Small Business Advice Week: Tips on how to budget
This week is Small Business Advice Week. IPSE is contributing to the conversation throughout the week by offering articles of advice for the small business community. For more information on Small Business Advice Week visit their website here or follow the hashtag #SBAW on Twitter.
Let’s face it – no one likes looking at their bank statements. But because freelancers are paid on a project by project basis, it’s especially important you’re able to manage your personal finances as well those of your business.
Here are a few quick tips to help keep your finances in order.
Keeping an eye on your finances
First things first, you need to know how much money you have going in and out. But knowing how much you’ll get paid for your next contract, when it will be and how long it will last is difficult. It’s worth taking an average of your earnings across a number of months and use that figure as a starting point.
Categorise your essential personal expenditure, such as rent or mortgage, food shopping and loan repayments, and allocate budget especially for them. These should be paid first. Then do the same for recreational spending, such as eating out and buying clothes. Set yourself a limit for each category, record how much you spend and stick to it.
Using technology to help
There are plenty of handy apps that can help. Money Dashboard, for example, does a lot of the hard work for you. By allowing the app to access your bank account data, it can automatically categorise your income and expenditure, showing you exactly how much is going in and out, towards what and when.
Saving for the future
But what if your income changes in the coming months? You should anticipate this by building in a buffer which you save every month to account for a decrease in earnings, or act as a savings pot.
This can be difficult. With interest rates at historic lows of 0.25 per cent, returns for savers are poor. Regular savers accounts with higher rates, if you read the small print, give pitiful returns if you make a withdrawal before one year. This means they are not ideal if you need access to cash between projects.
Those able to take on a little more risk can opt for stocks and shares ISAs or peer to peer lending. These offer higher returns but you can also lose capital, and it may take some time to withdraw your cash should you need it. Surprisingly, some current accounts now offer better returns than ISAs, but only up to a few thousand pounds.
The former Chancellor introduced Lifetime ISAs (LISAs), as part of the Lifetime Savings Bill, which come into effect in April 2017. Positioned as savings vehicles for young people looking to save for their first home, this could also act as a way for the self-employed to save for their retirement.
Those between 18 and 40 will be able to deposit up to £4,000 a year until the age of 50 and receive a 25 per cent Government bonus on top of savings when withdrawn tax-free at 60. IPSE believes this should be extended to allow for larger maximum annual payments and should be made available up until the retirement age. However, if you’re able to, this could act as a handy savings pot for when you retire.
For our members, we offer IPSE Futures, where you are able to join pension, life assurance and private medical healthcare schemes at group rates.
So – budget, plan and, like all good freelancers, be flexible!
Follow Adam on Twitter @AdamIPSE.