I’ve been freelancing for over 20 years now. In that time I’ve always done my own accounts – it’s a relatively simple task, given even in a good year you could maybe expect 20 invoices and expenses are pretty low. (Last year I got an accountant, so I still do my own accounts but he signs off on them and I pay him for it!)
The biggest problem with it is the way your income can go up and down month over month. I’ve always believed in having a three month buffer in the bank, three months of living expenses to ensure that my bills are all paid in the event of work drying up – if I‘ve no work on, I assume it’ll take me a month to find work (if I don’t find work after a month I‘ll need a proper job) then a further month to do the work, then a further month to get paid for it. So worst case scenario is three months.
Of course, what I needed to cover three months 10 years ago isn’t the same as it is now, and frankly I don’t have that kind of buffer any more.
So, I need to rebuild it.
With income being so sporadic (I went Jan/feb/mar this year with no invoices being paid, and almost no income, but that was ok, I had invoices due and work on and money in the bank, so I’d planned for it). I‘ve decided to start a slightly different system than the usual. Basically, right now, money comes in to my bank, and I lodge as large a chunk as I can into a savings account and try and keep my normal bank sitting at an even keel of £2k – once it dips below that I fill it back up again with money from savings. BUT this has the effect of fooling me into thinking I’m only spending £2k per month. My outgoing fixed expenses are about £500 and another £200 that go to two savings account, and another £100 that goes to a holiday funds saving account, so the rest is food bills and all the living expenses you’d expect when you have two kids who eat like adults in the house.
Come tax payment time whatever I’ve squirrelled away in savings a big chunk usually goes to the tax man. (And sometimes I’ve had to borrow a little bit of money to pay that too – don’t do that kids!)
I’ve been planning for a while to move to a system where income goes into savings and I pay myself a fixed amount of £2k per month, that seems like a reasonable amount, without topping the account up. So I’ve been watching my main account like a hawk every single day, and man, it’s worrying. I think it’s having an impact on how I feel about spending money. Well, I hope it is.
Of course, that assumes a regular income of around £33-£35k per year, below that and the tax man will eat up enough that I’ll have to tighten the belt, above that and I can actually start to save decent money.
Having started this first month of this system very loosely – my original plan was to pay myself at the end of the month – I’ve decide a pay date of the 25th is more reasonable. (This is entirely down to the fact I’ve about £60 in the bank right now). Most of my bills are front loaded and happen right at the start of the month (I think I spend about £300 on bills between 1-10th of the month).
I should stress my savings are still pretty decent, plus I’ve a large invoice payment from the US on the way too, so no worries on that front and I’ve another 15 pages of work that I’ll be invoicing probably at the end of the month (If I can get my finger out) But I’ll be sitting waiting to see how close to 30 days payments these guys can do.
Anyway, that’s some inside baseball stuff for you.
