A Freelancer's Guide to Managing Money

About seven years ago I quit my marketing agency job and switched to full-time freelance. At first, it felt like freedom, but then I realised I’d jumped out of a life raft into the ocean and had to learn to swim quickly so that I could pay my rent. No pressure.

One in twenty Kiwis are freelancers like me, and that number is growing fast. Most of them have experienced something similar and so will many Kiwis who switch in the coming years. To make life easier I’ve shared a few lessons I’ve learned the hard way about managing your money as a freelancer.

It’s a good idea to hold onto your life raft/job and slowly transition to freelance work. For example, you could do three days a week of paid work and freelance for two - rather than cannonballing into the ocean like I did.

During this time you’ll have the chance to refine your service offering, set up a website, network, create a budget, and do whatever you can to grow the business. Once you’re feeling confident, you can slowly start reducing hours at your job until you’re full-time freelance.

In a full-time job, you may negotiate pay once a year and you probably won’t have much wiggle room. As a freelancer, you might negotiate once a month, or more and if you quote wrong you could end up vastly underpaid. That’s why doing a bit of research before setting your rates is so important.

To get started, speak to other people in your industry with similar experience to find out what they charge, and how. Take your time when quoting jobs and make sure you fully understand what’s required - ask questions if you don’t.

As a rule, it’s usually best to quote higher and negotiate down than to quote to low. However, if you’re starting out in a competitive market sometimes getting experience is the most valuable and important factor.

Before you begin any project remember to agree on payment terms with your client - in writing if you can. I personally invoice on the 30th of the month and require payment by the 20th of the following, but many freelancers do things differently. And remember when working with bigger companies, it may be you who has to agree to their payment terms.

The important thing is that you’re invoicing regularly to keep the money coming in, and that you’re chasing your clients when they don’t pay. If your clients won’t pay after a few emails you can look at using a debt collector (but thankfully I’ve never had to). Cash is king.

After a year of freelancing a friend of mine asked me how I sorted my tax, and I realised I had no idea. Don’t be like me. Make sure you understand how income tax works before you go freelance, put aside a chunk of your pay each month (20-30% is a good place to start) and devise a system to record your expenses and income.

One option is Hnry - a Kiwi accounting application that automatically pays your taxes, records your expenses and chases late invoices. Xero is another good one but you’ll need basic accounting knowledge to use it (or do what I did and date an accountant).

If you got sick or lost work and had to cover your expenses out of your savings account how long could you last? A recent Finder Survey found that 39% of Kiwis have no emergency fund and wouldn’t last more than a month - only 7% could last three months. Yikes.

As a freelancer, this is particularly important as you won’t get sick pay, and you’ll probably have below-average income security. Broadly speaking there are two possible solutions - income protection insurance and putting aside savings.

Speak to an insurance broker if you’re interested in income protection, and aim to save at least three months of your pay if you go for option two (and make sure those savings go into an account that you can’t easily access). For me, option two works the best as it helps to smooth out the lumpiness of my income - I’m able to draw down on my savings when my income drops and top them up when the money’s coming in.

When you’ve got a 9 - 5 your employer will automatically pay 3% of your income into your KiwiSaver, plus an employer contribution. But freelancers have no such luck - we have to contribute to our KiwiSaver or no one will!

It’s a good idea to contribute at least $1,043 annually (that way you’ll get the free government KiwiSaver contribution of up to $521 annually), or as much as you can easily afford, you’ll still get some government contribution. To simplify this you can automate your Kiwisaver contributions and investments with Kernel Wealth through the Hnry app. As long as you seek the financial advice you need, and assess your investments regularly - you can put your retirement fund on auto-pilot.