Setting out on your own as a freelancer or starting your own business can be an exciting time. However, it can also be tricky to determine the best way to handle your income. Being self-employed means that you no longer have the security of a monthly pay check from an employer, and sometimes, simple mistakes could mean that you end up running out of money or owing taxes that you can’t afford to pay. Whatever kind of work you are planning to do as a self-employed freelancer or business owner, it’s important to keep these money management strategies in place from the start.
Figure Out a Budget
Coming up with a budget is important for before you do anything else. Be sure that you have determined both your personal budget and your business budget before making any decisions since this will provide the framework for factors such as pricing and how much work you do. Having a clear budget in mind will help you make the best decisions possible with your money.
Set Clear Payment Terms
While in an ideal world, every single client you work with would pay their invoice straight away, it doesn’t always work like that. More often than not, self-employed workers, business owners and freelancers are left waiting for longer than they should be when it comes to getting paid. Because of this, it’s important to be prepared for what might happen. Whenever you take on a new client, it’s important to set clear payment terms from the start and be clear about what you expect. This could include whether you want to be paid into your bank account or via an app such as Ria Money Transfer, and how long clients have to make the payment after receiving the invoice.
Put Tax Money Aside
Putting aside money for tax is something you will need to start as soon as you become self-employed. While there is a tax-free allowance of £12,750 currently in the UK, you will still need to pay National Insurance while earning under this amount so be careful that you are putting the right amount aside. Generally speaking, you should put aside 20% of your income for taxes. You can find apps and websites to help you work this out and put the right amount aside from each paycheck.
Build an Emergency Fund
One of the main disadvantages of being self-employed is that you don’t always know if you are going to have work. One month could be exceptionally busy and the next, you could be completely bored with nothing to do. This of course depends on the industry and the number of clients that you have. However, being prepared for the ebbs and flows that come with being self-employed is key. Start to build an emergency fund as soon as possible so that if the worst happens, you have funds to cover you until work picks back up again.
Get Income Protection Insurance
Another downside to being self-employed is that there’s no sick pay if you need to take time off work due to an injury or illness. While building an emergency fund can protect you if you need to take some time off work to recover, you may also want to consider getting income protection insurance, which is designed to cover you financially in this situation. Paying a small amount each month for income protection insurance can give you the peace of mind that if you were to fall ill or be involved in an accident, you would still bring in money that you can use to pay your expenses without having to dip into the emergency money you’ve been putting away for the slower weeks and months.
Insure Your Work Tools
Whether you work from a van with power tools or at a desk with a laptop, insuring the tools that you require to do your job is absolutely essential when you are self-employed. If you work from home, check your home insurance or contents insurance to see if your gadgets are covered and if not, if they can be. It’s always worth paying a little extra for the peace of mind that comes with knowing that you can easily replace the tools that are necessary to do your job if anything were to go wrong.
Stagger Your Bills
If you are paid weekly rather than monthly, or your income is sporadic, then consider staggering your bills so that they are coming out throughout the month rather than a lot of money leaving your account on one day of the month. While this might be the best option for those who are paid a monthly salary, it can be frustrating to deal with if you get paid more often throughout the month. For larger bills, put aside a portion each week so that you’re not paying out a huge chunk of money when they are due.
Track Your Business Expenses
When you are self-employed, you do not need to pay any tax on any business-related expenses. These can be recorded in your self-employed tax return, so it’s worth keeping tabs on them to make sure that you’re not missing out on savings when it comes to paying your tax bill. Any software that you use for your business, hardware, and even a percentage of your bills or mortgage/rent if you mainly work from home can be written off and reduce the amount of tax that you pay.
Consider Getting Professional Support
Professional support might be worth every penny if you are struggling to get started with managing your money and are newly self-employed. An accountant or specialist financial advisor can help you with things such as bookkeeping, keeping records of your income, setting up a pension, saving for tax and filing your self-assessment tax return.
Starting out as self-employed can be tricky and sometimes confusing when it comes to money. Without the security of a monthly salary coming in, it’s essential to take steps to prepare yourself for the future and secure your own finances.
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