One of the so-called basics of personal finance is to use ‘automatic savings’ or to ‘pay yourself first’. In a nutshell, your wages arrive once a month and you set up standing orders etc to whisk some of it off right away to accounts for savings and investments. It’s supposed to reduce the temptation to splurge, and creates an easy long-term wealth creation habit.
In principle, I think this is a great idea. As a freelancer, though, you often don’t know when you will be paid for a job, and it’s possible that you could have months where you don’t earn much at all. Is it possible to pay yourself first under these circumstances?
I’d say yes, as long as you’re earning a little more than enough to cover the basics most months. If you’re earning less than that then the priority for most freelancers would be to focus on increasing income. That’s maybe an article for another time…
Meanwhile, let’s say you’re running a reasonably thrifty household, the basics are covered by your earnings at least ten months out of twelve, and there are no out of control debts etc to worry about.
What I’ve recently gone back to doing is splitting each payment as it comes in. That includes:
· A payment towards my tax bill and savings for business expenses (I know much can be offset against tax, but I like to have enough money to buy things upfront)
· A payment for personal savings, investments, pension etc
· A small fund for treats
· A majority share to household bills and everyday expenses (this stays mostly in my current account, but I’m also saving £25 a month out of this for the Christmas fund in a separate account)
Why have these accounts and payments?
Putting money aside immediately for my tax bill gives me a lot of peace of mind. Getting a tax demand when you don’t have the money to hand is really stressful, so that portion of earnings goes off quickly to a savings account with a regularly-checked interest rate.
The slice that goes for savings is a way to build up an emergency fund, among other things. Freelancers need an emergency fund to dip into on months when income is lower than desired, to help smooth things out. I’m currently rebuilding my emergency fund as a priority compared to other savings and investments, and the proportions of savings and investments etc will change after that because it will be on to the next goal.
A treats fund is a tiny amount of pocket money that I allow myself to spend completely free from guilt or worry. In the past I had a savings account with an ATM card for this, the sort where it wasn’t possible to go overdrawn. The interest rate completely changed on that so I stopped using the service, but I’m thinking about searching out a new product if a good deal can be had.
The household and everyday account is just in my current account, which pays some interest and is very easy to access and review. Bills, groceries, travel etc comes out of this one, and smaller savings on good months. In the interim period, any scraps of cash left over at the end of the month – if any – will get swept into the emergency fund as well, so that’s sort of pay yourself first and last if it all works out ok.
Breaking that down completely
For each £100 in income that arrives, my planned split for the next few months will be:
· £25 to tax and business
· £25 to savings
· £4 to treats
· £46 to bills and everyday expenses
Let’s see how that works out! It’s easy enough to change the proportions as you go along if it isn’t quite right.
Are you a freelancer? How do you make sure you can pay your tax bill? Do you have any tips for creating savings when your income is irregular?