I recently had an on-air discussion about some of the financial challenges of being self-employed in a creative field. Namely: the irregular income!
Research has found that artists’ income, even counting non-arts related income, tends to be below the income earned by others in the workforce. It is also prone to being irregular which can create cash flow issues and – if you’re not careful – debt.
For many working in the arts, it’s the ad-hoc nature of the payments that cause problems. Unlike an employee who receives a regular fortnightly or weekly amount that can be budgeted for, someone who is self-employed isn’t sure when the money is going to come in. It means that you need to be even more disciplined – or run the risk of ending up broke!
There are a few habits that can make it easier, though:
1. Put aside 10% of your earnings
Every time you get paid, put aside 10% into an at-call savings account to use as a cash buffer during the weeks when nothing or very little comes in. 10% is an easy-to-calculate rule of thumb and being a percentage it means that when a lot of money comes in you’re putting aside more and when only a trickle of money comes in, you’re putting aside less.
2. Put aside money for your tax
Don’t forget that when you receive a payment, it probably hasn’t had tax deducted. So put aside another 20% of what you receive as income tax.
3. Pay your necessary bills first
Whenever you receive an income payment – and once you have deducted the amounts above – pull out any accounts that are falling due and pay them before you spend money on anything else.
4. Don’t get a credit card!
According to statistics that were released by MoneySmart Week, the average cardholder owes $4,500 on credit. Overall Australians owe around $50 billion, with around $36 billion of that accruing interest. The average credit card interest rate currently across the products we survey is 12.8% on low rate cards and 19.4% on standard credit cards. If you don’t have a regular income the risk is that you start relying on your credit card to pay living expenses – that can be an expensive option!
People who are creative aren’t always great with the day-to-day administrative tasks of being self-employed. But it’s those administrative tasks that keep your cash flow under control! So a few essential tips include:
5. Remember that you are running a business
It doesn’t matter whether you’re a farmer, a plumber or a writer, you are running a business and you have to think of yourself in those terms.
6. Allocate time every day to administration
To be self-employed you will need to spend at least an hour every day in producing, distributing and following up invoices, as well as pitching for income-generating work. Ensure that you send invoices promptly and that you diarise to follow them up. Keep a spreadsheet that details your earnings and invoices.
7. Stay up to date with business resources
Check out the great resources that are available on the government’s business website. There’s an excellent marketing plan app, plenty of taxation advice and a “grants and assistance” finder. There is information on how to apply for an ABN, business templates, a business checklist – all sorts of stuff that you need.
Finally, there are some common mistakes for the self-employed to avoid, including:
8. Put money aside!
Without money set aside to smooth the cashless weeks, you run the risk of running up debt. So ensure that, no matter how tough, you do put aside the cash you’ll need.
9. Seek out regular sources of income.
You can live for those big projects that professionally and creatively satisfy you, but it’s important to seek out regular sources of income as your bread and butter. Whether it’s tutoring or teaching, writing a regular column, working in a store one or two days a week… Seek out some sources of regular income to help smooth the weekly fluctuations.
10. Equating cash in hand to income
Aside from tax, there are other small – and larger – ways in which, as a self-employed person, you can “miss out”. There is no holiday leave, no sick leave and you are less likely to have personal insurance. As well, employees receive superannuation; as a self-employed person or an employee who earns under $450 per month, superannuation isn’t compulsory. It’s an omission that can have a significant impact on your future well-being.
Working in a creative field and being able to follow your passion is a gift that the majority of people don’t receive. Some time spent in planning and administering your business and implementing a regular savings habit can help prevent that gift from turning into a burden.
MoneySmart Week is an independent, not-for-profit initiative to raise awareness of the importance of financial literacy and to encourage all Australians to take action on their finances. The Week was founded in 2012 by members of the Australian Government Financial Literacy Board, led by Paul Clitheroe AM.