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Investing for freelancers: what types of investment can I buy?

You’ve done the steps, you think you’re ready to go, so what types of investments are out there for the DIY investor?

I’ve spent the past few posts untangling the basics of investing for freelancers and self-employed creatives, I’ve already discussed what investment is and why you should bother and how to get ready to invest. This time, let’s look at some different types of investments.

There’s an overwhelming variety of things you can buy that are branded investments, either by others or ourselves. However, people are often overly optimistic when it comes to defining what is an investment.

As a working musician, for instance, you might tell yourself that the vintage amplifier you found on eBay is ‘an investment’, when in reality it’s mostly an electrocution risk.

If you have to spend more money on something than it generates, then it’s a liability – not an asset.

You’ll probably have to get the power adapted for the UK, get it repaired every other gig and pay a painful amount to insure it. This is all fine, if you love it and it helps you creatively, but it doesn’t make it an investment.

In fact, if you have to spend more money on something than it generates, then it’s actually a liability – not an asset. Getting your financial life in good shape depends on decreasing your liabilities and increasing your assets (things that put money into your pocket).

Disclaimer: This article is for financial information and education purposes only. It is not financial advice. Investing carries risks. The value of your investments and can go down as well as up and you may not get back the original amount invested. Always do your own research and seek independent advice where required. Read the full disclaimer here.

A class system

So what are some examples of more useful assets?

Assets are varied and numerous, so it can be helpful to think about broader groups or types of assets. Because money-people like to be fancy, and elitist, these groups of asset types are usually referred to as ‘asset classes’.

Three of the main types (or classes) of assets that might fit the definition above are stocks/shares, bonds and property. Let’s look at each of those in more detail…

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1. Stocks and shares

When you purchase a share, you’re actually purchasing a tiny slice of a company. In return for your investment, you gain the right to a share of that firm’s current or future profits (the dividend).

As the fortunes of different companies, sectors and entire markets rise and fall, so does the value of their shares.

When you purchase a share, you’re buying a tiny slice of a company.

This is because investors are anticipating better or worse dividend returns as a result of these changes and therefore considering it to be more or less desirable to hold related stocks.

This process is not always rational, of course. All sorts of things create and influence these changes in share prices, which makes them very volatile in the short-term.

The upside: if you invest directly, you get to pick exactly where your money goes and which firms you invest in. Stocks can usually be sold quickly.

The downside: very few individuals are able to accurately predict these changes and consistently make good stock picks.

via GIPHY

Mutual funds

A common way to invest in the stock market is through mutual funds. These collect the money of many investors together and use it to buy shares in many companies.

Small investors can then purchase shares in the funds and the fund manager runs the investments, deciding what, when and how much to buy and sell of the investments in the fund’s portfolio.

People describe this type of fund management as ‘active’, because a human being (the fund manager) is actively picking the stocks and deciding .

The upside:

  • Benefit from the fund manager’s expertise.
  • You can invest in many companies at once, diversifying your investment.
  • Huge variety of mutual funds available.

The downside:

  • Over time, many active fund managers do not outperform the market (i.e. do better than the average performance of the market as a whole).
  • Higher fees to cover the administrative costs and (typically large) salaries and bonuses of the fund managers.
Index funds

Another option is to invest in index funds. Like mutual funds these simultaneously invest many investors money in a collection of stocks, but this time they reflect a defined market or ‘index’ (for instance, the US S&P500 – the 500 biggest firms in the US). You invest in the fund and every pound is split proportionately across all the firms in the fund.

There are index funds tracking all sorts of indices, from the FTSE100 (UK’s biggest firms) to globally diversified ESG (Ethical Social Governance) focussed funds, which aim to only invest in companies that fit a certain ethical criteria.

The upside:

  • Diversifies your investment (reducing the risks of investing as returns are not dependent on the fortunes of just a few firms).
  • Enables small investors to quickly purchase the shares of many firms at once.
  • Lower fees as the funds do not require active management.
  • Over time, the market can often outperform many actively managed funds.

The downside:

  • You have less influence over the companies you invest in.
  • Your money may be invested in firms that are not aligned with your values.

Financial markets as whole typically tend to rise in value over the longterm and the longer you invest for, the more likely it is that this will be the case. Another compelling reason to start investing earlier rather than later.

Overall, stocks and shares (AKA equities) are considered higher risk than the likes of bonds, but have the benefit of offering much higher potential returns over the longterm.

via GIPHY

2. Bonds

Want to lend money to a company or government?

Bonds are essentially certificates of debt issued by companies or governments. If you buy a newly issued bond you are lending your money to that institution, usually in return for a certain amount of interest and the promise that the debt will be repaid by a certain date.

Many investors switch to less risky options, like bonds in their later years

They typically offer more predictable and reliable returns than stocks. However, the interest rates (and therefore returns) are low compared with the potential rewards from stock investing.

Many investors like to take on a more risk-heavy approach when they’re young and have more time to recover potential losses, but will switch to less risky options, like bonds in later years, as they near retirement or want more stability.

The upside:

  • Lower risk – typically more predictable and reliable returns.
  • A useful asset class for those nearing retirement age.
  • Can be used to balance risk (e.g. creating a mixed portfolio of stocks and bonds).

The downside:

  • Low returns make it extremely difficult for most to reach their financial goals purely with bonds.

via GIPHY

3. Property

While our own houses might not be assets day-to-day, There are lots of ways to invest in property. Figuring out the right strategy for your circumstances is key.

