This is the third in a four-part guide to freelancer finances. From day-to-day cashflow management to thinking bigger and smarter about your money, it covers everything a freelancer needs to know to get on top of your finances.
This is part three of the guide, a plan for handling day-to-day finances as a freelancer. Part one of the guide was about financial freedom and part two was on money mindset.
Disclaimer: I want to emphasis that I’m not a financial advisor and that you should take this guide as a set of suggestions for thinking about how you approach money rather than as financial advice upon which to base any purchasing or investment decisions. Also, remember that I’m based in the UK and some of the suggestions I make may have different rules or requirements depending on where in the world you are
This post covers the four cornerstones of day-to-day freelancer finances:
Developing good invoicing habits
Avoiding late payments
Paying yourself a salary
Saving for tax
1. Good invoicing habits
I talked about cash flow in the second part of this guide, but as a refresher: cashflow is the amount of money that comes in and out of your business and the goal is to have more coming in than going out. One way to do that is by developing good invoicing habits because if you have a slick system for invoicing clients you can (somewhat) regulate your cash flow.
Pick a method that works for you
There are lots of ways to keep your finances organised as a freelancer. If anything, there are too many products on the market at the moment and picking one can be quite overwhelming.
The most important thing is to find a system that actually works for you. It’s like exercise, if you hate the treadmill you’ll never workout, but if you like running outdoors, you’ll actually do it.
The same goes for your finances. The best place to start is with your needs. As a freelancer, there are three core features you need your accounting system to do: invoice, track incoming payments and log business expenses. You want a system that does all that and is easy-to-use, doesn’t require any accounting knowledge and is digital.
You can use a spreadsheet to keep track of your finances, but most freelancers find it easier to use specialist software. Some of the most commonly used accounting software for freelancers include: Xero, FreeAgent, FreshBooks, QuickBooks and Wave.
It’s worth spending time researching your options as each individual freelancer will have different needs and preferences. Some questions to ask yourself when looking into accounting systems (not all of which will apply to you):
How many invoices do I send a month? Is there a cap on invoices?
How much do I want to pay for my software? (Remember that you can expense the cost of invoicing software and that a free option may be a false economy in the long run)
Do I need the software to integrate with my bank account?
Can my accountant access my reports?
Does it comply with the tax regulations in my country?
Do I like the look and feel of it? Is there a trial I can use?
What do my freelance friends use?
Does is handle international currencies?
Dedicate a time slot
A good habit to develop is invoicing once a week. Put it in your diary, ideally the same time each week, and use it to send your invoices, check on incoming payments and also to chase any overdue invoices.
The big advantage of invoicing like this rather than on an ad hoc basis is that it helps keep things super organised. It’s easy to lose track of invoices if you’re sending them as and when work comes in. By dedicating a time slot only for invoicing and checking on payments, you know exactly where you stand with your cash flow each week and it’s easier to spot when something is overdue and needs chasing. In theory, it should also regulate your payments a little bit (except in reality that doesn’t happen because of the haphazard way in which clients pay their invoices).
2. Late payments (and how to avoid them)
Late, slow and no payments are the scourge of freelancing. Not only does it affects cashflow but it can lead to personal financial trouble and is the number one reason freelancers go out of business. My #FairPayForFreelancers campaign calls for the media to change its policy around payment on publication, but until that happens there are some things freelancers can do to help themselves.
Know your rights: This will vary depending on which country you live in, but generally speaking, freelancers do have rights when it comes to getting paid on time and you should familiarise yourself with the law. In the UK for example, freelancers are entitled to a late payment fee for overdue invoices. In the US, different states have different protections for freelancers including New York’s Freelancing Isn’t Free Act. The Freelancers Union and the Freelance Journalist Union are good places to learn about your rights if you work in the States.
Pre-empt delays by including all possible information on your invoices: Include your address, email address, phone number, national insurance (or social security) number, you bank details (including bank address), SWIFT/BIC code and tax-payer number. Any time a client asks for a piece of information you haven’t already supplied, start including that as standard on all your invoices.
Detail your terms: Include a paragraph at the bottom of your invoice that clearly outlines the terms as they pertain to the law in your region regarding late payment. This is the text I use:
Payment terms are 30 days. Please be aware that in accordance with the Late Payment of Commercial Debt (Interest) Act 1998, suppliers are entitled to a fixed sum for the cost of recovering a late commercial payment. This is £40 for debts up to £1,000 and £70 for debts over £1,000.
A revised invoice with the late payment fee will be issued on any overdue invoices. If payment of the revised invoice is not received within a further 15 days, additional interest will be charged to the overdue account at a statutory rate of 8% plus Bank of England base rate of 0.75%, totally 8.75%. Failure to pay outstanding balances in full, including late payments fees, will be reported to the Office of the Small Business Commissioner.
