Savings When Freelance

Reading Time: 5 minutes

Whether employed or self employed savings are important. The strain and financial commitments of life mean invariably you need more money than you think. Car insurance, house repairs, birthdays, Christmas…the list goes on. A month won’t pass without you needing to pay for something extra on top of your current out goings.

Being self employed adds an extra layer of anxiety to this. Where the majority of the western world live paycheck to paycheck that level of security is removed when self employed; meaning savings are even more important.

Sure there are ways to alleviate this stress. Having your retainer contracts watertight, starting out with a part time job or having an alternative revenue stream can help take the burden off freelancing, however having a saving strategy is essential when becoming a success in the freelance world.

There’s also more to it than the financial side too. When life/business decisions are made due to financial implications then they can for the most part be detrimental to your aspirations. Let’s nip that in the bud before it becomes a problem and highlight why saving is important when freelance and how I personally save.

Oversave your tax:

I communicate with so many freelancers day to day via social media and I have come across a number who are worried about their tax bill due to the lack of tax saving. I completely understand that sometimes the financial demands of life can take a big shit on you and more money is required than you think but jumping into your tax savings is not recommended unless every other avenue has been explored.

Tax is not your money. It’s what you pay to the government for healthcare, national security, education and so on. Where in employment the temptation is gone as the tax is removed before payment the same cannot be said for self employment. Tax saving is your gig now.

Since I’ve been freelancing I have routinely saved 40-50% of my earnings for tax purposes. With a student loan I knew I needed at least 30% of my earnings for tax purposes but I wanted a cushion where I am relaxed knowing I have enough.

I also never remove expenses off my tax savings. I log them and at the end of the year I know I have a tax deductible amount to take off my final bill. This gives me further security and money back in my pocket.

Always try and run with enough clients so that you can cover your monthly outgoings after 40% is taken off. This way you will always feel far more comfortable. If you don’t have enough then actively pursue more clients. Sure you may have up and down months with earnings but try to save more when things are going well so you have more when you’re on a slow month.

For example:
Monthly outgoings (mortgage, car, general spend): £2000
You will need:

Earnings: £3500
Tax Savings (40%): £1400
Monthly Salary: £2100

The above would have you comfortably within the 20% tax rate so the additional tax saved would leave you incredibly secure financially.

Work out the numbers backwards and if they don’t match up then try and locate more work.

Warning: if you are new to self employment you need to be aware of Payments on account:

‘Payments on account’ are advance payments towards your tax bill (including Class 4 National Insurance if you’re self-employed). Essentially HMRC take half of your projected tax bill in January & July respectively. These extra savings come in handy for this too.

 

In case shit happens fund:

Before making the leap to self employment you will read many freelancer blogs which suggest you need at least 6 months of salary savings before making the move. For some, freelancing is forced through redundancy or a change in circumstances and this just isn’t always possible from the beginning.

I structured this a little differently. I started with a part time role, built my ‘in case shit happens’ fund up on the side as well as freelance clients. I slowly moved towards full time freelance and secured my employer as my first client.

Since being fully freelance I have engineered an ‘in case shit happens’ fund which is as recommended, around six months of essential outgoings. Ideally my long term goal is to get this to 12 months which would give me a financial cushion to make business decisions aligned with my aspirations.

Start small and begin to build up a safety fund. Life has a habit of springing surprises on you so make sure you are covered for any circumstance which may arise.

Why save?

The importance of saving when freelance goes above and beyond the financial implications. Freelancing is a way of life; a decision based on removing the barriers which come with full time employment. Maintaining the life you want to lead is also incredibly important.

Removes anxiety:

The lack of finances and security brings on anxiety. Not knowing if you have enough money from month to month gives you that worrying feeling. With worries, comes irrational decisions which can hamper your decisions. It can also affect your output and the quality of work you deliver to your current clients. This creates negativity across the board. Being anxious is the worst platform for quality work. Saving and a level of financial security prevents high levels of anxiety.

Choose enjoyable work:

Remember why you went freelance in the first place. Most freelancers are born out of frustrations towards the restricted, red tape hugging corporate world. They seek work of a more varied nature and want to work when they are most productive.

The problem a lot of freelancers have is that they struggle to turn down work even if it’s work which is not really best suited to them. The lack of safety net means you take on work you don’t enjoy for the sake of paying the bills. Granted there are times when you have no choice but to do this however having savings means you can reject work which just isn’t something you are going to perform on or particularly enjoy. It gives you a choice.  

Business direction:

Since going freelance I constantly analyse my business direction, the clients I’m taking on, the type of work I want to do and when I want to do it. This is my business, and I want to mould it and move it in a direction I am comfortable with.

I’ve made some difficult decisions and moved on from clients I consider friends. I’ve reluctantly turned down people who really needed my help. This is all because I have a clear direction of where I want to be and the type of work I want to attract.

The savings have a huge bearing on this. Without savings my business direction is dictated to me by my outgoings. This may then take me into a direction which I’m uncomfortable with. With a level of savings I don’t have to snatch at every client who passes my inbox. I can see requests for digital marketing consultants on social media and close the window without having to stray off path.

Business development time:

I spend approximately 16 hours a month working on the development of my business. Updating spreadsheets, tweaking content, responding to enquiries, writing content to serve the freelance community.

I see all this as business development. I’ve come across countless freelancers’ websites where the blog, website content and client testimonials haven’t been updated for months (sometimes years). I believe in many circumstances this is due to the burden of day to day work and constantly chasing more clients without developing the business to attract the RIGHT clients.

Having an emergency fund means you don’t need to fill your calendar every single month. You can have times where you refine your website, write some fresh content and spend time developing your business. Removing the financial burden with savings means your business will prosper in the long term.