A Little Bit Richer

James: This series is brought to you by L&G, helping you build a future that's a little bit richer.

Iona: Hello and welcome to A Little Bit Richer with me, Iona Bain, brought to you by Legal & General. Now, being self-employed can be a financial rollercoaster. Managing the ups and downs definitely can be a challenge, whether it's sending invoices, juggling projects, or looking for new clients, it's easy to forget that actually what's most important is the freedom of being your own boss, even if it can feel unpredictable at times. But how can you make the self-employed life work for you? Well, whether you're bossing it already or dreaming of working for yourself one day, here to give us some tips on managing finances is friend of the show and fellow freelancer, Krystle McGilvery. Krystle is an accountant, campaigner, and speaker who actually has a master's in behavioural and economic science, so she's just the person we need to talk to about planning ahead when you're working for yourself. Welcome, Krystle.

Krystle: Hi, I'm so glad to be here.

Iona: Can you set the scene for us and describe the kinds of challenges that the self-employed can face?

Krystle: Yeah, self- employment is such a fun thing to do, but income is so unpredictable. The challenge that a lot of self-employed people face is not having that stable income like you do when you are employed. You have your salary, it's paid every month at the same time, guaranteed. But when you're working for yourself, you're often chasing clients, you're dealing with payment terms, you're having to look at your bank account and think about costs, so there's quite a few things to manage in making sure that that business runs and functions nice and smoothly. Yeah, it's a job.

Iona: But how important is it for the self-employed to just normalize the conversation around their finances and not fear them and not kind of think that they're failing if they find some aspects of this whole issue quite tricky?

Krystle: I mean, I guess what we're thinking about here is when you are employed, your finances are effectively sorted with a pension and you're contributing, you set that money aside for however many years, you have a retirement plan. When you're self- employed, if you don't do that, if you're living in the moment, kind of generating an income, covering your costs, you're living for today, and you actually don't have anything put away for later in life, whether that's saving, investing, so it's really key to do that initial hard work to get clear on that financial aspect and set something up so that later you can relax.

Iona: Absolutely. Like you deserve if you've worked really hard.

Krystle: Yeah.

Iona: What are the practical ways that people can manage their money when their income isn't predictable?

Krystle: First of all, it's really getting clear on the cash side, so if we think about bills, things you have to pay for. Doing that initial bit of work of looking through what subscriptions do I have? What cost do I incur to make this business run? But then outside of that, what are your personal living expenses? When you're thinking about your income that you need to generate, you're clear on what that number needs to be. And then you're stabilizing ideally in terms of your business plans to generate that income. And that allows you to also factor in savings, investments, and set up those automations so you can plan for the future.

Iona: Are there particular budgeting techniques that might work for a self-employed person who's facing that irregular income?

Krystle: Yeah, there's a few. I mean, the first point again is really being clear about your ins and outs, so having that as your foundation. And you might want to think ahead of, I need to pay this much to myself as a minimum to be okay. And one thing that's really topical is of course the irregularity of your income, so you may have months that are amazing and you'll pay maybe three, four times the basic.

Iona: And then it's very tempting to celebrate.

Krystle: Yes, of course. Yeah.

Iona: But perhaps that's the month when you need to make sure that you're putting extra aside for the lean times.

Krystle: You're spot on. Yeah, so those months where it's amazing and you've been such a success, still see as, okay, I'm going to pay myself what I need to pay myself and put this extra into an emergency fund, maybe top up your pensions if you haven't maximized. And of course you can celebrate, but do it within reason and prepare for the future.

Iona: What is a good way to handle those periods when you've got big invoice gaps, dry spells? How can someone who is self-employed smooth their cash flow?

Krystle: We call it cashflow management. This is where you are paying attention to the fluctuations of your bank balance effectively, so you think about your bank statement and you think about the numbers going up and down in terms of your end of day balance. What you want to do is make sure it does not drop to a negative. That requires you to have maybe a buffer. It could be that you have separate bank accounts, so money comes into one account, but then is dispersed amongst different accounts for different things. And that helps you manage taxes in the future, making sure you're paying yourself a set amount.

Iona: Yeah, absolutely. Setting aside money for your tax is really important because that can be a nasty surprise for a lot of people who are new to being self- employed.

Krystle: I hear it all too often. People who've had that uncomfortable, unfortunate situation where they weren't aware of what their tax bill would be come January. When you are due to pay your taxes and submit your return, the deadline, and whether it's 3, 000 pounds or much more, but actually you can find out way before, and that's kind of part of the managing your money that I encourage.

Iona : Yeah, absolutely. And even if you end up using an accountant and lots of self-employed people do, you will always feel that much more empowered if you understand the numbers yourself. I know an awful lot of folks who are listening to this and watching this who are self-employed will face this problem. It's chasing invoices. We have all been there. I know I have. Do you have any advice on how you can navigate that issue?

Krystle: There's a couple of things. First of all, I encourage people to send invoice reminders, even before it's due, so you could send a polite email, " Hey, just letting you know your invoice is due in a week or so. Thanks. Great working with you." But what you're doing there is making sure that they have your invoice and it's on their radar, so it hasn't got lost in the emails. Also, and this is kind of before the fact, making sure you've got the right information, you've got the right email contact, you've got the right address for the company, that you're invoicing, et cetera.

