Cherry Sophomore recently left his high-paying corporate job to work full-time as a freelancer. All upbeat about his new beginnings, he worked hard on several successful projects and was able to earn quite decently. He had a single bank account and a credit card for all his work-related and personal needs. For the first few days, he judiciously recorded all his expenses on a spreadsheet, but after a few days, the work pressure and deadlines made him lose track of things. Unsurprisingly, as the month waned, Cherry was struggling to match his accounts and also missed paying his life insurance premium. He knew he needed to automate his finances as much as possible.
We, humans, have a relatively short memory bandwidth. Keeping a tab on ten things at a time isn’t a feasible solution. It would only make you lose your wits more than you lose your hard-earned income. Just give yourself a minute and think over, when was the last time you looked into your mutual fund policies or investment plans, whose files lay stacked up nicely in one corner of your cupboard. You keep delaying until the danger bell starts tolling. It is ironic that we never forget to keep enough milk or veggies for the next day as we won’t get our hot cuppa of tea and a nice warm breakfast, but we keep postponing managing our finances and investments that would eventually add to our existing wealth.
Why Even Automate?
Putting your finances on autopilot mode, especially for a freelancer, has its own utilities. First of all, A freelancer doesn’t get a lump sum salary amount credited into their accounts. Usually, the salary an employee receives is the ‘cash in hand’ fund after several deductions such as employee provident fund scheme, pension scheme, group health insurance, and so on. For a freelancer, the income trickles in on a project basis, in fragments, and isn’t even regular or fixed. Also, the income received is the gross amount from which deductions for both work and office expenses have to be made, provisions for the future have to be set aside, premiums and installments have to be made!
Above all, a freelancer has to budget his earnings in order to decide their tax bracket and make provisions for the same. A sound financial plan isn’t complete without a share for savings and investments. Does hearing all this make you think how much easier it is to earn than to manage what you have earned? Pretty understandable.
Putting your finances on autopilot means making arrangements for your financial tasks and obligations such as bills, taxes, investments, and budget without going over them each month.
The Freelance 101 Guide to Managing Your Finances
Automation frees up valuable time which can be better utilized in your work or doing things you enjoy. You can have timely payments, negligible miscalculations, and lessened financial worries using these simple ways to automate your finances:
The 50/20/30 Budgeting Rule
Every freelancer has unique needs, some might prefer working from their study while others might prefer a co-working space. Some need more fixed assets while others need to spend more on raw materials and supplies. Based on your unique situation, assume an approximate monthly income for yourself. You could use the 50/20/30 as a guide to planning your expenses accordingly. 50% of the budget allocation is for essential expenses, 20% for savings, and 30% for personal lifestyle needs out of your after-tax income. Tweak the ratio to suit your requirements and create a financial plan around it to limit your expenses within the limits set by you. This habit of pre assigning funds can go a long way in helping you achieve your financial goals.
Set up Automatic Payments as a Freelancer
You can start by creating a bills folder, preferably, in your email account, and transfer all the monthly and weekly payments there. This would help you ensure what to put on autopilot and what not. Use direct debit to pay your bills automatically.
Open a new bank account with net banking facilities to be used specifically for your recurring monthly expenses. An app, if available for the aforementioned bank account can come in quite handy. Set up automatic payments to be paid out of your new account for less-flexible but recurring expenses such as electricity, rent, insurance, loan installments, premiums, etc.
Make Room for Savings
Setting aside funds for future emergencies and life’s surprises is paramount for any freelancer to smoothen the bumps and troughs in their lives. You could open a new bank account just to serve this purpose that doesn’t have any bill pay or debit card features. A direct deposit from your income account to this account of up to 20% of your income after tax is recommended. Try and make it difficult for you to access this money- go for a term deposit or a recurring deposit or any of the government saving schemes and set up a direct deposit from your income account.
Automate Your Investments
As freelancers, tight on budget or no, it is up to you to decide your investment goals and what percentage of your savings should go into investments. Based on your risk appetite, list down your investment options such as stocks, bonds, funds that would form a part of your investment portfolio. Several country-specific tax breaks and exemptions are available on such investments. Research well for the same before automating the funds into specific investments.
Tax Management as a Freelancer
As an employee earning a fixed salary, your tax worries are minimal all thanks to the accounts department of your organization and your CA. When it comes to freelancing, there is no such vocation available, the income you would be earning in the entire year will be fluctuating. Go for an estimate of 30% of our income to be set aside for taxes from every payment you receive. Saving up in advance for your taxes accruing at the end of the year takes discipline and restraint on your part. Believe us, the discipline is worth it. If you are unsure about whether your funds would remain intact in your personal account, open another account for tax purposes only.
Opening so many accounts might sound freakish but that’s the best way you can segregate and tether your finances without much intermediation on your part. However, managing separate accounts is in itself a management task. That’s where Neobanks can help freelancers by automating their financial needs via a variety of utilities.
Neobanks like Salt offer banking services online to their customers at lower costs and deliver distinctive customer-specific services such as the convenience of opening accounts, seamless payments, remittance solutions, transfer solutions, and a lot more. Freelancers, especially, can alleviate their financial management hassles via such banks integrating tech innovations and banking like never before.
