If you’re organised, you have the potential to earn more and the freedom to work on your own terms. It can come with some challenges however - the most prevalent being that consistent work is not always guaranteed. Here we share some easy budgeting tips that can help your cash flow.
1) Project your earnings and price your rate
If you already have a contract secured for the next six months to a year it is easier to work out what you’ll make versus bills, savings and living expenses. However, if you’re between roles or will be working on shorter contracts throughout the year, a good strategy is to assess what you must earn in order to live comfortably and then price out what you need to earn in the year to get there. It doesn’t have to be over a 12-month period, but whatever amount of time you feel makes sense.
Remember, as a contractor you choose what to charge for your own services, so you should consider both what you need to be earning versus what compensation you deserve for your skills. This will help you budget effectively by knowing what your gross income will be and will give you a baseline for setting your rates in the future.
2) Save and put it out of your mind
Whether you’re saving for a rainy day or for a new home, following the rule of putting 10-20% of your take home pay away as savings can help you reach your saving goals if you can manage it.
However - even if you are able to put money away every week or month, it can be easy to dip back into your savings whether it’s in a savings account or under your mattress.
As a contractor, putting money away is especially important when work is not guaranteed. Saving for a sick day or when you are in between contracts will ensure you are secure.
3) Look at apps and tools to help you budget and save money
Whether you have your own limited company or work through an umbrella company, accounting software is one of the best ways to manage your finances as a contractor, so be sure to make full use of this tool available to you. Your contractor accountant would have provided you with a client portal for you to track your incoming funds and how much you need to keep aside for taxes (for limited company directors).
4) Know what you’re spending
Knowing where your money goes is key to budgeting - so, if you don’t already, track your spending. This can be done in so many ways: a spreadsheet, a notebook, or an app. Try to come up with an average figure of your spending to make sure that you are spending less than you earn.
Try to come up with an average figure of your spending - on items such as travel, eating out, shopping, education, household goods, etc.
5) Separate your personal and business bank accounts
It is crucial to have two bank accounts. One account is for business income and expenses, the other is for personal transactions. Having all financial transactions in one place is extremely useful when it comes to paying taxes and claiming expenses.
6) Get professional advice
Finally, just because you are an independent contractor does not mean you have to go it alone. Benefit from the power of professionals and the power of community.
These budgeting tips can help you be more aware of your expenditure and ensure you have enough to cover times when you are in between contracts, off sick or on holiday. Different budgeting tactics work for different individuals and you should choose a method that will work best for you. You should also discuss tax planning with your accountant who can help you maximise your take home pay.
Contact us if you have any questions on contractor accounting and accounting services.