At home, stocking your cupboards with staples, and cooking with core fresh ingredients, is much cheaper and more nutritious than relying on pricey ready meals.
As for socialising, instead of going out for dinner and a movie, why not do dinner at home and watch sport or a film streamed on-demand?
Are expensive gym membership fees draining your bank account? How often are you going – and how much is each visit really costing you?
Fundamentally, at private gyms you’re paying for exclusivity: plush locker rooms, fancy spa facilities, personal trainers and swish cafes. Private gyms draw you in on the pretext of fitness and well-being – which is fine, of course everyone should look after their health – but they’re also invested in taking an awful lot of money off you.
Buying into the wellness culture is one thing, and if you are sufficiently motivated to going, that’s great.
But if you fail to use your membership at least several times a week, you’re locked into a hefty annual contract that’s bleeding your finances dry.
The further irony of private gym membership is that people often drive there, then spend 30 minutes running or on stationary bikes. They even work free weights when they could easily buy a set and train at home.
Consider alternatives
These days, municipal gyms have come a long way. They’re less costly than private facilities but just as well-equipped with machines, studio classes and health suites.
Many operate no locked-in contracts or eye-watering joining fees either: you can simply sign up, pay as you go for the kind of usage you want, and quit whenever you like.
Moreover, it costs nothing to run or cycle around your neighbourhood, but you will still get fit in fresh air rather than hacking on a treadmill in a sweaty room, watching music videos! Outdoor activities such as hiking and park-based workouts are just as effective.
And being freelance, one luxury we do have is flexibility in our schedule: we can go to swimming pools outside of peak hours, when they’re not only blissfully quiet but much cheaper.
Alternative toiletry and cosmetic brands to the designer offerings in department stores are also worth considering. Here, you really don’t have to compromise: these days, products are high quality and totally on-trend. They’re also less expensive than the big names, and if organic, kinder to you, your body and the environment.
Another way to get great deals is to sign up to sites offering cashback, coupons and deals, especially for major purchases, dining out and pampering experiences, as well as ordinary retail. There are tons of offers out there online and via apps just waiting for you.
There are many ways you can downshift and still have a good lifestyle. And if you have more stuff than you genuinely need, this could be a good opportunity to have a clear out and make some extra cash via online marketplaces, eBay of course being the most prolific.
6. Shift your money mindset
Being brought up short over finances can be a positive thing. It’s a chance to liberate ourselves from extravagance, and to concentrate on what really matters to us.
It’s also a lesson in the importance of planning ahead.
Our lives as freelancers can be unpredictable: we signed up for uncertainty when we ditched our employed jobs and decided to go it alone. That is a brave choice – and we’re to be congratulated for it! – but it’s also sensible to recognise the things over which we do have some control.
Finance is an area of our business lives of which we must – and should – keep track.
Mitigating risk is the sensible thing to do.
As the old saying goes, watch the pennies and the pounds will take care of themselves. It’ll take a great weight off your shoulders, should lean times come along.
The Serialist 