Getting on top of your finances not only makes a huge difference to your wallet, it helps to reduce stress, give peace of mind and offer a sense of security for the future. Taking the time to manage your money better can really pay off.
As we welcome in the new year, January is ripe with opportunities to take control of your finances.
Below, we explore some important financial habits to cultivate in 2019.
The importance of budgeting
Budgeting is important for everybody. Whatever your occupation, whether you are employed, self-employed, a freelancer or a contractor. Budgeting your money ensures that you will always have sufficient funds for the things you need and for the things that are important to you.
Setting up a budget
Taking your monthly income into account you can work out a budget that works for you with the following steps:
- Establish how much you need to set aside for essential costs including: rent or mortgage payments, bills, your mobile phone contract, transportation, food and any other expenses you may incur.
- By deducting these costs from your monthly income, you will be left with a baseline figure which indicates how much you will have leftover.
- Now you can set a budget for how much you will spend on pleasure and leisure and establish a figure you will set aside for savings.
- It is also a sensible idea to budget for the unexpected by setting up an emergency fund. Putting aside even a small amount of money will help out in the eventuality that you are faced with unexpected costs such as your boiler breaking or your car needing urgent repairs.
Budgeting for the self-employed
For contractors, freelancers and the self-employed budgeting a variable income can be a little trickier and requires keeping expenses as predictable as possible.
Ebbs and flows, feast or famine. This is usually the reality for contractors, freelancers and the self-employed when it comes to work and income. Even the most experienced or seasoned will find that there are inevitably periods that the phone stops ringing, and work dries up.
Whilst this way of working can be highly rewarding, both financially and personally, getting by without a predictable income requires preparation, planning and budgeting.
Firstly, it is important to track your expenses. Over a 3-month period observe and record how much you are spending within a month. Now you can work out an average figure of your monthly expenditure.
Financial experts advise the self-employed to live off 50% of their income. That leaves the other 50% for flexible expenses and savings. Remember, you need to save for tax, National Insurance and pension contributions yourself – and don’t forget about personal savings and emergency savings.
Contractors, freelancers and the self-employed are responsible for making their own tax contributions. Taxes do no automictically get deducted from their income as it would for an employee.
It is therefore important to remember to set aside enough money to pay taxes within your budget. That way, when the tax bill arrives, there will be no nasty surprises.
Each time you get paid, keep a running total of your earnings and plan accordingly. From this you can draw up an estimate of how much you will owe in tax.
Be organised. File your tax return with plenty of time to spare as to avoid the £100 fine. This is easy to do online by registering for your Unique Taxpayer Reference.
Don’t forget to record your work-related expenses. Keep a detailed record of your business expenses including travel, marketing costs and any equipment you have been required to buy. These can be offset against your tax bill.
Open a business account
For contractors, freelancers and the self-employed who are able to claim certain business expenses, mixing personal and business costs can make life much more complicated.
It’s therefore a great idea to open a separate business bank account for your salary, taxes, business expenses and emergency fund. This will make life a lot easier when it comes to distinguishing between business and personal expenses.
Invest your money
Investing in an ISA can be a valuable financial tool. There are two types of ISA, cash and stocks and shares. At the core, they are a great, tax free way to save money.
The difference between an ISA and a standard savings account is that the interest earnt in an ISA is not taxed.
A stocks and shares ISA allows people to invest money in equities, bonds or commercial property without paying personal tax on any returns from this investment. Rather than shelling out for capital gains tax once profits have hit a certain threshold, the gains made can be kept.
Choosing your options
There’s never a better time to pick up some great new financial habits than the beginning of a brand-new year.
For contractors, it is important to remember that when planning your finances, you will need to consider the way you choose to work. Depending upon whether you set yourself up through a limited company, register as a sole trader or use the services of an umbrella company, you will be subject to different rates of tax and varying payment schedules.
Each option has their own benefits and draw backs, but as a rule setting up a limited company typically involves more paperwork and ongoing reporting. Tax is paid on profits once a year, and VAT once a quarter if registered.
Registering as a sole trader means less paperwork, yet there is more tax to pay. A sole trader pays income tax on the entirety of their profit and income.
The third and final option is working through an umbrella company. This option requires less paperwork, admin and ensures consistent payments. This way of working can make it easier to budget and know exactly where you are with your finances.