Iona: Get that established straightaway when you start working with the client.

Krystle: Often if you're working with a company, they pay based on invoice date, so the longer you take to invoice, the later you'll be paid. There's also one that I encourage people to do, but I know also is a little bit uncomfortable. You can actually charge a penalty if your client is late to pay. And what I say to do is just pop a little narrative on the bottom of your invoice to say you will be charged a penalty if this is late. And often that alone just deters people paying you late, so it's a little kind of secret weapon you could have.

Iona: I think it's interesting that just saying that you are legally entitled to charge, I think it's 8% interest on the value of your invoice if it is later than it should be. That alone will often do the trick because it just shows that you know your rights.

Krystle: Yes.

Iona: And it indicates to the person who should be paying you that they can't mess you about.

Krystle: And then one other point, requesting a deposit, so money upfront before you actually start the work, especially if you are going to incur some costs along the way.

Iona: And especially if it's a longer term project, say you're working on it for six months, it's more than reasonable to say, how about we have one payment upfront and then the other payment on completion?

Krystle: Or even break it down even further, quarters, maybe set milestones, but I encourage people to have those conversations early and see if there's room for that to happen.

Iona: And what's your feeling about clients that despite you following all these rules and doing your best to get that invoice paid on time, they just won't pay up and it does happen occasionally? What are your thoughts on maybe deciding not to work with those clients again? Because freelancers find it difficult, don't they, to walk away from clients even when they're late paying invoices.

Krystle: When it comes to chasing payments, loop in who you need to, it kind of opens up that conversation so more people know about it. But in terms of somebody who has paid you late, I don't feel right saying don't work with them again. I think because it depends on the client, right?

Iona: Yeah.

Krystle: For example, me, I'm not sensitive to receiving late payment and that's because I have reserves and my financial situation makes that okay. As long as it's a good relationship, especially if you're working with a large organization, there's quite a bit of a process to go through to get that paid. And actually a real case, I'm working with someone now, they encouraged me to send the invoice a month before we started working together.

Iona: They sound like a dream client.

Krystle: Great client. It's been like a month and a half now. They're late paying. They're not being difficult. There's just lots to go through to get that settled. And then also you're thinking about the value of the client. Is it worth it? Do you still definitely get paid? What is it doing for your career? Is it an investment in that sense that actually working with them is going to position me quite well? If that stuff is not included, then yes, maybe question, should I work with them? If, am I wasting time that it could be spent on more valuable things, getting this paid?

Iona: That's really good advice, Krystle, because I think it's very difficult to be able to make a hard and fast rule about these things. But what I will say is that the more that freelancers can stick up for their rights and make sure that they get what they deserve, and that includes having your invoices paid on time, even if you do it in a polite way.

Krystle: And actually, there are some organisations that have policies where they pay freelancers, self-employed people immediately because they understand the situation when it comes to working for yourself, money management. I mean, if you can seek out those companies to work with-

Iona: And that's where networking with other self-employed folks-

Krystle: Yes.

Iona: ... can really help because they can say, " Those are great clients. Those ones, not so much."

Krystle: Not so much.

Iona: Krystle, you already touched on this, but how can we make sure that we are not neglecting longer term things that are really important like our retirement savings?

Krystle: I think first of all, it's definitely roll up your sleeves and do your numbers, so know how much you have available, know how much you want to have available later in life, so maybe use a retirement calculator to see, okay, what does that look like? How much do I need to put away every month to get there? But in terms of now in the practical sense, automate is always my answer.

Iona: And when you talk about automation, can you give us a couple of examples of what that looks like?

Krystle: Yeah, of course. If we're thinking about investing or putting money aside into an ISA or a pension pot, a standing order or direct debit to go to that account, so you are saving every single month on the back of the calculations you've done for how much you want to have in retirement. The automation is that money leaving your account to go towards investing, to go towards your saving pot. And once that's set up, you don't have to think about it.

Iona: That is a very, very good hack. I also want to just touch on the different types of self-employed status because that can then have an impact on how you manage your finances. Can you just very briefly talk us through the difference between a sole trader and someone who has a limited company?

Krystle: When you're a sole trader, basically all the money you earn effectively is you earning that money, so everything you pay for comes out of that number, so income and costs come out. What's left is your profit, and that's where tax is calculated. Quite basic, quite straightforward. When you have a limited company, it's a separate legal entity, so it's almost like another person. You create this company and the company earns money and then you can pay yourself from that company. And it's a good time to mention that because if you think about maybe you were employed before and your company paid into your pension for you, you could set up the same thing for yourself where your company pays into your pension as well as you deducting it from your salary that you're paying yourself.

Iona: Ah, so it's like you have a workplace pension.

Krystle: Exactly.

Iona: And what advantages would that give you?

Krystle: So much. I mean, first of all, the payment to your pension from your company is seen as a tax- deductible, so when we talk about being self- employed, income, costs, profit, and then tax. Here, it's income, costs including that pension payment, then profit, and then you calculate your tax.

