How to best manage your finances as a freelancer

PHOTO: Pexels
Coffee meetings at 11am, yoga sessions in-between conference calls, attending networking/Zoom drinks daily, this is the life you imagine as a freelancer.

While calling your own (work) time is a dream of many, the grass isn’t always greener on the side of the freelance fence.

There are a number of issues often overlooked: continually pitching for business, being your own HR and accounts department, chasing late payments, balancing work and personal time.

While the list can feel overwhelming, half the battle is sorted with a solid financial plan.

To get you started, we speak with Michelle Ngiam from Great Eastern Financial Advisers on settling the crucial money matters to allow you to focus fully on becoming your own boss. 

How much do I need for an emergency fund?

PHOTO: The Straits Times 

If the first half of 2020 has taught us anything, it is that everything can change overnight. One moment you’re in the money, the next, you have no idea when you’ll get paid.

While Ngiam advises an emergency fund of at least  six months of monthly expenses for salaried employees, for freelancers it’s double.

“Due to the nature of variable income, they should set aside preferably at least 12 months to tide them through lean months during emergencies.”

The fund not only provides for peace of mind but if something unexpected happens – say a pipe bursts in your apartment – you’ll have a ready source of funds to tide yourself over.

To keep your emergency fund being eaten by inflation, put it in a higher interest savings account. UOB, CIMB and Citibank all have accounts that don’t require a salary credit and interest rates can go up 1.5 per cent per annum.

What’s a good strategy for managing cash flow?

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Committing to a budget will be key to a less anxious life as a freelancer.

Not only will a budget help you weather through fluctuations and slow months but it’ll keep spending in check, especially on the good months.

Ngiam singles out two approaches. “You can try the 50/30/20 approach, which involves 50 per cent on non-negotiable expenses (Needs), 30 per cent on discretionary expenses (Wants), and allocating the final 20 per cent (Savings or Taxes). Another approach, the zero-based budgeting method means allocating all your money to expenses, savings and debt payments.”

Whatever you choose Ngiam emphasises “over-budgeting for the first year as certain expenses may be overlooked being new to the gig economy.” She also cautions being prudent till one has gotten a concrete feel of business ebbs and flows.

What medical insurance should I purchase?

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As a freelancer you automatically become your own human resource department.

On the upside you decide the hours/days you work, the public holidays you’ll observe and even the type of medical coverage to have.

Ngiam advises prioritising a review of insurance needs and to consolidate plans to reduce payable premiums.

While having multiple plans sounds confusing, what you’re really doing is protecting yourself in the event something untoward happens.

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Aside from Life, Hospitalisation, Critical Illness and Personal Accident plans, she also advises additional ones like Income Protection Insurance (pays a daily cash benefit if one is on medical leave for a certain amount of days), Disability Income Insurance (provides a monthly payout up to 75 per cent of income if a disability renders one unable to work) and Business Insurance (which dependent on the nature of the business can potentially safeguard against legal liability).

Also, while budgeting, keep in mind anyone earning above $6,000 is responsible to make a Medisave contribution. The amount varies according to income and age. 

What about CPF contributions?

While freelancers are not obliged to make CPF contributions, this shouldn’t be an excuse to put off retirement savings plans.

“You can contribute a maximum of up to $37,740 a year spread across all three accounts,” shares Ngiam who adds that the forced savings can be used to off-set one’s income tax and become more tax-efficient.

On that, at up to 3.5 per cent interest per annum on Ordinary Account (OA) monies, and up to 5 per cent per annum on Special and MediSave accounts (SMA) monies, this beats stashing cash in the bank where interest rates are currently very low.

What’s the deal with income tax?

Gone are the days where it takes just five minutes to fill up your tax return.

As a freelancer, the annual tax filing exercise – and understanding all the various tax reliefs, rebates and deductions – is now your responsibility.

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Ngiam recommends immediately setting up a separate account where 20 per cent of every payment is set aside as estimated tax payments.

“Many employees get their taxes taken out of their pay before they even see it, therefore it is easier for them to budget for their expenses,” says Ngiam.

“As a freelancer, the onus is on you to make such concessions on your income. That is why it is a good habit to separate the estimated tax payable into another account to ensure you are well-prepared beforehand. You can automate the payments and I’ll recommend over-budgeting and setting aside 20-30 per cent of your income for the first year. After that, when you have a better idea of your business income and expenses, you can re-calibrate the amount you set aside for the future tax payments.”

How do I keep saving for retirement?

Going freelance presents the additional challenge of maintaining disciple around retirement savings.

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With CPF being a voluntary exercise, Ngiam warns that it can leave one behind in building up a retirement nest egg.
“In and outside of CPF, insurance savings plans are useful, as these have a guaranteed value and staggered payouts that can also match your intended retirement plans,” advises Ngiam.

Typically conservative products where the risk is transferred to the insurer, a choice she points to is Great Eastern’s Supreme Retirement which has a high guaranteed monthly income and also starts to pay out annual cash bonuses from the second year of the plan.

“To stay ahead of inflation, your retirement income will be raised by 25 per cent of your first monthly payout every five years,” says Ngiam explaining further that upon retirement age, one will be entitled to a lump sum Retirement Reward of up to 24 times of selected monthly income and a guaranteed monthly income for 20 years.

This article was first published in Her World Online.