10 Tips to manage your money as a freelancer

10 Tips to manage your money as a freelancer

Around 2 million people in the UK have waved goodbye to the daily commute and unshackled themselves from demanding employers by becoming freelancers. This autonomous working style offers them professional independence, flexibility, and control. But unlike traditional employment arrangements, the onus is on them to manage their money. They must channel their inner accountant, having swapped a steady monthly salary, built-in deductions, lifestyle benefits for sporadic work, potential cash flow bottlenecks, and headache-inducing tax obligations.

It is crucial to understand how to manage your money as a freelancer to maintain financial stability and success – making it just as important as the work you produce. Our ten tips will help you stay on top of your finances, so you can concentrate on making money on your own terms.

1. Set a budget

A well-planned budget offers you compelling benefits: it gives you a clear picture of where your money is going, it facilitates informed financial decisions, and it helps you spend less. Start by tracking your income and expenses. Understand your average monthly earnings and fixed expenses like rent, utilities, and insurance. Allocate a portion of your income for taxes, savings, and variable expenses.

Budgeting should be a dynamic process. It’s not realistic to set a budget and then stick to it for a prolonged period. After all your income, expenses, and cost of living won’t remain static. List your expenses before the start of each month and save previous budgets as records so you know whether you’re spending more or less.

2. Set aside emergency funds

Freelancing income can be unpredictable, so it’s essential to establish an emergency fund – a stash of money intentionally set aside for a rainy day. Aim to save three to six months’ worth of living expenses to provide a safety net during lean periods or unexpected financial emergencies. This money should be kept separate from your personal savings and should only be used in an emergency.

3. Separate personal and business finances

Open a separate bank account for your freelance income and expenses. This helps you keep track of your business finances accurately, simplifies tax calculations, and ensures you’re not mixing personal and professional funds.

It’s also much easier to identify opportunities to save money if you have transparency over where it’s going. What’s more, you can apply for a low-interest business credit card to make it simpler to manage your payments, with the added advantage of improving your credit score.

4. Track your invoices and payments

Keep a record of all your invoices, including the amount, due date, and payment received. Follow up promptly on overdue payments and maintain clear communication channels with your clients regarding invoicing and payment terms. This will help to prevent cash flow challenges.

5. Plan for taxes

As a freelancer, you’re responsible for your taxes. The best way of ensuring you save enough money to pay taxes and National Insurance is to set aside a portion of your income to cover these financial obligations. This will leave you financially prepared for tax season, meaning you won’t have to worry about finding the funds for HMRC last minute.

Consult with an accountant or tax professional to understand your tax obligations, deductions, and how to optimise your tax situation. For example, you don’t have to pay taxes in the first year if you make less than £12,500 – this is your personal allowance for the tax year.

6. Diversify your income streams

Relying solely on one client or one type of project can be risky. Look for opportunities to diversify your income streams by working with multiple clients, exploring different industries, or offering additional services within your skill set. This helps cushion the potential impact of losing a client or facing fluctuations in demand.

7. Invest in your professional development

Don’t rest on your laurels. Continuously enhance your skills and stay up-to-date with industry trends. Obtaining knowledge and skills related to your industry – or a new industry – is a proactive approach to work that can set you apart from your competition and help you stay relevant and up-to-date. Investing in your professional development can lead to higher-paid opportunities and broaden your client base, providing more financial stability in the long run.

E-learning courses are popular among freelancers seeking to further their professional development. Other resources include webinars, workshops, seminars, conferences and fairs.

8. Negotiate fair rates

Know your worth, and don’t undersell yourself. Negotiate fair rates that reflect your skills, experience, and the value you provide. Charging too little can lead to financial strain and dent your credibility while charging appropriately ensures you’re adequately compensated for your work and provides an air of professionalism.

Consider your living costs, monthly expenses and taxes when setting your rates. If you have plenty of experience in your industry and have built-up skills and specific knowledge that is sought-after by clients, raise your hourly or daily rates to reflect this.

9. Track business expenses

Keep a record of all your business-related expenses, such as equipment, software subscriptions, marketing, and professional memberships. These expenses may be deductible, reducing your overall tax liability. For example, if you work from home, you can claim for part of the water, gas and electricity costs. You can also claim work-related travel expenses such as fuel and train fares to attend meetings.

10. Mitigate currency risk

If you want to join the army of freelancers who have taken flexible working to a whole new level by becoming digital nomads, you will need to mitigate currency risk when managing your money. Our currency converter is a good place to start.

Before you pack your laptop and hop on a flight somewhere with a good internet connection – and plenty of sunshine – get to grips with fluctuating exchange rates. If left unaccounted for, these market movements can potentially drive up the cost of your international payments – denting your disposable income. Fees are another consideration when sending and receiving payments across international borders. These transactions could accumulate large fees with some banks. So, consider using the cost-effective services of a foreign exchange specialist.

Find the best deal on your international payments by comparing the world’s leading foreign exchange companies here.

Tom Vicary