The future of work, for many, will be freelancing. This may conjure up images of working whenever, wherever, and in whatever you want (hello pyjamas!). But there are more pressing things to think about.
When you take the leap into freelance life you need to consider the fundamentals: where will you find your clients, what kind of work will you do, and how will you market yourself?
You’ll need to think about your finances too, because a big downside to the upside of complete career freedom is the insecurity of your income. This can have a knock-on effect on the rest of your finances too, such as getting a mortgage, managing your cash flow, or paying those dreaded taxes.
Luckily, with freelancing and its offshoots (such as digital nomadism) gaining popularity, there’s a host of tools and handy tips to help you handle your finances. Let's explore a few of them.
What to charge
Working out your rate is one of the trickiest things you’ll have to do. Every role and industry will be different, so there isn’t a one-size-fits-all formula to work it out.
Your rate should be more than what you were earning in full-time work because you’ll have additional business expenses that will take a chunk out of your earnings - like taxes.
Obviously, your rates need to cover your living expenses too. It’s worth working out your budget and the kind of annual income that you’d like to achieve, then divide by weeks, months or days to figure out what you should be charging. Don’t forget to include weekends and holidays in your calculations, plus time for admin and new business activities. For ease, you can use Your Rate to break your desired annual income and holiday time down into an hourly rate.
Some industries have benchmark rates published online which you can find through a quick Google search. Otherwise, you can always ask on freelance message forums such as The Freelance Lifestylers.
For digital nomads in particular, but also for any freelancer doing business abroad, consider how to get the most bang for your buck when converting currencies. There are lots of extra costs that could rack up when paid internationally.
If travelling to a lot of different countries, it’s a good idea to keep a bulk of savings in a strong currency (like the Euro) that won’t fluctuate too often and that gives you a good exchange rate. There are services such as TransferWise that will hold and accept money in many different currencies, with fewer charges compared to traditional banks.
Budgeting for freelancer life
Budgeting is generally a good habit to get into, but even more so when you have an irregular income and fluctuating living costs. For nomads, it’s vital to remember that living expenses will change based on the country that you’re living in.
To start your budget, look at your income. Consider what you’ve earned over the past 12 months and use your lowest month’s income as your baseline budget. Plan your expenses around this.
Once you have your budget, track your expenses for a few months to see how close these are to your original budget. If you fall short then you may have to cut back on some non-essentials, revise your budget or reconsider your freelance rates.
Sole trader or limited company?
Another question you’re likely to ask yourself somewhere down the line is whether you should be set up as a sole trader or a limited company. There are pros and cons to each.
Sole traders have less paperwork to do when filing their taxes. In fact, they could use a service like Coconut to do most of the legwork for them. However, if earning over a certain amount they might find it more beneficial tax-wise to become a limited company. Additionally, clients in certain industries may refuse to work with sole traders.
To hire an accountant or go it alone
Another decision you’ll have to make is whether to hire an accountant or do your own taxes. If registered as a limited company, then you’ll need an accountant. But if you’re a sole trader (or even if you just want to keep your accounting fees low) there are many online bookkeeping services that will make filing your tax returns much easier. QuickBooks is a popular option, as it offers an app as well as an online option so you can do your accounts on-the-go.
If your tax affairs are complicated (for example if you have multiple sources of income) then it’s worth getting an accountant so you don’t fall foul of legislation.
Contingency funds are a must
Having an emergency fund is crucial as a freelancer. It will cover you if anything suddenly breaks, if you fall ill or if work dries up for a while. Critical illness cover is another safety net to consider.
You should also keep a portion of your earnings aside to cover your taxes. Try keeping it in a high-interest savings account that you can instantly access, so it earns money before you hand it over to the taxman.
Getting a mortgage
Eventually, you might want to consider buying a new home or remortgaging your current one. This can be a bit more difficult as a new freelancer, but is still possible and gets easier as you have more freelance years under your belt. If you have two years of accounts to show, then you’ll have a greater choice of lenders, even better if you have three years. These accounts will usually have to be prepared by an accountant.
One potential issue that freelancers can face is that many will minimise their reported income to reduce tax - but this isn’t great for mortgage purposes. However, there are freelance specialist lenders such as Precise Mortgages, Kensington and Aldermore Bank who are more likely to understand. Hiring a mortgage broker who can help you navigate this tricky area can also help.
Planning for retirement
Often freelancers and digital nomads will completely forget about saving for retirement. But failing to save means that you’ll be stuck working forever. Plus, there are some good tax breaks that you can get on pension contributions from the Government. So, automatically put some money aside each month and then forget about it until you’re older.
Something all freelancers must learn
Getting to grips with your finances is a key skill for every freelancer. Like freelance work itself, it can take some time to get used to. But it gets easier with experience. If you look after your pennies, the pounds will soon add up.
Photo by Ali Yahya on Unsplash.