Becoming self-employed is a daunting process.
There are a lot of different things to consider, from how much you’re going to spend on your business to get it up and running, to how you’re going to ensure that you have a regular source of income each month. However, more and more people are beginning to leap into self-employment throughout the UK.
The rise of cloud computing, digital working, and eCommerce means that anyone can launch a business, even from the comfort of their own home. All you need is the right plan to get you started – and that plan needs to involve the right business budget.
The following tips will help you to manage your money when you’re self-employed.
- Understand the Need for a Spending Plan
As much as you hate the idea of having a budget, it’s essential to know how you’re going to spend your money as a freelancer. You don’t have the same support as a self-employed person that you had when you were a standard employee. After all, you need to handle everything from your taxes to your retirement fund on your own.
When you’ve got a fluctuating income, and additional expenses to worry about, a budget is how you stop yourself from entering any dangerous financial situations. Don’t avoid budgeting just because you think it seems too restrictive.
- Try to Estimate your Monthly Earnings
It’s not always possible to have an idea of how much you’re going to earn one month before the month is over. When you’re self-employed, there’s no guarantee of how much you’re going to make. However, if you know how much you charge for a product or service, and you know how many clients you already have waiting in the wings, you can make a cautious estimation of your monthly earnings.
Knowing how much you’re potentially going to earn each month will also help you to decide whether you need to invest more time and effort into marketing your products and services. It should help you to determine when you’re likely to have slow months too.
- Keep Personal, and Business Expenses Separate
It’s crucial to keep business and personal expenses separate as a freelancer. This can be difficult at times, particularly when you’ve taken out a loan to fund your business, but your accountant or bookkeeper will be able to give you some advice if you’re struggling. Keeping your personal and business expenses as separate as possible will reduce your risk of any confusion when you’re trying to track your incoming and outgoing money.
You’ll also find that it’s much easier to find deductible expenses when the time comes to file your taxes with the HMRC.
- Set Money Aside for Taxes
Speaking of taxes, make sure that you’re prepared for them each year. No-one’s going to handle your contributions for you. This means that you’re going to need to save a portion of your income from every customer away to pay your taxes each year. If you’re worried about this, speaking to an accountant can help you to figure things out, like your tax rate and national insurance contributions.
Usually, beginners will need to save about 20% of their income away each month, but you might need to save more as your earnings go up.
- Make Savings Essential
As a freelancer, it’s crucial to get into the habit of saving some of your earnings away for a rainy day. When you’re self-employed, there’s no-one saving towards your retirement on your behalf. Your savings can help to ensure that you can maintain your quality of life when you decide to retire. Additionally, saving some cash each month will protect you when a client stops using your service, and you’re not earning as much as you used to.
Your emergency savings keep you covered while you look for opportunities to fill the gap in your income.
- Have a Bare Bones Backup Budget
Finally, make sure that you know exactly how much money you need to keep the lights on from day one. This is your “bare bones” budget, and you can use it to ensure that you’re not going to end up in dire straights when you first start to experience issues in your company.
When your income is lower than usual, you can switch to your bare-bones budget, to avoid over-spending when you can’t afford it. On this budget, you won’t be able to afford things like extra marketing, specialist support, or bonuses. You’ll be working on minimum expenses alone.