You can purchase a run-down flat, fix it up and try to sell it at a profit straight away (‘a flip’). You can buy houses or flats and rent them out to tenants, focussing on rental income. Or you could invest in a creating a holiday let and focus on short-term, seasonal rentals.

There are lots of ways to invest in property. Figuring out the right strategy for your circumstances is key.

Alternatively, one option for those without a large cash deposit or the inclination to run their own property empire is to invest indirectly via a Real Estate Investment Trust (REIT), which acts a bit like a mutual fund – pooling money from many investors into a managed fund that purchases property.

The upside:

  • Property prices tend to rise over time.
  • Variety of strategies for different needs (e.g. investing for regular income or intensive renovations for fast returns)
  • Can create a source of regular income.
  • Property prices have increased rapidly in recent decades.
  • Different strategies to suit different investors.

The downside:

  • Often requires a large amount of money for a deposit.
  • Your money is tied-up in the investment for a long time.
  • Selling property can be a laborious process.
  • Reliant on finding the right tenants.
  • You have to spend time researching and managing the properties (or pay someone else to do it).

There is a bit of a long-running mania around property in the UK, so be careful not to get caught up in the rhetoric and, as ever in investing, always do your own research.

brown and white medium-coated dog
Photo by Michelle Tresemer on Unsplash

Don’t panic! The perfect investment does not exist

With all of these asset classes, you invest in the hope that they will produce income and/or rise in value before you wish to sell them. However, no investment is perfect. As you can see, each of these types of investment or asset classes carries its own risks.

Knowing that the perfect investment does not exist is a liberating thought. We simply cannot get everything right every time.

Reading all of this for the first time, it can feel like a lot to consume and be tempting to put the whole thing off and avoid it all together.

However, knowing that the perfect investment does not exist is also quite a liberating thought. We simply cannot get everything right every time.

Instead, we need to think about what we’re comfortable with: in terms of the amounts we invest, our knowledge of the investments we’re buying and the risks associated with the assets we buy.

In the posts that follow, then, I’m going to look at some of the ways to manage risk when investing, untangle some of the main investment wrappers (ISAs and pensions) and discuss how to actually go about purchasing investments (this is coming last for a reason!)

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Coronavirus financial help for UK creative workers

Want to know what’s available in your sector? Start here…

This piece was first posted in July, 2020. However, the pandemic has dragged on and with it the devastating impacts on the lives and livelihoods of many of those in the creative industries. This is now the second third fourth fifth update of this page. There is definite light on the horizon, but we remain in the grip of coronavirus. Financial help for UK creatives has ebbed and flowed throughout, so let’s take a look at what’s available right now.

Just want to know what’s going on with the SEISS now? Skip to the Freelancers section

If you want to stay up-to-date with wider funding opportunities for the creative industries and shorter-lived hardship schemes, I round these up in a free fortnightly newsletter. This is usually the best place to find current opportunities.

Here I’ve rounded-up some of the key resources by sector. This list will likely be updated, so if you feel I’ve missed anything useful or important, please drop me an email on creativemoneycontact@gmail.com.

#GapsInSupport

Creative Money would also like to take the chance to shout about the significant struggles faced by those who have fallen through the gaps in government support, an outsized proportion of whom work in these industries.

These groups include freelancers taxed via the PAYE system, those setup as limited companies and paid via dividend, plus the newly employed or self-employed.

UPDATE (10 March, 2021): The government has now announced that those who filed 2019-2020 tax returns but not previous years (i.e. the newly self-employed) are now eligible for the Self-Employment Income Support Scheme (SEISS). This should apply to some 600,000 people, though only a fraction of those will be in the creative industries.

Meanwhile, those who receive most of their payments via PAYE or via limited companies are still excluded from the SEISS. Rishi Sunak has now said unequivocally that limited company directors will not be getting any more help.

That still equates to millions of taxpayers who have been unable to earn since the start of the pandemic and who have, effectively, been penalised by the somewhat arbitrary rules regarding Covid-19 support schemes.

What can you do to support the excluded?

If you’d like to help do something about this, then please support the excellent work of ForgottenPAYE and ForgottenLtd by visiting their sites and following their social media channels.

More importantly, sign the petitions they are promoting, email your MP, write to the papers/media and make your voice heard. If you’ve not been impacted directly, it’s highly likely that your colleagues have been.

Hang In There artwork - Coronavirus financial help UK
Hang In There. Credit: Ayşegül Altınel.

Submitted for United Nations Global Call Out To Creatives.

Coronavirus financial help: support by sector

Jump to your sector using the links below, or scroll down to take a look at the full range…

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Arts Council funding

Since the pandemic, the Arts Council (the body responsible for awarding public funding for UK creative work) to respond more readily to the needs of small practitioners and freelancers.

The government’s vaunted £1.57bn support for the cultural sector is being delivered via the Arts Council. However, the options below are not Covid-19-specific…

Developing Your Creative Practice

This fund focuses on helping creative workers to develop their skills and associated career options.

UPDATE (10 March, 2021): The ninth round has recently closed and applicants will notified of decisions by the end of April.

National Lottery Project Grants

Aimed at everyone from individuals to larger organisations, there is an enlarged budget of £75 million available until 21 March, 2021 and the fund is now designed to be “more responsive to the needs of smaller independent organisations and individual practitioners during Covid-19.”

