The rewards offered through contracting are both personal as well as financial. Despite this, challenges arise; a crucial one being working without a guaranteed income. Below are some simple budgeting tips to help your cash flow.
1. Predict your earnings and set your rate
By already having a contract for the coming six months to a year secured, you should find it far easier to figure out what you will be earning taking into account savings, bills and living expenses. Nonetheless, if you are working on shorter contracts during the year or in between roles, a strategy for you to take is to evaluate what you need to earn to live comfortably. After that, you can estimate accurately what you must earn over the 12 month period in order to achieve that goal. If the 12 month period does not suit you, you can choose any amount of time you believe makes sense.
Remember, one of the perks of being a contractor is that you can choose what you want to charge for the services you provide. This means that you should not only consider what you need to be earning, but what you believe you deserve for your skills. This way you budget efficiently and set a baseline for when you plan to set rates in the future.
2. Find the payroll option which is right for you
Being a contractor or freelancer is a popular decision among professionals because of the heightened earning potential. What is crucial is making the best choice in payroll method. Part of being a contractor is essentially getting paid as a regular employee through agency PAYE, and not through their client’s books. This means they are experiencing the same National Insurance and income tax deductions and only leaves 3 payroll options: limited company, umbrella company or sole trader.
There is potential for those working as a sole trader to benefit from high returns, but they then stand as personally liable for any losses made financially to the business. Using an umbrella company means the contractor receives similar returns to those in full-time employment, but if your working conditions meet certain requirements you may be eligible for some operating costs being claimed. By taking the limited company route, limited liability for financial losses is provided as well as allowing high returns if a tax planning strategy is put in place. This all depends on your general working practices and whether you are happy with some administration to be completed by you along the way.
In short, the payroll service choice you make should depend on your work as well as the lifestyle you preferably want to live whilst contracting. Making the right choice means you can budget for this lifestyle as well as maximising your take home pay. This handy contractor pay calculator will help you get an idea of what you potentially could be taking home through these various payroll options.
3. Save and put it out of your mind
Regardless of whether you are saving for a mortgage or just for a rainy day, following the conventional rule of putting aside 10-20% of your pay you are taking home as savings will help you reach your saving objective. Putting away money weekly or monthly can mean it is easy to dip into these savings, particularly if it is an Instant ISA or simply stowed away under your mattress.
A possible solution to this would be locking away your savings so you are unable to access them. This means you should see these savings as money you no longer have and will be far less inclined to dip into the pot.
Putting away money for a later time is especially crucial for a contractor as work is never guaranteed. When you are in between contracts or have a sick day, these savings will mean you are not left in an undesirable position financially.
4. Look at budgeting tools and apps
Whether you work through an umbrella company or run your own limited company, a favoured method of managing your finances as a contractor is using accounting software, so make sure you take advantage of this kind of tool. A client portal would have been provided for you by your contractor accountant so you are able to track your income and how much you should be setting aside for taxes (for directors of limited companies).
There are endless budgeting and saving tools available for you to give you that bit of extra support:
- You Need A Budget (YNAB): YNAB is a perfect tool for those who are looking for a stricter budgeting regime and this can be accessed on mobile or desktop. The basis of this app is that you import your bank files, assign funds to your current and future expenses so everything is accounted for. The outcome of this is that you spend smarter, as every pound is assigned to an expense.
- Idealo: If you have a tendency to impulse buy or online shop, Idealo is a free app which will help you find items elsewhere for a cheaper price. When you search via the app or scan an item’s barcode, it compares prices. Through knowing you can buy the item for somewhere cheaper, you will undoubtedly save money as well as being possibly being less inclined to shop impulsively as more thought is going into each transaction.
- Pennies: Pennies is an app which uses your local currency to track your spending habits and then assigns you a spending allowance daily. If you spend under your budget or go over it, the app will then modify what you can spend the following day based on that. Pennies will inevitably help you limit the amount of impulse buying you do.
5. Keep your business and personal finances separate
If you have both personal and business accounts, it is vital that you keep your expenses separate from each of these accounts. Essentially, you should not be using your business account for personal expenses and vice versa. This could inadvertedly cause unnecessary tax repercussions (eg. Not being unable to claim an expense against your Corporation Tax bill) as well as possibly giving yourself a director’s loan by accident. This is not a salary, expense repayment or dividend but an expense from a limited company’s bank account and it is fundamental that it is paid back to the company. This example shows why it is so important for your cash flow and budget to be separate as well as organised.
All of these budgeting tips are ideal for ensuring you are aware of what you are spending and making sure you are financially stable when in between contracts, on holiday or sick. The tactics you choose depend on the type of person you are you should go for the method that works best for you. Finally, discussing tax planning with an accountant will ensure you maximise your take home pay.