When it comes to managing income as a freelancer, it can be a roller coaster. One month is champagne and caviar, and the next is 30 inventive mince recipes while maxing out the credit card, writes Fiona Hamann.
Budgeting is not my strength, so I have forced myself to do it right. Now I find that despite income inconsistencies month to month, my lifestyle doesn’t need to suffer. Now I am a few years into my system, I am comfortable to share it.
First and foremost, make sure you are charging a realistic rate, that will keep you on top of your bills and allow you to enjoy life. After all, most of us chose to go solo for the lifestyle benefits.
Charge what you are worth.
There was a time when I felt that I needed to undercut everyone else to do a job. I never quite plumbed the depths of Airtasker rates, but I erroneously thought client priorities were mostly about price. I had to work significantly longer hours to reach my income goals, so I set my rate correctly.
Get an idea of the going rate in your industry. A Google search can help. Some business sectors, such as writing, photography and public relations have handy MEAA rate guidelines to help. Sometimes though, you are more niche, more senior, or junior than the rate cards suggest so will need your own calculations.
Work out how much you need to live comfortably. That could be the full-time salary equivalent of an employee in the same role. While calculating an hourly rate might seem a simple division of desired annual income divided by the number of hours worked, that will leave you short. There are a few considerations you must factor in.
Consider your business running expenses and add that to your desired income. Include superannuation (10%) and any insurances you might need to pay. For example, if your desired income is $100,000, your business expenses are $10,000, and superannuation and insurances are $11,000. Your total “desired income” is now $121,000.
If you are looking at growing your business in the future, you will also need profit (after you’ve paid your salary), so add a margin on top. If you want to make a 10% profit, then your desired income jumps to $133,000.
How many hours will you work per week? Usually, that is between 37.5 hours to 40 hours. How many of those hours are actually billable? If you religiously take a one-hour lunch break, then subtract that from your weekly hours – though I am yet to meet a sole trader who stops for lunch.
Multiply that figure by 52 weeks to get 1560 billable hours per year.
Now take into account public holidays, annual and sick leave. Let’s assume public holidays are ten days, annual leave is 20 days, and sick leave is about five days. That’s 35 additional days (or 280 hours) you won’t be working. Subtract that from your annual hours worked (1560), which leaves you with 1,280 billable hours per annum. Divide your actual desired income ($133,000) by billable hours (1,280), and you get $103.00 per hour.
Had you merely done the first calculation of total hours (2080) divided $100,000 (desired income), without considering your expenses and leave, you would have been left charging yourself out at $48 per hour. Big difference.
Put aside money for tax as soon as you receive it.
It is tempting to spend all your income at once, but I can’t stress enough how important it is to put your tax aside before anything else, so you aren’t caught short by thousands at tax time.
I have a separate account where I immediately deposit GST collected and estimated tax.
My accounting app helps me with that, but I also pay quarterly instalments, so my BAS statement nominates a quarterly sum (useful if you don’t use an accounting app). Once deposited, I don’t touch this money until I need to pay the ATO. Nope – I don’t even look at it. Not my money.
Superannuation. Just Do It!
I also pay superannuation. Religiously. I never used to pay it. After all, there is no legal requirement for freelancers or sole traders to pay super and it can be a significant chunk of your earnings, but I realised there was a good chance that the creative mince meals for lean freelancing months might be replaced by tinned cat food in my retirement years (home brand).
If you don’t pay super but have an account or seven from your full-time employment days, check out the online calculators and see how much you’ll have to survive when you retire. Scary right?
Consolidate all your super accounts into one. Those funds whack you for fees. I chose a super fund that is in the top five performers and has lower fees, but also one that was really easy for me to deposit money into. I pay 10% of my earnings into super. Every. Single. Invoice. Like my GST and tax, I treat the money as if it was never there. I transfer it as soon as I receive it.
Expenses, emergencies, holidays
I have a big media quarterly subscription bill, so I set aside money for it each month. And if I charge my clients for the service, that portion of the invoice is put away immediately. I put it into the same account as my tax money.
I also put aside money into an emergency account. I can dip into it during quieter times if I need to pay for kids’ excursions and things that can’t wait. Ideally, you should aim to have a few months income locked away there, but that can take time.
I also have another account – and I love to check the balance of that. That is my annual leave accruals. I don’t religiously deposit into that, but as often as I can. I save all year for my holiday. It is a pleasure to deposit my money there. Next year we are planning a trip to Europe for the family. Happy days.
While it might sound like there’s not much left after that, it is enough to feed a family and also feel secure I can meet my financial obligations in the quiet times.
It took me years to come up with a system that works for me, but knowing that my finances are in some semblance of order gives me peace of mind year round.
Which reminds me – here’s 44 mince recipes.