UPDATE (10 March, 2021): the ‘supplementary guidance’ on supporting individuals has been extended until 31 August, 2021.

Film/TV

Bectu

Media and entertainment union Bectu has been calling for a government to create a support package to specifically aid the recovery of the much-beleaguered creative industries.

They are asking people to write to their MPs and have created this handy letter template that will populate an email to your MP, based on your postcode. It’s very easy to use, you just have to pop in your name and address.

Covid-19 – Support for the UK Television & Film Industry

This is an active support page on Facebook for UK TV and film industry workers. It’s got 6000+ members and aims to share information on everything from financial support to spare rooms. You might find it useful.

Film & TV Charity

Offer a free 24-hour support line on 0800 054 0000, or if you prefer you can email or live chat. They can offer advice on financial issues, legal queries, health and wellbeing and even career development. They also have a helpful page on financial support options amid the pandemic.

ScreenSkills

The industry body ScreenSkills is offering loads of genuinely good online training courses at present, some have a fee but many are free and offer direct access to commissioners and other industry experts.

Music

Aim Crisis Fund

This launched back in April and got bolstered by a further £300,000 (from PPL and others) in new funding in late September. It is directed specifically to support music freelancers who have lost work with AIM member’s artists. Requires nomination by an AIM Rightsholder (more info on the site).

CoronaMusicians

The excellent UK charity Help Musicians has built a dedicated site to compile a vast array of resources and support available for musicians affected by the pandemic. This includes links to government schemes, union support and charity funds, plus legal/contract advice, resources for those in music education and mental health support. Thanks very much Help Musicians.

Help Musicians Hardship Fund

We’ve highlighted this separately as it’s one example of support that can be accessed without being a member of a union (though we’d still recommend you join one ASAP, if you have the means). You can support the fund by donating to the charity.

UPDATE (8 July, 2021): The current phase of funding appears to be ongoing and will support successful applicants with a monthly top-up until September 2021.

Music Minds Matter

A helpline for anyone working in the music industry. It’s free, confidential and open 24 hours. Just dial 0808 802 8008.


Does your work situation make it difficult to save money? Check out our guide: ‘How to start saving (when you don’t think you can)


Performing Arts

Actor’s Children Trust hardship grants

ACT continues to pay Corona-crisis grants of £300 per family per month towards food and bills, as well as specific grants for children’s costs.

Equity Benevolent Fund

Full members of the Equity union can apply for grants for one-off emergency expenses like bills and food if they’re facing financial hardship.

Exchange Project

A great scheme that aims to connect the under-utilised, furloughed staff from the theatre industry with creative freelancers, in order to help the latter develop new projects and skills.

Royal Variety Charity Financial Assistance grants

The Royal Variety Charity is uniquely positioned to provide financial assistance to anyone who serves any facet of the Entertainment Industry.

Theatre Helpline

A free and confidential helpline for those working in the theatre industry. They can offer support on everything from debt and financial options, to mental health and career decisions. Just call: 0800 915 4617.

TheatreSupport

TheatreSupport is the mega resource you need for a full breakdown of support for those working in the arts. They’ve even put together this extremely useful flow chart to help you figure out where to go, depending on your role/sector.

Publishing

NUJ

The National Union of Journalists (interesting note: it’s also open to those in publishing) has a charitable hardship fund NUJ Extra for members, which can issue one-off grants to help cover bills and other crucial expenses. You can donate to the fund here. They have also put together this briefing on government support schemes.

The Society Of Authors

Have set up the Author’s Emergency Fund, which issues grants of up to £2,000 to meet “urgent need” for writers and related roles (including journos, illustrators, poets, scriptwriters etc.) No need to be a member, as far as we’re aware.

The White Pube Writers Grant funded by Creative Debuts

Not Covid-specific, but might be useful… £500 given out monthly to a working class writer based in the UK. This grant has been set up to support writers of all ages who are early in their careers and would benefit from this no-strings attached financial support to help them in whatever they like. Deadline: ongoing

Writers Guild Of Great Britain

The WGGB has a welfare fund for members to help them meet debts, or cover essential business or personal expenses. Grants are usually limited to £1,000.

Coronavirus financial help for UK freelancers

The Self-Employment Income Support Scheme has received numerous tweaks since it was first unveiled in Spring 2020.

UPDATE (8 July, 2021): The latest news is that the fifth grant will soon be available to those eligible. However, following a trend established since the third grant, the criteria and the generosity of the grants have been tightened.

SEISS Grant 5

As with previous grants, the fifth instalment has a payment cap of £7,500, which is calculated at 80% of a three-month average of your trading profits (e.g. if you averaged £5,000 profit over three months, you would receive an SEISS payment of £4,000).

This is calculated using up to the last four year’s tax returns, depending on your personal situation.

This is designed to cover May to September 2021 (a five month period) but maintains the payment cap of £7,500, meaning that is in effect 20% lower than previous payouts.

Those eligible should be able to apply from the end of July, but there’s a few things you should note: 

  • As with previous grants, you will receive a maximum grant of 80% of your average profits for three months, or £7,500, whichever is lower.
  • How much you get is now dependent on your turnover. They will look at your turnover to April 2021 and ask you to supply a previous year for comparison. 
  • If your turnover has dropped by more than 30% you will be eligible for 80% of profits (up to the £7,500 cap). If it has dropped by less than this, you’ll only be eligible for a grant of 30% of your profits (with a cap of £2,850).
  • If you were newly self-employed in the 2019-2020 tax year (and eligible for the grant) you’ll automatically be offered the 80%
  • The application window will close 30 September, 2021. 

