How to manage your money as a freelancer

How to manage your money as a freelancer

The world is changing. The traditional jobs that required us to go to the office from 8am-5pm are rapidly changing. With more people exploring their talents and skills further without traditional employment, it is now more important for people to acquaint themselves with their personal finances. Traditionally, your employer would make sure that your tax is paid over to the taxman every month, provide you with an IRP5 during tax season, give you the opportunity to save and invest for your retirement etc; but as a freelancer/entrepreneur, you have to take care of all of these things and more!

  1. GET ORGANIZED

As someone who works for themselves, you are often the marketing person, sales and accountant. You need to have systems in place to make sure that you are keeping track of everything going on. Admin (i.e. sending invoices, capturing payments, planning your diary etc) is a big part of running a business and should not be left to the last minute; if left unattended for too long, it can potentially cause a lot of strain on running your business.

When starting out, you do not need expensive software to help you with invoicing for example, good old excel works just fine until you can sustainably afford to purchase one

2. Separate your business and personal bank accounts

There are many advantages of keeping your personal finances and business accounts separate. One that is mostly compelling is because of Tax, it is much easier to keep track of your business expenses for tax purposes if you use a separate business account.

Another very good reason is that this will help you track your income and expenses (which by the way, you can potentially claim as deductions come tax season) within your business. This gives you clarity if your business is actually making money or not, allowing you the opportunity to reassess if your business strategy is working or not.

It is a good idea as well to have a separate account where you transfer money into in anticipation of tax. Remember that for every payment you receive, you need to have the taxman in mind

3. Have a budget

A budget is your income less your expenses. Drawing up a budget helps you gain clarity on just how much your monthly needs are. This will help you figure out how much you need to pay yourself from the business.  As a freelancer, a budget clearly indicates to you just how much you need to be generating not only to be able to pay yourself a salary but to be able to carry the expenses of running your business.

Without this clear picture, being a freelancer can quickly get frustrating because of the fluctuating income. You need to stay on top of your budget by tracking your expenditure regularly. You can use different apps and an excel spreadsheet to do this, you can also use 22Seven. The app is free and available on any smartphone.

There are a few methods in which you can budget, you just need to find the one that best suits you:

  • 50/30/20 budgeting rule – this means that 50% of your income towards your needs; i.e. housing, transport, food etc 30% goes towards your wants like entertainment, holidays etc while 20% goes towards your savings, investments and paying off your debt
  • The Kakeibo Method of budgeting – this is a Japanese method of budgeting where you have two notebooks, in one notebook you write down your projected income and expenses in the other notebook, you keep a daily record of all your expenditure. This method of spending makes one more in tune and aware of their expenses. It helps you to become more conscious of where your money is going.
  • Using the envelope system – the envelope system can be used for miscellaneous expenditure or those areas that you struggle to keep under control i.e. eating out. With the envelope system, you physically draw cash and put it safely in an envelope marked for a specific category of spending, for example petrol or entertainment. With every Rand you spent, you physically see the money getting finished for each category, then you know your budget for that specific area is running out.

4. Have an emergency fund for both your business and personal needs

One of the biggest challenges of being a freelancer is the inconsistent income, especially in the beginning. That is why it is so important to create an emergency fund, not only for yourself but one for your business as well. This will ensure that you’ll be able to make it through a couple of months if you can’t find much work or run into an unexpected expense.

The best practical way of doing it is to set aside a percentage (say 10% or 20% of every invoice, whatever works best for your financial situation) and also create a debit order for your emergency savings to go into another account, say a 7-day notice account which is easily accessible.

5. Get insured

As a freelancer/entrepreneur, you cannot ignore the importance of having insurance, especially the type of insurance that protects your income, remember you have no employer who could potentially pay you for ‘sick leave’. You are your own employer and you need to protect your potential to earn an income. You also need to take a look at dread disease and capital disability protection.

6. Save towards retirement ~ have investments

The fact is, you will have to retire one day, yes, you might love your work and intend on doing it for as long as you can but unfortunately, age does catch up.

As an entrepreneur, there are several ways in which you can save towards your retirement ( I have often heard entrepreneurs say that their business is their retirement plan, while there is nothing wrong with this, you need to diversify just in case things do not go as planned)

  • Retirement Annuity – you should always opt for a unit trust-based retirement annuity that does not carry high fees

A retirement annuity also gives you protection creditors, it cannot be attached to your debts

When you contribute towards a retirement annuity, you are eligible to receive a tax rebate.

  • Tax-Free Savings Account (TFSA) – one cannot deny the benefits of a TFSA, you can use it to supplement your retirement income. Just remember NOT to contribute more than the prescribed amount of R36,000 per annum.
  • And off course, you can also invest in shares in different companies as well.

Although the road of a freelancer/entrepreneur or consultant is never easy, it can bear much fruit. To make sure that you get to enjoy the fruits of your labour, you need to make sure that you stay on top of your finances as well.