Iona: That could be a good option if you are looking to really supercharge your pension saving.

Krystle: Absolutely.

Iona: And are there particular tax benefits to having a limited company versus being a sole trader?

Krystle: Yes, there are. And it's one of the big questions that are put to me actually. When you earn over approximately £50K in terms of your income, there are tax benefits in terms of how you can pay yourself via a limited company, and eventually you start to pay less tax as a result. When people are deciding between self- employment or limited company, there are other factors to consider depending on who you're going to be working with, maybe they prefer you to have a limited company, but if those things don't really matter, like the legal status, liability, then sometimes being a sole trader is absolutely fine if you're not earning that much that the tax incentives are really going to show up for you.

Iona: I guess it's one of those things where if you're not sure, maybe having a conversation with an accountant would make sense.

Krystle: Absolutely. Absolutely.

Iona: What are some of the ways that self-employed folks can feel a bit more in control of their income and therefore their finances?

Krystle: The first thought that comes to mind is diversifying your income type. Often you may be a freelancer and you do the odd job and you do the old project, but actually thinking about having a retainer with clients where you're earning the same money from this particular client every month or recurring income and that would help provide kind of like a base level income and you can build on top of that.

Iona: I have to say that I've had a lot more peace of mind ever since getting certain regular clients on my books as a freelancer, but also a lot of this is about the service that you offer and making it as unique as possible. And what are your thoughts on that?

Krystle: This is around the relationship building side and actually what are you selling and how are you communicating that and really targeting what these organizations need. And the other point I wanted to mention actually was income protection. Income protection is there to protect your income if say you were to get sick, so when we're talking about income uncertainty and not knowing how much you're going to earn next month or you possibly being ill because that does happen, you could have a policy in place that will pay your salary up to a certain percentage every month to see you through that period.

Iona: And we're talking about an insurance policy here.

Krystle: An insurance policy.

Iona: And people might be thinking, " I feel pretty healthy. And if I can't work, well, I'll just dip into my savings." But why might that be a little bit shortsighted?

Krystle: I mean, it's the hardest thing about insurance, isn't it? It's you don't know what's going to happen. And I'm sure we have all come across stories where something has happened unexpected and it just throws everything out of whack, but that insurance policy is there to help you. And when we're thinking about how much it costs, it's not a lot of money in the grand scheme of things for that peace of mind later.

Iona: And I also just wanted to touch on an issue that is definitely a danger for the self- employed, which is that you can end up feeling like your self- worth is wrapped up with how much you earn and how well you're doing as a self-employed person. And as a recovering goalaholic, perfectionist, someone who used to really think that the career that I have was central to my identity is still very important to me, but I have learned to just take more of a step back from it in recent years. But it's hard, isn't it?

Krystle: It is hard. I think it's also hard to understand that the work you're doing, it's meeting a need of the person you're selling to. You're having a value exchange and that money you're being paid is off the back of how much of a need is it for that client or individual, less so you and your worth as a human. Making this a bit more practical, when you're having those conversations and you're maybe looking to price up your services, focus on what they're looking for, where their challenge lies, what they're trying to get sorted and focus the conversation on that because that's what they're paying you for, to address that issue.

Iona: Yeah, absolutely. And it's striking that balance, isn't it, between not undervaluing yourself and then not taking your work home with you too much. And it's especially hard if you do work from home as a self-employed person. Having that separation between your work life and your personal life is more important than ever as you go along because actually that is what's going to allow you to come to work, bring your best self, do your best work, and show up for the client.

Krystle: Absolutely. And I think there's something around creating that separation, so if you do work at home, maybe trying to be as rigid as you can in terms of your working hours, you cut off at a certain point. Understandably, there are times where you have to work later, but trying to create something that draws a line between the two, so it's in and out.

Iona: I have my home office and when I close the door on it, that's the signal to myself to leave it behind and to relax.

Krystle: Absolutely.

Iona: There's been some great advice here, Krystle, but if there is just one thing that you would like viewers and listeners to take away from this episode, what would it be?

Krystle: I would encourage people to really understand where they are financially. And what that means is, do you have savings? Have you got a buffer? And understanding, well, how much do I need to have coming in every month to be okay? And I guess the follow- up would be around the insurance piece maybe if that's needed for you. But that cash piece is the biggest bit because if you think about it, if you don't have that sorted and you've got bills to pay, you end up having to borrow and that can send you in the wrong direction.

Iona: Build up your buffer. Brilliant advice. Thank you, Krystle.

Krystle: Thank you.

Iona: That's it for today's conversation. I really hope that you're walking away from it with a bit more clarity and importantly, a few practical ideas to put in place so you can enjoy all the perks of being your own boss. If you found this episode helpful, please do share it with someone else who's self-employed and might be struggling with the same challenges and help them get a little bit richer too. This podcast is brought to you by L&G. You can keep up with the show on YouTube, TikTok and Instagram @legalandgeneral. And if you've got a question or a topic that you'd like answered on the show, you can get in touch on our socials. Until next time, see you soon and thanks for listening.