Don’t wait until you need the money to chase it: Get in the habit of chasing late payments as soon as they are overdue, not just when you’re in the red. Having a robust system (as outlined above) for invoicing is the best way to keep on top of late payments. This way, you know exactly who owes you what, when it’s supposed to be coming in and when it’s late.
Where to go if you can’t get your money back: Take recourse if you need to, especially when the law is on your side. In the UK there are a couple of options for when an invoice becomes severely overdue. If you are an NUJ member, the union can help you recoup your money. The free option is to go to the Small Business Commissioner, which sounds a lot grander than it is in practice. It’s a free service for small businesses and freelancers which has a 100% success rate in claiming back overdue invoices. You can also take the company to the small claims court. In the US, unions (Freelancer Union and Freelance Journalist Union) can help you claim overdue payments, as can lawyers and debt collectors.
3. Pay yourself a salary
Depending on how you’re registered with your local tax authority, you’ll either trade as an individual or as a company. If you trade as a company you’ll typically draw a salary, somewhat alleviating the classic freelance problem of not having a payday.
But even if you don’t technically operate as a company, you can still set up a system of paying yourself a monthly wage. (Side note, the question as to whether register as a self-employed individual/sole trader/contractor or to incorporate as a company is a complex one and you should seek professional accounting advice about it).
In order to pay yourself a salary, you need a separate account for your freelance income. Then, do a budget and work out your minimum living costs and set up an automated transfer to pay that amount from the business account into your personal account each month. The idea is to be transferring an amount that covers your fixed personal bills as well as your necessary costs (food, rent, gym membership etc). If you do this and also have a good system for putting money aside for tax (more on that below) and other savings goals, what you have leftover is truly is disposable income.
(For the financial nerds reading this, this technique is the freelance version of the piggy banking budgeting method)
4. Saving for tax
In the first part of this guide, I talked about how being on top of your taxes is an essential step on the path to financial freedom for freelancers. But what are some actual methods for making sure you’re putting enough away for the taxman?
The pay-yourself-first method
The pay-yourself-first budgeting method is typically used by employees with a monthly paycheque for long-term savings goals, but freelancers can use it to put money aside for their taxes (as well as their savings!)
The principle is that you invest in your financial future by paying into your savings accounts before your daily spending, aka “paying yourself first”. In practice, this means every time money comes into your account, you immediately transfer a percentage of it into a separate savings account.
How much to transfer depends on how much profit you make and whether you trade as an individual or a company. So this amount can be anything between 20-50% depending on where in the world you are and your personal situation. (The best way to work out the percentage to transfer is to either speak with a professional accountant, check your local tax authority website or use accounting software that gives tax estimates). The principle, however, is the same: every time money comes in, money needs to be immediately squirrelled away.
Automate as much as possible
Another option is to pay a fixed amount into a separate bank account each month via an automated transfer. This method works particularly well if you do use the “pay yourself a salary” technique because what ends up happening is money accumulates in your business account and you’ll find there is actually enough in there to pay a regular amount into a tax account.
The trick is to figure out an amount to transfer that’s manageable but also will work out to roughly cover your tax liability by the end of the year. If you’ve been freelancing for a while, it’s easier to predict this amount. If you have a good budget, however, this is actually easier than it might seem. You do have to remember to keep an eye on this account and to make sure the savings accumulating in it match up with your tax estimates (more on that in the next point).
To help top up savings, take advantage of the mobile banks and apps that will round up your spare change. These apps put that money into a savings or investment account for you, so you quite literally save without having to think about it. (NB: this is not a method for saving ALL of your tax money, rather a top-up technique).
Use a high-interest bank account
These are few and far between at the moment and the only ones on the market require you to lock in for a fixed period (usually a minimum of a year), but if you can save your tax money in an account with a high-interest rate, the savings will work harder for you.
Financial check-ins
It’s a good idea to regularly check your tax savings match up with your tax estimates (especially if you’re transferring a fixed amount for tax each month). How often you do this will depend on when and how you pay your taxes, but for most freelancers doing this once a month is sufficient.
Use an official tax calculator to estimate your tax liability (if you live in the UK, HMRC has one) or check in with your accountant for an estimate. This is also a good time to make sure your expenses are in order, that you have copies (paper or digital) of all your receipts and that you’ve categorised them into some kind of comprehensive system.
If you want to go the whole hog, do a more in-depth financial check-in once a quarter as well. You can check on your pension, emergency fund, investments, what percentage of your income is being made from your different revenue streams, which clients are paying the best, who is consistently paying late and anything else money-related you’ve been putting off and needs attention.
Something to remember: you can never save too much for tax. In fact, if you do over save for tax then filing your return should be a great time of year for you because there will extra cash leftover that you can consider an end-of-year bonus.