Once again, claiming for the SEISS now means you must declare “significant reduction in your trading profits due to reduced business activity, capacity, demand or inability to trade due to coronavirus.”

As ever with HMRC, if you’re struggling to pay tax it’s best to let them know ASAP. HMRC has a Covid-19 hotline: 0800 0159 559.


Trying to keep a closer eye on your finances? Check outThe best budgeting apps for UK creative workers


Coronavirus financial help for UK students

Many of the unions mentioned above are not extending hardship funds to their student members, so if you need help start with your student union and/or education provider.

Most universities have student hardship funds, such as this one from Sheffield Hallam, which may be open to applications and can help you with grants, bill payments, advice and food voucher schemes. Housing charities like Shelter can also offer support to those struggling to pay rent or facing accommodation issues.

UPDATE (10 March, 2021): I know from my own sometime-workplace that the OfS (Office For Students) has recently bolstered certain institutes’ hardship funds significantly, so if you need help, talk to your student support/welfare office.

And finally… a note on Universal Credit

Bear in mind that if you can’t get support through the existing government schemes or funds above, you will likely still be eligible for Universal Credit (provided you are on low/no income and have <£16,000 in savings).

The system is still far from perfect and the amounts involved are simply not enough for most, but the system has reportedly improved dramatically since its launch. The standard monthly allowance is £409.89 for over-25s and £342.72 for under-25s, but this can be higher, depending on your circumstances.

UPDATE (10 March, 2021): Universal Credit payments have been topped up by £20 a week throughout the pandemic and this has been extended until September, 2021.

What did I miss?

If you have anything to add to the list above, or any recommendations or resources that have proved particularly helpful during this time, please let us know in the comments below, or via email on creativemoneycontact@gmail.com.

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Investing for freelancers and creative workers: getting ready to invest

Getting ready to invest? There are some things you should ask yourself

In my first piece about investing for freelancers, I tried to usefully define the process of investing, but how do we go about getting ready to invest? What do we need to do first?

This time I’m going to dive into some of the questions we need to ask ourselves before we can start.

It can be tempting to skip having these conversations with yourself and leap straight into buying investments, but here’s my hot-take on that: don’t.

We need to learn to walk before we can run. And before we can walk we need to check we’ve tied our shoe laces.

There are plenty of stumbling blocks in both creative work and in investing, so this piece is about trying to make sure we don’t trip ourselves up on the way.

Disclaimer: This article is for financial information and education purposes only. It is not financial advice. Investing carries risks. The value of your investments and can go down as well as up and you may not get back the original amount invested. Always do your own research and seek independent advice where required. Read the full disclaimer here.

Hurdles - investing for freelancers
Photo by Austrian National Library on Unsplash

The two hurdles faced by freelance investors

The great irony of the creative/freelance lifestyle is that despite our deep and (mostly) abiding love of the work, we are in reality, forced to spend more time thinking about financial admin than a typical 9-5 employee. Investing is no exception.

In more traditional roles, employees might benefit from being automatically enrolled in a pension, have the chance to take part in share-purchase schemes and other opportunities. They’ll likely have an HR department to talk them through their options and maybe even perks like life insurance or discounted financial advice.

“Saving is the most effective tool we have for smoothing out that feast and famine cycle and yet it’s often the last thing we’ll actually try”

Sadly, this does not come boxed and ready for freelancers, once we fill in the self-assessment forms. We therefore face a double challenge:

1) We need to learn how to compensate for this lack of a ready-made financial infrastructure by building our own

2) The feast and famine cycle of freelance creative work, as ever, makes it harder for us to predict cashflow and commit to investing

You know the pattern: if you’re in a ‘feast’ stage and loads of work is pouring in, you’re too busy keeping on top of work to spend time sorting pensions or other investments.

However, if you wait for a time when work does go quiet (the ‘famine’ stage), you feel you don’t have the spare cash required to invest, or if you do, that you’re not willing to lock it up for a long period.

Are you ready to invest?

Getting ready to invest? Be the dog, clear the log
Photo by Matt Walsh on Unsplash

So how do we get ourselves in a position to clear these hurdles?

Before we can invest, we need to know that we’ve got ourselves covered elsewhere. This means being in a position where, despite our wobbly income, we know we spending less than we earn (on average) and that we have some cash set aside for emergencies.

“If you don’t have the security of an emergency fund, you could be forced to sell an investment at the worst time”

Regular saving is the most effective tool we have for smoothing out that feast and famine cycle and yet it’s often the last thing we’ll actually try (or it was in my case).

Once you establish that habit, though, you can really create some breathing room for yourself, financially. You’ll also find it will then roll nicely into an investment process, too – as the money you are in the habit of funnelling towards paying off debt or building an emergency fund can then be redirected to your investments.

For most of us, we need to be able to answer ‘yes’ to the following questions:

  1. Am I tracking my earning and spending?
  2. Am I spending less than I earn (on average)?
  3. Have I paid off expensive debt?
  4. Have I got an emergency fund?

If you want some ideas on how to do any of those things, check out How to sort your personal finances in 5 stupidly simple steps.

Building this foundation before we invest is super important. Try and invest before you can say yes to all of the above and you tend to get caught out.

For instance, investing for a return of 7% a year (a fairly typical projection of stock market performance) makes little financial sense if we’re still stacking up debt on a 17.9% APR credit card.

