In 2003, I took the life-changing step of turning my hobby into a career. It was exciting and completely nerve-wracking! Many freelancers eventually go back to a job, but 13 years later I’m a little older, a little wiser, and still loving the work I get to do. Here are a few things I’ve learnt about money as a freelancer:
1. Put money away for tax
There are few things more depressing than receiving your tax bill, only to realise you don’t have the money to pay it off by the deadline. This was particularly problematic for me because most of my corporate clients require that I send them my tax clearance certificate in order to pay me.
That meant that if I didn’t pay my tax in time, not only could I get fined but I’d find it even more difficult to generate the money to pay the account.
And unlike someone who’s employed, I don’t have someone to pay my tax automatically on my behalf.
The trick to preventing this is to have a separate savings account where I keep the money to pay my income tax when the bill arrives. When a client payment arrives, I immediately put 20% of it into my tax savings account, despite the temptation to spend it all. When my tax bill arrives, I have the money ready to transfer and any surplus immediately becomes a ‘surprise 13th cheque’ that I can use to spend as I like (or, even better, pay off a debt).
2. Have separate bank accounts for your personal finances and your business finances
When I first started working for myself, I had one bank account and I was having trouble meeting my monthly financial commitments. By getting separate accounts for my business and my personal finances, I got a realistic understanding of how well or poorly my business was doing. Now I try to remain disciplined at paying myself a reasonable monthly salary from my business account to my personal account. I can also see the difference between what my personal and business’s financial status is.
3. Create a budget … and then stick to it
In the past, I’d guess what my expenses would be. Then I’d buy something on impulse, only to discover later in the month that I couldn’t meet my financial commitments so I’d have to withdraw money from my savings or increase my credit card debt.
I finally have a working, realistic and easy to maintain budget!
I’ve gotten pretty good at seeing exactly where my money is going. And I’ve surprised myself by putting more money into my savings account quicker than I expected!
4. Try to find savings on your recurring expenses
Take a regular look at your recurring expenses and try to see if you can find savings. If you’re a loyal customer, you could ask for a discount. Sometimes you may discover that a new, cheaper subscription package that better suits your needs is available. Many online subscriptions (like website hosting, or mailing list software) will offer you a considerable discount if you agree to an annual payment instead of a monthly one. It might also be to your advantage to look at a competitor’s rates to see if you can save money by changing your supplier.
5. All those coffees add up
I love coffee, and one of the ‘perks’ of being a freelancer is how often I get to drink it. The problem is that a couple of cups of coffee a week add up surprisingly quickly and suddenly you’ve spent your entire petty cash budget on cappuccinos.
Of course, this kind of discretionary expense isn’t just limited to coffee – since I’ve started using 22seven, I’ve become very aware of how much money I spend on Eating & Take-Outs. And for you there might be other expenses you didn’t know were costing so much.
6. Get a good tax consultant
When I started out, I didn’t know anything about how it works, so I hired the first tax consultant I could find. That was a mistake – he wasn’t very good and I never felt like he was really happy to help me. I’ve been through several consultants since then, who I all ended up leaving because I felt I was getting poor service. However, the tax consultant I have now has done a superb job of getting to understand my business, he communicates regularly with me, he clearly explains what he’s doing, and he ensures that my tax submission is done on time and I am fairly taxed. He’s not the cheapest consultant I could find, but I’m keeping him because he’s saving me a lot of time and money.
7. Avoid over-capitalising
Because my work is my passion and my hobby, I’m constantly tempted to invest money into my business by buying materials, props or educational material. Of course, it’s important that freelancers continually develop their skills and tools, but you don’t want to put pressure on your cash flow. What I do is to plan to spend a certain amount on educational materials every month, so that I can enjoy a little bit of ‘shopping’, and whatever I don’t spend in the month, I can save towards something more expensive. Every time I want to buy something for my business, I consider whether it’s going to make me money or end up being an avoidable expense.
8. Get the best insurance you can afford
My work requires that I spend a lot of money on highly specialised and expensive assets, as well as all the basic requirements for running a freelance business today, like a car, laptop and smartphone. Having to replace these items – especially if you need them in a hurry to be able to deliver work to a client – can put a serious dent in your finances. Sadly, crime is a reality and I’ve experienced it on several occasions. However, I’ve always made a point of getting the very best insurance I can afford, even if it was going to cost me a little more than I wanted. I’ve heard some horror stories from people who, having been on low-cost insurance policies, have had to deal with long delays and disappointing payouts. I’m happy to say that when I’ve had issues with theft and breakages, I’ve been able to get most of my money and get back to work quite quickly.
9. Do a little bookkeeping frequently
I have a box in my office where I put all my cash receipts. In the past, I’d save up a whole year’s worth of receipts and statements, only to get completely stressed out at tax time because I had a huge pile of paperwork to process. One of my early solutions to this was to send my paperwork to a bookkeeper to process. Not only was this quite expensive, it took several weeks for the bookkeeper to process. I was also worried whether or not the expenses were being assigned to appropriate categories.
Eventually, I decided that I needed to learn how to do my bookkeeping myself. I started looking for online accounting packages but I found them either too complicated or too pricey. Then I found 22seven and once I started using it, I realised it’s the easiest ‘bookkeeping’ app out there because it assigns my transactions to categories. And because it assigns all my electronic transactions, I’ve stopped spending cash in my business so that I don’t need to process the receipts (if I do spend petty cash, it’s for an expense that doesn’t affect my taxable income). Now I just have an envelope for each month in the same box, and I put any receipts into its month’s envelope. This has saved me a tremendous amount of time and money.
10. Put your prices up
Charging the right price for your offering is one of the most common problems we freelancers face, particularly if what you offer is something you are passionate about doing and you want to do it as often as possible. For whatever reasons, we have this ‘mental block’ about charging for the value we offer, and this can end up meaning that you’re constantly busy ‘working’ but you’re not seeing financial results.
What I’ve learnt is that you’re almost certainly worth more than what you are charging. In some cases, it’s appropriate to work for exposure or experience, but you need to strike a good balance with well-paying work. Besides the fact that inflation has an impact on your expenses, the experience you constantly gain means that you’re more valuable, so you must make a point of making regular and significant increases to your fees. I’m quite aware of how scary this can be, as our ‘inner voice’ wonders if we’ll lose clients, but I can tell you from experience that as you charge more, you’ll start working with better customers. I’d rather be working less frequently for more money than trying to constantly ‘find’ work in order to meet my financial commitments.
Remember that if you are helping your customers meet their goals, you should be paid fairly and handsomely for the unique service you provide. As freelancers, it’s very satisfying to get paid well for work that you would love to do for free!