The benefit of separate business and personal accounts and budgets
As a sole trader, it’s tempting to think that one of today’s all-singing bank accounts and apps can do everything for you, business or personal, with a few taps or clicks.
And if you are opting not to incorporate your venture as a plc, you don’t legally need a separate business bank account.
But for any freelancer, your business is just that - a business. So the way to go is separate accounts. You really don’t want to be mixing up your printer cartridges with your Netflix subscriptions, your IPSE sub with your gym membership. Besides, banks tend to frown on using a personal account for business and you might be flouting their Ts and Cs.
Your personal account will handle all your living expenses and bills. So this is where to keep your payments, preferably direct debits, for council tax, rent or mortgage, energy, broadband and insurance. Yes, if you are working mainly or partly from home, some of these costs will be tax deductible against your business income. But you can calculate those later. Paying them out of your personal account will help you maintain an overview of your core outgoings and remind you they are non-negotiable.
How to save money as a freelancer and create an emergency fund
Your working budget may include a monthly allocation to saving, based on your past efforts or the 20 per cent rule. Or you may exclude it until all the more fixed parts of your budget are pencilled in, so you can see how much headroom is left for savings each month.
However you do it, you need savings goals to get you out of bed in the morning. The smarter banking apps will magic up virtual pots which you can name and assign to a must-have, a holiday, or the less glamorous target of paying off a credit card debt.
But before the fun starts, two funds should be top of your wish-list. First is the pot needed to pay your tax bills. Second will be the famous rainy day fund, where you will ideally park three to six months worth of income. Typical money advice says this fund is for emergencies such as a boiler breakdown. But you may already have insurance for that.
For freelancers, the real emergency could be running out of work for a few weeks or longer, though you could consider an insurance back-stop in the shape of income protection.
Whatever you allocate to savings and pensions, building that emergency fund and keeping it topped up should be priority number one. Or perhaps, almost number one, depending on your tax fund, your debt position, and possibly your energy bill credit at the moment.
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