An unexpected owl.

Expecting the unexpected

Likewise, if you don’t have the security of an emergency fund, you could be forced to sell an investment to cover an unforeseen expense. The paradox being that there’s always an unforeseen expense.

If this happens at a point when your investment has dipped then would have to sell at the worst time and may get back less than you put in.

This is important stuff for anyone to understand before they invest, but it’s essential for creative workers to grasp this. The tenuous nature of our work and income already leaves us more exposed to these risks than Mr Monthly-Salary, so we must ensure we have our own backs.

These steps are not new. Follow them and you’ll create a solid foundation for investing – and find life is a lot less stressful as a result.

Why are you investing?

Before you pull the trigger on any investment, you need to know why you are investing and what you actually want to do with the money.

“What do you actually need to do what you want to do? How much is enough?”

Of course, one of the most appealing things about money is that it’s pretty flexible – indeed downright immoral – when it comes to what it can be spent on. However, different investment tools and approaches suit different goals.

For instance, the freelancer investing to provide for their retirement will require a different plan to the freelancer investing to boost their income.

They might pick different kinds of investments (shares or property), different ‘wrappers’ (pensions, ISAs etc. – more on this to come) and have different ideas about the risks they are happy to take along the way.

Turn goals into numbers

Knowing why you are investing will help you understand how much you need and when you will need it. The advantage of being in a creative career is that we’re rarely just blindly chasing a paycheque, so take some time to think about the numbers behind your goals. What do you actually need to do what you want to do? How much is enough?

Come to understand this and it will help you to determine your approach to investing, understand when you have met your goals and give you the motivation to stay the course when there are bumps in the road.

Next time, I’m going to take a look at what investments we can buy, how we can buy them and some of the techniques and ideas that can help us to manage the risks of investing.

Creative Money Guides are ‘How-to’s and explainers relating to specific aspects of money management for those working in the creative industries.

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Investing for freelancers: what is it and why bother?

A jargon free guide to investing for freelancers and self-employed creative workers

You’re given three wishes. What’s the first thing your inner wise-ass asks for? That’s right: more wishes. When it comes to finances there is an option that comes pretty close to this scenario – it’s called investing…

I’ve said it before and I’ll say it again: no one gets into creative work for the money. There are benefits in creative work that far outweigh the relative dent in your paycheque. It’s an exchange the majority of us are happy to make. But with less cash available to us across our careers, we need to be smarter with what we have. This is where investing can help us.

Disclaimer: This article is for financial information and education purposes only. It is not financial advice. Investing carries risks. The value of your investments and can go down as well as up and you may not get back the original amount invested. Always do your own research and seek independent advice where required. Read the full disclaimer here.

What is investing?

The term ‘investing’ conjures up all sorts of negative connotations of city boys, YouTube shysters and sheep-stealing aristocrats. But let’s try to ignore those preconceptions for the moment, because investing is far too powerful a tool to leave in the hands of such characters.

Instead, let’s go back to the wish analogy. If our money is like wishes, then once we’ve covered our basic needs and a few things that make a genuine, lasting difference to our happiness, what’s the smartest way to use what’s left?

“Investing is about short-term sacrifice for longterm gain – this is something we are good at in the creative industries.”

Probably using it to buy things that produce more income. This is the process of investing and those ‘things’ are called assets. They come in many forms – for instance, stocks, bonds or rental property – but you can think of them as things that ultimately put money into your pocket.

Let’s borrow from another fairy story – the golden goose. That sparkly water fowl is an asset. To raise a golden goose you would need to buy the goose, invest in some feed, maybe build a pond and some form of shelter, but the golden egg it popped out every day would make it worth the initial sacrifice.

Investing for freelancers
Photo by Sharon McCutcheon on Unsplash

Don’t dismiss investing as a boring thing for boring people

Think of it this way: buying assets is how you make money work for you, instead of the other way around – and that is a considerably more exciting concept.

Each good asset you buy will generate a little bit more income. If you’re on a low or variable income from your work, investing could one day make a real difference to your cashflow.

“Keep it simple, invest in things you understand and make it a habit that you keep over the longterm”

As you acquire assets, you can choose to spend that increased income, or reinvest it to buy more assets.

The latter habit is how the “rich get richer”, why “money goes to money” and why the pandemic – with its stock market crash (resulting in cheaper assets) and subsequent recovery – has created more billionaires than ever before.

Contrary to popular belief, though, you don’t have to be wealthy to invest. Anyone who can create a bit of disposable income can choose to funnel some into investments.

Keep it up and, eventually, you may be in a situation where you have built up enough income-generating assets to make a huge difference: to your lifestyle, your travel plans or even backing creative ventures of your own.

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Thinking longterm is something creative workers know how to do

To invest, you need to make a choice to put that money into something for the longterm (in the stock market, this is usually 10 years+) instead of spending it.

Investing then is all about short-term sacrifice for longterm gain and, for all the crappy stereotypes about creative people and money, this is something we are good at in the creative industries.

“Many in creative roles have better things to do than watch the markets all day and cursing that Tesla dipped while they were in the loo.”

Any actor who spent years waiting tables so they could make auditions knows about investment. Anyone who did the internship and landed freelance work; who spent time at the funding workshops and received an Arts Council grant; who saved their gig money and bought recording gear… I’ll stop listing cliches now, but hopefully you get the picture.

