The lifestyle of a freelancer or gig worker differs significantly from that of a person employed full-time. For starters, your definition of an office is very different – you can be working from home, at a café, or hot-desking at a co-working space. It can also mean starting at 8 a.m. if you’re an early bird, or burning the midnight oil if your creative juices flow better after sunset.
However, being your own boss comes with its own set of challenges. As a solopreneur, you’re on your own. You’ll have to handle accounts, sales, marketing, business development, invoicing and more, and of course, still do the actual work. This can get overwhelming. Although you have the liberty of making better freelance lifestyle choices, there are nagging things that you need to safeguard against.
One of the biggest worries of freelancers and gig workers is that they often find their income fluctuating. Your income is dependent on the number of projects and how fast you get paid rather than regularly receiving it at the end of the month. This can adversely affect your budgeting needs as your personal expenses will likely be on a monthly basis.
To avoid finding yourself in a situation where you’re strapped for cash or find yourself in financial distress, here are 4 financial moves you can consider.
1. Separate your business bank account
When you decide to leap from full-time employment to work on selected gigs, it’s important to consciously treat your freelance journey as a business. One of the first steps to doing so is to separate your business and personal bank accounts.
Depending on whether you’ve decided to incorporate a business entity for your freelancing, you may or may not be able to open a business bank account. Even if you can’t, it’s going to be much easier to utilise a separate personal account for your business needs.
Opening this separate bank account can help you track and manage your business income and expenses better, and is also helpful in the long run for tax purposes. The last thing you want is to have to go over every transaction at the end of the year to differentiate business and personal expenses.
2. Plan for an oversized personal emergency fund (don’t neglect your cash balances for your business)
Regular 9-5ers are typically advised to keep an emergency fund equivalent to 6 months of their income. For a freelancer, this can be risky, and you should consider doubling it if you can. Due to irregular income from your work, you should build an oversized emergency fund to help you meet your personal expenses.
Many also tend to neglect expenses that come yearly rather than monthly, such as insurance premiums, annual health assessments and dental appointments you may have and others. While we usually associate emergency funds for personal expenses, you should also consider having an extra stash for your freelance business expenses. COVID-19 has taught us the importance of this. Many freelancers found it difficult to maintain business expenses, such as co-working space rentals, digital tools subscriptions and even paying themselves while business took a turn for the worse. Having the financial muscle to sustain your business expenses will come in handy in such trying times as well as it provides you with another safety net, which could be in the form of a smaller monthly salary.
Another reason for having sufficient cash in your business account is for cashflow purposes. While you may have a healthy stream of projects, different companies have their own payment terms. You may only end up getting that big cheque 30 or even 60 days after completing a project. In that time, you need to still fork out cash for your business expenses as well as to continue being able to pay yourself a salary.
3. Set aside a portion for CPF contributions and taxes
As a Singaporean freelancer or gig worker, you are typically not required to make mandatory CPF contributions to yourself (the only mandatory top-up that needs to be done is for your Medisave Account). This could also be dependent on your choice of business entity incorporation and how you pay yourself.
While typically not required, you may want to consider contributing to your CPF for several reasons. Firstly, as a Singaporean, you can use your CPF for housing, education and it helps you build up your long-term retirement nest egg. This is especially since the 2.5% you earn from your CPF Ordinary Account and the 4.0% you earn from your CPF Special Account is better than the bank interest rates. This is also risk-free – which means there is no risk of losing money and a guarantee that you will earn the returns, unlike investments.
A mandatory payment you have to make as a freelancer is income tax (if you earn more than $20,000 a year). Again, depending on the type of business entity you have incorporated, you need to look into how to pay your income tax, both personal and corporate income tax (if required). Self-contributing to your CPF is actually an expense that can lower the amount of tax you pay. By contributing to your CPF accounts, you can also stand to receive tax reliefs.
Circling back to the earlier points, having a separate bank account for personal and business expenses, as well as keeping sufficient liquidity buffer, will help keep these worries at bay. As a freelancer and gig worker, focusing as much time and effort on money-generating tasks like project deliverables brings in the cash.
4. Secure yourself with adequate insurance
Thanks to the mandatory requirement of contributing to your Medisave, freelancers and gig workers are automatically covered for basic medical insurance via MediShield Life and basic severe disability insurance via CareShield Life (or ElderShield). However, basic insurance protection may not be sufficient for freelancers, especially since you cannot bank on any extra corporate insurance for private hospitals or any disability or critical illness issues. This is also important since you do not have paid sick leaves and hospitalisation leave.
Once you are sick and unable to do work, you stop getting paid. Worse still, you have to continue paying for your business expenses.
For these reasons, you need to supplement your MediShield Life and CareShield Life with adequate hospitalisation insurance coverage, that precludes higher class wards or private hospitals if you wish, in addition to insurance coverage for critical illness, personal accident and disability.
You can also consider insurance for freelancers, such as Gigacover, which provides income protection if you are unable to work due to illness or injury, and cash payouts for every day of valid medical leave. As this type of policy is relatively new, you should read the terms and conditions in detail as well. Doing this will protect you in the case that you fall ill or get injured and are unable to fork out the hefty medical expenses that come with treatment.
Beyond that, having an income protection plan is just as important to cover you in case you are not able to work in the long term. As a freelancer, you are often the sole person operating your business and not being able to work means you will face difficulties in making ends meet. If you want more insurance coverages such as life insurance or business insurance, and find it hard to justify paying high premiums, you can also factor your premium fees into your hourly rate when you invoice your clients.
Defining clear lines between personal and business expenses
Freelancers and gig workers must define clear lines between personal and business finances. Not only does this help you manage your business better and ease your workload when accounting for taxes, but it also ensures that you are covering yourself against potential downfalls due to any unforeseen circumstances that hinder your income generation. Having sufficient savings and investments (insurance or otherwise) is akin to preparing an umbrella in case of rainy days in the future.
And, if you need some more help figuring things out, you can make use of the Autumn app, a digital financial and wellness solution that gives you an overview of your finances, helps you plan for the future and achieve your life goals, no matter what stage you’re at. Join our waitlist at – http://www.autumn.sg
* The information in this article is not intended to be and does not constitute financial advice, investment advice, trading advice, or recommendation of any sort offered or endorsed by Autumn.