Essential Financial Planning for Aspiring Freelancers: Insights from Vicky Parry

Going freelance can be an exhilarating career move, offering flexibility, autonomy, and the chance to pursue your passions. However, as Vicky Parry, Editor of MoneyMagpie, emphasizes, it also comes with significant financial risks. Before you take the plunge into self-employment, it’s crucial to establish a solid financial plan. Here’s a comprehensive guide to help you navigate the financial landscape of freelancing.

Be Realistic About Your First-Year Income

The allure of freelancing often leads to inflated expectations regarding income. While it’s inspiring to see the success of other freelancers, it’s essential to ground your expectations in reality. The first year can be a rollercoaster ride filled with both triumphs and challenges.

Create a Three-Year Financial Plan

Instead of focusing solely on immediate earnings, develop a financial plan that spans at least three years. This approach allows you to scale your freelance business realistically, helping you avoid burnout and costly mistakes. By setting achievable milestones, you can create a sustainable path to success.

Join Freelance Communities

Isolation can be one of the biggest challenges for freelancers. Joining freelance communities can help combat loneliness and expand your professional network.

Explore Various Communities

Consider joining platforms like Creative Boom Studio for creatives or The Messy Collective for writers. These communities provide invaluable insights into industry etiquette and best practices, equipping you with the knowledge needed to thrive in your chosen field.

Have a Six-Month Savings Reserve

Before embarking on your freelance journey, ensure you have at least six months’ worth of living expenses saved. This financial cushion is vital, as many freelancers spend months securing their first clients and waiting for payments.

Understand Your Financial Position

While saving six months of expenses may seem daunting, it’s crucial for your financial security. If you’re transitioning from unemployment to freelancing, aim to save as much as possible to mitigate the financial strain during your initial months.

Set Up a Business Bank Account

Keeping your personal and business finances separate is essential for effective financial management. Although sole traders aren’t legally required to have a separate bank account, doing so simplifies tracking income and expenses.

Choose the Right Account

Start with a basic current account dedicated to your freelance business. Deposit your startup funds into this account to streamline your financial tracking and ensure clarity in your business transactions.

Prepare for Making Tax Digital

Tax regulations for freelancers are evolving. By 2028, freelancers earning over £20,000 annually will need to report taxes quarterly through approved software under the Making Tax Digital initiative.

Stay Informed

While this may seem burdensome, it can help you avoid unexpected tax bills and keep your financial records up to date. Many business bank accounts now offer integrated software to assist with tax reporting, so explore your options.

Decide on Your Business Structure

Choosing between being a sole trader or forming a limited company is a critical decision. Each structure has its pros and cons.

Weigh Your Options

Sole traders face fewer obligations but are personally liable for business debts. In contrast, a limited company offers personal financial protection and may be more tax-efficient if you expect to earn above the VAT threshold. Consider your long-term goals and consult with a financial advisor if needed.

Look for Grants and Financial Support

While financial support for freelancers can be limited, there are resources available.

Explore Available Options

If you’re transitioning from unemployment, consider applying for Universal Credit, which may offer support during your initial months. Additionally, check out the Turn2Us grant finder for potential grants that can alleviate living costs.

Research Your Rates

Setting your rates can be daunting, but it’s crucial to value your work appropriately.

Avoid the Race to the Bottom

While it may be tempting to undercut competitors, this can devalue your services and harm the freelance market. Research industry standards to establish fair rates, and ensure your invoices include terms for late payments to encourage timely client payments.

Set Aside 40% of Every Invoice

One of the most challenging aspects of freelancing is managing your income effectively.

Budget for Taxes and Savings

Set aside 40% of every invoice to cover taxes, National Insurance, and unexpected expenses. Additionally, consider contributing a small percentage to a pension, as even minimal contributions can accumulate over time.

Consider Part-Time Work

Transitioning to freelancing can be a significant adjustment.

Maintain Stability and Community

A part-time job can provide a steady income while you build your freelance business. It also helps you stay connected with others, maintain a routine, and keep your skills sharp. Plus, part-time work can lead to new client opportunities through networking.

Conclusion

Embarking on a freelance career can be rewarding, but it requires careful financial planning and organization. By following these guidelines from Vicky Parry, you can set yourself up for success and navigate the challenges of self-employment with confidence. Remember, preparation is key to thriving in the freelance world.