We might feel repelled by some of the imagery around investment, but most creative types have already adopted this core concept.

Why you need to figure out investing now, not someday

Here’s a well-known example (I’m not the first to use this)…

man and woman sitting on brown sand during daytime
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Two 20 year-old twins – Early Ellie and Late Larry – start jobs with identical incomes.

Early Ellie decides to immediately invest £100 a month. She pays in for 10 years, until she’s 30, and then stops – making a total contribution of £12,000. She then leaves it invested until she is 60.

Late Larry waits until he is 30 to start investing, but then diligently pays in £100 a month until he is 60. A total contribution of £36,000.

Both get the same annual return of 7% on their money and opt to reinvest any returns it generates across that time.

Question: Who do you think ends up with more by the time they’re 60? Ellie who invested £12,000 or Larry who invested £36,000?

Categories
Guides

Finances for first-time freelancers: tax and self assessment

Newly self-employed? Self-assessment can seem confusing. Let’s try to simplify things…

Whether you’re a tour manager or vocalist, designer or dancer, it often seems that the one thing all new creative freelancers have in common is a sense of confusion around tax and self assessment.

When you first approach it, self-assessment can be frustrating, confusing and worrying. I always think this scene from Black Books nicely captures the unique anguish of the clash between your lovely, creative brain and your tax return.

It’s not surprising then that tax and, in particular self assessment, frequently pops up among the top concerns of new freelancers.


Starting out in the creative industries? Read: Getting ready to graduate? 5 tips for new creative workers


Seeking clarity

So what can we do to alleviate some of that panic and actually get some clarity on the self assessment process? Aside from experience, it comes down to three things…

  1. Knowing where to get your information. In the UK, this will be the gov.uk site. The content in this piece is based on that information and I’ve included direct links to all the source pages.
  2. Staying organised. Regularly organising and storing your receipts, invoices and relevant bills/statements is essential. It will help you to quickly and accurately complete your return, evidence your claims should you be audited and give you more time to anticipate and deal with any surprises arising from the self-assessment process. Keep it simple and frequent.
  3. Seeking advice from a qualified professional: namely a tax advisor or accountant. An accountant can cost around £200 a year (more in London) for a basic self-employed client and may well save you this in tax and admin each year alone. At that price, you will likely still need to track your own income and expenses, but they will complete the return and answer any questions you have. Many also find the peace of mind to be well worth the fee.

Below I outline some of the key things you’ll need to know to get going as a new self-employed creative worker. This is about getting clarity – it is not an exhaustive list, it’s just meant to help you get up and running.

However, before we go any further, because I am NOT a qualified professional such as an accountant or tax advisor, I have to offer the following disclaimer, please read it.


DISCLAIMER: The information below and on CreativeMoney.co.uk is provided for financial guidance and education purposes only and is not intended to address your particular personal requirements. It is not tax advice, financial advice or recommendation and should not be considered as such.

Matt Parker is NOT a financial advisor, accountant or tax advisor and Matt/Creative Money is not regulated by the Financial Conduct Authority (FCA). This means he is not authorised to offer financial or tax advice.

Always do your own research and seek professional advice from an accountant or tax advisor before acting on any of the information provided here.

The content in this guide is based on information sourced from gov.uk and was accurate at the time of writing. Creative Money and Matt Parker cannot be held responsible for subsequent changes to the law or tax system.


Help I’m new to self-assessment!

Getting started? Gov.uk is your gospel.

First and most importantly: for all information relating to UK tax, use gov.uk’s pages on Self Assessment.

This is the official site of the UK government/HMRC. Be wary of all other platforms – even this one – as they may not always relate to the UK laws, carry the correct qualifications, or be kept up-to-date.

Do I need to register as self-employed?

When you are self-employed/freelance (unless you setup as a company or partnership) you are a ‘sole trader’ in the eyes of the taxman. Here’s Gov.uk’s criteria for being self-employed.

Anyone who earns over £1,000 in a single tax year from self-employed work (even students) needs to register as self-employed and complete a self assessment tax return. Head to Gov.uk to register as self-employed.

Once registered, you can complete the self assessment process online and the site calculates the amount owed based on your profits.

How does it work?

To calculate our profits (and later our tax) we need to know how much our business as a sole-trader has earned and how much it has spent:

Your business income – your business expenses = your profit.

You are responsible for tracking and evidencing your own income and expenses. Once a year you will then enter these figures to calculate your income tax, student loan and national insurance payment, via the self-assessment website.

Personal Allowance for self employed workers

Everyone gets a tax free Personal Allowance, which is the amount you can earn in income (or self-employment profits) before you have to pay income tax. As I write this, in May 2021, the standard Personal Allowance is £12,570.

National insurance for self employed workers

National insurance payments are collected in addition to income tax and are essentially another form of taxation.

You will be liable to pay tax and class 4 national insurance on profits above £9,569 at 9% and above £6,515 you pay Class 2 national insurance at £3.05 a week – payable annually with the rest of your bill.

Student loans and self assessment

As with the Personal Allowance, self-employed workers share the same threshold for student loans as regular employees. As of April 2021, that will be £27,295 for new graduates.

However, whereas regular employees have an automated deduction from their pay cheque, the self employed make the repayment in an annual lump sum based on their profits, which (as mentioned above) is rolled into your income tax and national insurance payment.

Here’s the gov.uk guidance on how to tell HMRC about a student loan on your tax return. Here’s a bit more about student loans, from a previous piece I wrote.

