From feast to famine: Managing money when self-employed

This is how a freelancer turned her finances from a rollercoaster ride into a sustainable income.

Freelancer Tamsin found herself in the classic self-employed trap of living from feast to famine depending on her income. During good months she would spend and in bad months end up relying on her credit card to make ends meet.

As a freelancer in the film industry she was used to receiving large, irregular lump sums rather than a regular salary.

“The film industry has for most of my career dropped large and intermittent sums of money into my bank account giving me the illusion of wealth and success. Although I had known this all along, and managed to ignore this, I was living well above my means,” says Tamsin, who had accrued significant credit card debt.

During the six months of the Absa/City Press Money Makeover challenge she worked on organising her finances so that she could recreate a more sustainable income. She achieved this with the help of her Absa adviser Leighanne Decker.

The Money Makeover challenge takes six individuals through a money bootcamp over six months in which they transform their finances.

Tamsin’s first action was to get her business and personal finances separated and to create a cashflow model that allowed her to pay herself a regular monthly income. Tamsin created a budget so that she understood how much it was costing her to live and what salary she needed to earn.

Tamsin created a contingency “salary fund”. By the end of the six-month challenge she had five months salary put away which allows her to smooth her income during “down” times. She was also able to pay herself a proper salary at the start of each month rather than drawing down from the business during the month.

Tamsin built up a personal emergency fund to cover those unexpected bills that are over and above her budgeted living expenses. Her adviser recommended that she keeps this separate from her “salary fund” as this is for unexpected expenses, not a short fall in salary.

Tamsin also needed to create a “tax fund”. While her income from her film work was taxed at source, it did not take into account the income she received from her Airbnb and web design business.

One of the most common problems with self-employed people with multiple streams of income is that at the end of the tax year they find that they are in a much higher tax bracket and land up with a tax bill they were unaware they would have to pay.

“This is prevalent in the market where people have retired, have a pension, and they return to contract work and are now earning an additional income, plus they have interest-bearing investments,” says adviser Decker who recommended that Tamsin open a “tax savings” account to ensure that the right amount of tax is put away and readily available when that tax bill comes in.

Part of managing tax was to understand Tamsin’s potential tax deductions. One of the benefits of being self-employed is that any expenses incurred in producing an income can be deducted for tax purposes. If you work from home you can deduct up to 20% of mortgage interest as “rental” or if you are earning a rental from a property you can deduct the full monthly interest portion.

Decker identified that Tamsin was not utilising her travel expenses.

“By tracking her business orientated mileage she can receive a tax deduction for travel expenses, including the interest she is paying on her car loan. She can get a healthy tax deduction, as long as she maintains a logbook,” says Decker.

Tamsin also used a retirement annuity which is a great tax deduction and funds your retirement. As committing to a monthly contribution was difficult based on her variable income, Decker advised her to top up before February 28 when she can calculate her tax rate and what additional funds she had available.

By the end of the six-month challenge Tamsin not only had a better handle on her finances and had built up her salary fund but had also paid off R15 000 of debt.

“The budgeting process helped me to stop being an impulsive spender and to stick to a strict budget.”

If Tamsin’s story resonates with you, get ready to follow this year’s challenge which kicks off in City Press on February 23 and in YOU magazine on March.

Read all about Tamsin’s fellow contestants from last year’s Absa/City Press Money Makeover.

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