Let me tell you a story about freelancing and finances…

Last week I returned home from my holiday to find that one of my long-term contracts was being terminated without notice.

Usually, when setting up a new agreement, I specify one month notice from either party. However in this case I had signed the client’s standard contract. I hadn’t anticipated that it’d be terminated early – but when you are a contractor there’s always risk involved.

Fortunately, I’d already been offered a few pieces of work to get me through the end of the year, but I was also prepared in other ways.

Although it’s never fun to lose work, it’s important to plan for the best and be prepared for the worst. With that in mind, here’s my brief guide to freelance finance.

How to be financially prepared

1. Forecast your income

My contracts can run for anything from one week to a year, so I track my clients and number of contracted days as I go.

On my wall I have a calendar for the year. Under each month I list my client names alongside the number of days or fee for that month. At a glance I can see how many days are spoken for and how much I’m due to earn.

I also keep a spreadsheet with invoices due, sent, and paid where I can track my income, all of which keeps me right when it’s time to file taxes, too.

2. Know your essential costs and income

My basics are rent, bills, travel allowance and food. You may have others, like childcare or a car or a mortgage.

These basic costs amount to an average of £1000 per month. To account for tax and savings (see next point), I need to bring in at least £1400 per month to cover it. (I also work on the assumption that I can and aim to make a little more than that to cover things like clothing, cleaning supplies and maybe even some social engagements.)

Here’s a simple formula: work out your essential costs, divide by your day rate and you’ll have the minimum number of days’ work you need to live. Voilà!

3. Set money aside

I have a rule for getting paid: don’t even look at what’s come in before detracting the basics.

For me the basics are:

20% for business savings (these cover taxes and National Insurance);
10% for expenses (this will depend on your overhead);
10-20% for personal savings (depending on how much is coming in).

After those are spoken for, anything over and above your basic costs can go towards the finer things in life.

4. Limit stress: have a float

Most sources suggest saving enough to cover your basic expenses for at least 3 months before going freelance.

I have a couple of personal savings accounts: one for fun stuff like holidays and treats, and another as a nest egg / rainy day fund which acts as my float. Having a float is vital for any unexpected expenses: loss of business, illness, a broken computer – you name it.

Let’s be real. When you freelance, you probably won’t have a reliable income. Payments will be late, contracts will break, or other life hazards might get in the way. Unless your business covers sick pay and leave, you’re probably not going to be earning while you’re sick or taking a break. Have a float, save, and plan for those instances and cover yourself for those things large and small.

Knowing you have a float can make setbacks (like the one I’ve just experienced) so much easier to deal with. It can still be a blow to the ego, but I know that financially, I’m fine and I have time to find a new opportunity.

5. Don’t kid yourself

Now a general point: have a good relationship with your money.

The worst thing you can do is to be dishonest with yourself about your finances. Even if you think you aren’t “good with money,” you need it to live. You must be good with money to freelance successfully.

6. Avoid the time = money trap

Time is money. It’s a cliché for a reason. When freelancing, time often does have a direct correlation with money – but please don’t let it control you. I see a lot of freelancers give up opportunities to work on their business, or just to relax, because they are too busy working in their business.

Know how much you want to make, how much time and effort it takes to make it, and how far you can reasonably stretch it. Save for rainy days and factor in holidays, research days, professional events and any other time-costs you encounter. You’ll be saner for it.

Your Turn

Did I miss anything? What are your best tips for dealing with freelance finances?

Do feel free to share them in a comment below, tweet me, or shoot me an email and we’ll chat.

I’m available!

As you may have guessed from the story above, I have some availability through 2016. Want to work with me? Get in touch!

Freelance life: my makeshift desk at the in-laws’

The Generation Gap

I was chatting with my father-in-law the other day, and he related a story about hiring a new Marketing Director on one of his projects.

They had found an excellent candidate, fully qualified and keen to work… but her idea of working benefits didn’t quite match those of the interview board members. They were offering a base salary, goal-driven incentives, and health care – a package that they felt was air-tight. She asked about gas mileage, the ability to work from home, and general perks that the business might offer her.

What happened to taking the deal you’re offered? seemed to be the employers’ stance. I argued that the ability to telecommute and on-the-job perks are far greater incentives than salary-driven commissions nowadays. Today’s young professionals are an inherently different breed.

If it ain’t broke…

We are living in an interesting time – one in which young up-and-comers have new concerns and aspirations. We know that job security is a distant dream, and would rather have the freedom to work away from the office and make our own hours than to strive towards (often arbitrary) employer-set goals.

The aspects of work in which we find value, or seek to do so, have changed drastically over the past 20 years. Those who have been in the work force for upwards of 40 graduated into a very different system than ours. They took what they could and worked their way up. There was structure, job security, and economic incentive.

The idea that those with that once-privileged position were virtuous, and that today’s young professionals are entitled young upstarts who negotiate for more than we’re worth is patently ridiculous. It’s an attitude that I’m glad and lucky enough to largely avoid, working mostly in young, innovative industries led by people with similar value systems to mine. (I work in digital and social media – it’s a self-selecting client base. But there’s the rub.)

This got me to thinking about my own life and work.

I have been freelancing now for 3 years, and have never looked back.

I’ve never had a full-time, permenant contract, PAYE office job. I worked part-time in my current field while I studied for my Masters, followed bya series of long-term part-time commitments. Mine has been a portfolio career since day 1.

So why do I do it?

I love the freedom and flexibility that freelancing gives me. Setting my own hours gives me freedom to pursue outside projects, like writing a book or travelling to California to visit the in-laws for 3 weeks without having to take time off.

Freelancing also incentivises me to work, too. At a job you show up, you work, you get paid. Coast for a while, and as long as you don’t get up anyone’s nose, you still get paid. Where’s the incentive? For me, if I really want that new laptop or to pay for a trip, I pick up as much work as possible. When it’s time to take a break – like this month – I can wind it down for a bit.

This isn’t a new attitude for me. As a teenager, all of my friends had part-time jobs in retail. I did too, but always treated it more like seasonal work. I’d get a 4-hour per week contract, work 4-12 hours per week for a few months, then quit. Part of this had to do with living in one town and going to university in another. But mostly it was because I was happy to save up a chunk of money then live on it while taking a longer break.

Why it’s backwards-compatible

Once this taught my Dad a lesson. (One that he’s happy to admit – promise!) It was summer – my last at home before university started – and I got a job at a local supermarket. I’d worked there before, before dropping it to study for and sit my final exams and get out of school as early as possible. When I went back, I was put in the café. It was hot and miserable, I came home stinking of fryer fat, and I’d rather be watching Wimbledon. So that’s what I did. I quit and I watched Wimbledon. At first my dad was pretty angry. Why is she sitting around while she could be making some pocket money? Then a while later, he told me – hey, why should you work a rubbish job when you could be enjoying the time off?

That’s the philosophy I took with me from my pre-university summer all the way to this one, 9 years later. Like that adage: I work to live, not live to work. As a mid-recession graduate, it’s one of the few perks the economy has afforded me.

So give it a shot

Am I entitled for demanding a work life that I want? I don’t see it that way. Being freelance doesn’t make my wants any different from those of my peers. The difference is that I don’t have to face the gatekeeper.

In fact, maybe in 20 years I’ll be the gatekeeper, wondering why the class of 2025 wants a whole different world of working benefits.

Let’s see what the next 20 years bring.

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Freelance Finance