When is the self-assessment deadline?

The tax year runs 6 April to 5 April. Your first payment will be due on or before 31 January, following the end of your first tax year.

You will need to keep records of all your business expenses and income. Keep hold of these for at least 5 years after the 31 January submission deadline of the relevant tax year.

For instance, a new graduate who has started doing self-employed work after 6 April 2021 would complete their tax return following the end of the year tax year in April 2022. They will then have until the deadline of 31 January, 2023 to complete the return and make their payment. They would also need to hold the records until at least 31 January 2028.

OK, now let’s get on with being self-employed…

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Invoices and getting paid

What you need to know to create your invoices

To get paid for your work as a self-employed person, you will need to send an invoice. This is a request for payment from your clients and there are rules about what an invoice needs to contain.

Make sure your invoice includes the following information:

  • a unique identification number
  • your company name, address and contact information
  • the company name and address of the customer you’re invoicing
  • a clear description of what you’re charging for
  • the date the goods or service were provided (supply date)
  • the date of the invoice
  • the amount(s) being charged
  • VAT amount (if applicable)
  • the total amount owed

You can track the key information from your invoices (dates, invoice number, clients, jobs, amounts) on an income spreadsheet for the year. This will help you to keep on top of payments you have received and give you a running tally on your income.

Use a separate bank account for your business

Setting up a separate bank account for payments and business expenses will help simplify your record keeping process and make it easy to review business transactions.

As a sole trader, it does not have to be a business account, a separate current account will do. Should you ever form a partnership or limited company then it needs to be a business account in the business name.

Expenses

You can deduct some of the costs of running your business provided they are allowable expenses.

This is the link you need for Gov.uk’s guidance on claiming expenses while self-employed. You can’t claim absolutely every cost you incur for your business, though.

Allowable expenses typically include the following…

  • office costs, for example stationery or phone bills
  • travel costs, for example fuel, parking, train or bus fares
  • clothing expenses, for example safety gear or stage wear
  • staff costs, for example salaries or subcontractor costs
  • things you buy to sell on, for example stock or raw materials
  • financial costs, for example insurance or bank charges
  • costs of your business premises, for example heating, lighting, business rates
  • advertising or marketing, for example website costs
  • training courses related to your business, for example refresher courses

Keep records and evidence of all your business expenses and income – this might include bank statements, receipts and invoices. They need to be well-organised and accessible. This is important should you be audited, but it also makes filling in your return much easier.

You can periodically log your expenses on a spreadsheet or use an accounting app to scan/record them. If you use a digital method to store receipts, make sure you scan both sides.

Joint business and personal expenses

If you use something for both business and personal reasons, you can only claim allowable expenses for the business portion of your usage.

To calculate this you need to make a reasonable estimate of your business usage. For instance, if you know 50% of your phone usage is business related, you can claim half of your phone expenses for the year. The key word here is reasonable, so when in doubt, err on the side of caution

There are lots of areas this joint usage might apply to, but in order to make things easier HMRC provides some ‘simplified expenses’ calculations for key situations. These are flat rates you can use to calculate the costs of working from home, living in your business premises and ownership/use of vehicles. You can choose to use these instead of your actual expenses (though you will still need to retain records of your actual usage).

Using your vehicle for work

If you use your vehicle for work purposes, you can claim a flat rate for work trips of 45p per mile for the first 10,000 miles and 25p per mile thereafter. Across a whole year this could really add up, so remember to track your mileage, particularly if you’re a touring artist.

While, we’re on the topic of vehicles: remember you will need to add business use to your car insurance if you use it for work. Otherwise, you may not be covered for any accidents that happen while travelling for work.

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Saving for your tax payment

The art of saving when you don’t know how much you’ll need

A tax bill can represent a significant amount of money, so it’s a good idea to ‘save as you go’. One way to do this is by deducting a percentage of each payment made to you to set aside for your tax bill.

A loose rule of thumb is to save 25% of everything you are paid for self-employed work. However, those anticipating payments on account, may want to aim for more like 40%.

This will vary for everyone, of course. If you want a little more clarity on your own numbers, Gov.uk has a tool to help you budget for your tax bill.

You may also find it helpful to store those savings in a separate bank account for each tax year, as it can help you avoid the temptation to dip into them.


Struggling to establish a savings habit? Read: How to start saving (when you don’t think you can)


Completing your tax return

Calculating your tax bill

Once you are registered you can login to the self assessment portal and complete your tax return from the end of your tax year (5 April for most). Your tax return (and subsequent first payment) will be due by 31 January in the following year.

You’ll need to enter some information about yourself and your business, then enter the figures as prompted for various forms of income and expenses. It will then produce your calculation for your tax, national insurance and student loan payments based on this information.

It all comes out as one total figure. This is how much you will need to budget to pay by the 31 January (and, if necessary, 31 July) deadlines.

Don’t forget payments on account

If your tax bill is more than £1,000 you will likely need to make payments on account. These often surprise people who are new to self assessment.

  • This is a downpayment on your next tax bill that equates to 50% of your current tax calculation. Payments on account are split equally across two instalments. One is due 31 January alongside the rest of your tax bill, the other by 31 July.
  • Effectively, once you hit the threshold you will need to pay 150% of your tax bill across the January and July deadlines associated with that tax year – the current calculation amount and the additional 50% downpayment on next year’s bill.
  • The following year you will pay the remaining balance (i.e. the difference between your actual tax bill for that year and the payment on account you have previously made) and your next payment on account instalment. This then feeds into the following year’s bill and so on…
  • Here’s the gov.uk link for more information on Payments on Account

Need help? Don’t wait to contact HMRC

If you have an issue, the absolute worst decision is to ignore it – there can be serious penalties for not paying your tax. There’s almost always a better outcome to found by taking any problems directly to your accountant or HMRC.

