How I set up my finances as a freelancer
A few of you have asked about the financial side of freelancing, so I thought I’d share my system and how I set it up. Of course, my approach won’t work for everyone – I had a lot of time to prep for freelance life, but if you want to peep my finances, press play and get the tea!
1) I built a financial cushion over 6 months
Yeah, you heard me. I spent 6 whole months on the run-up to freelance life taking jobs out of hours. Anything I earned went into a savings account so I’d have funds ready for that first month of full-time freelancing.
Not only was this a nice bit of financial security, the process also allowed me to trial freelance life before plunging into it. I built up a client base, got a portfolio together, and figured out whether the lifestyle was for me!
2) Set up a business account
One of my first tasks as a freelance business owner was setting up a business bank account. If you’re a limited company here in the UK, a separate business bank account is mandatory.
There are a ton of sick challenger banks designed just for freelancers and small business owners. They’ve created features to help you on the daily, so it pays to do your homework before you commit. I just went with my normal bank. Because I’m lazy.
3) Spent 3 months increasing the size of my cushion
For the first 3 months of my full-time freelance career, I scraped by on a salary below the UK tax threshold (as advised by my accountant). About £500 a month, I think it was!
Everything I earned went directly into my business account and didn’t get touched. This was mostly because I was petrified of all my work dropping off and partly because I had no idea how much my corporation tax would be.
Once I felt my financial cushion was big enough, I started paying myself a set salary (still below the threshold) and set dividends each month.
4) Capped my monthly income
Fast forward five and a half years! I’m still using the same system to pay myself, although the amounts have increased somewhat!
By paying myself a low salary and taking set dividends each month, I have a stable income that helps me budget. My personal income doesn’t fluctuate month-on-month, and I have enough business funds for paid holidays, sick days, and even maternity leave.
5) Invested in proper bookkeeping software
I tried to cheap out on this in the early days, and boy did I regret it. Whatever you do, invest in decent bookkeeping software — it’ll be way easier to track your finances and it speeds up money tasks, so you’re not wasting precious time.
My software allows me to automate invoices and invoice reminders. It also makes reconciliation super easy, too. Better yet, come tax time, my accountant can access my software, extrapolate what she needs, and just send me the paperwork to check. Magic!
Those are my finances in a nutshell! You can find full and professional advice from the good folk over at The Times.