Here’s the Gov.uk link on Help and support for self-assessment

Here’s the HMRC Self Assessment advice line: 0300 200 3310.

HMRC are even on YouTube. They post using the (very catchy) handle HMRCgovUK. See…

How to pay your self assessment tax bill

Finally, when you have completed your calculation and have enough money set aside, you have to pay your bill!

Fortunately, HMRC make this step nice and easy. There are options for bank transfer, direct debit, debit card payments, paying via your bank or building society and paying via cheque, among others. See the full list of ways to pay over on the Self Assessment site.

Whichever method you choose, make sure you allow plenty of time for the funds to clear, as they need to be with HMRC by the deadline date for you to avoid late penalties.

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Guides

Getting ready to graduate? 5 tips for new creative workers

From understanding student loan repayments, to calculating if you’re ready to move out, here’s what you need to know

It’s late April and those of you in higher education will currently be torn between a looming fear of final assessments and a looming fear of entering the workplace and post-graduation life. Finding your way in the creative industries is hard enough as it is and, while no one is in it for the pay, having a handle on your personal finances nonetheless has a very direct impact on your ability to sustain your creative work.

Life after graduation is sort of a weird time. After three years of independence, it often takes a surprisingly short spell at home before you realise that, actually, you very much need to be anywhere else. No shade on your parents (I’ve met them and they’re wonderful), I think it’s just an evolutionary thing.

“Establishing a few good financial habits could make a real difference to your ability to survive initial knocks”

Roles in the creative industries lack the graduate schemes, clear-cut salaries and HR conveyor belt of corporate roles. We all know this going in, but there’s also a part of each of us that is nonetheless banking on being the lucky individual who just happens to land a salaried dream job out of the gate.

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More likely, you’ll wind-up self-employed, working part-time out of the industry, in work experience/apprenticeship positions or some combination of all three, meaning it can be hard to figure out how or when you’ll be able to support yourself.

As part of my Creative Money workshops, I’ve been talking to creative students about how to set themselves up financially for life after study. This can be an expansive conversation, but there are five points I think it’s important to get across…

1. Setbacks are normal (pt. 1): Getting used to it takes time

Even in the most glitteringly successful creative careers, you will definitely encounter a hefty amount of rejection and you will very likely face some form of redundancy.

In addition, if you’re anything like me, you will entertain an ongoing series of identity crises. I question who I am, what the hell I think I’m doing and tell my wife ‘I’m leaving music journalism’ roughly every six months.

“The truth is that your emotional and financial resilience is built over time”

I am not sure if the right word for all of this is ‘normal’, but it’s certainly par for the course in creative work, as are many positive elements, for example: meeting interesting people, not dreading the alarm, moments of intense, victorious elation and bragging to people at house parties.

I don’t say this to deter anyone, more to reassure you that when the time comes that one or all of the above is happening to you: it’s not your fault, it’s not a sign – it’s just your turn.

Bloggers will often say unhelpful things like, ‘get used to it’, but the truth is that your emotional and financial resilience is built over time. Starting out from a place of relative strength, then establishing and building on good financial habits could make a real difference to your ability to survive those initial knocks.

2. Setbacks are normal (pt. 2): Emergency expenses WILL occur

I’ve said this before but it bares repeating: you cannot know when or where an emergency expense will hit you, but it will definitely happen.

You can really limit the impact of these by building up an emergency fund. Typically, the advice is to initially aim to hold £1,000 or a month’s expenses (whichever is higher) in reserve and then expand that to three months’ expenses over the longer term.

“Creative work tends to operate on a ‘feast and famine’ cycle, so putting money aside is crucial”

If you’re living at home and keen to move out ASAP, this might sound like the sort of expense you could skip (particularly when you might be factoring in rental deposits etc.), but it’s worth sticking it out a few months more and building that cash buffer if you possibly can.

Not only will give it you a sense of extra confidence and security, but starting out with an emergency fund in place could make the difference between you maintaining that independence or having to move home for a much longer stint down the line.

Creative work opportunities tend to operate on a ‘feast and famine’ cycle, so putting money aside is crucial. What longevity, stability and freedom I have achieved doing this work has been directly proportional to my ability to accept that I have to save.

What’s more, it has probably not escaped your attention as a new graduate that we are living through the worst economic calamity for 300 years. We’ve all got our fingers crossed for a swift recovery, but when newsreaders talk about ‘economic pain’ in certain sectors this is usually code for ‘we have shafted the young in order to protect the management team’s pensions’. Protect yourself with savings.

3. Know how much you need to support yourself

This is all about figuring out your likely monthly expenses figure.

Try to be accurate. As an inherently optimistic idiot person, I find this quite difficult. The best way I have found to do this is to stop predicting and start actually tracking my spending using a budgeting app.

“Don’t judge yourself on what you see –  when you involve emotions figures have a habit of getting ignored or rounded down”

You download it, connect it to your bank account and it will automatically categorise your transactions. Use it for a month or so, review the information to make sure it’s correct, but don’t judge yourself on what you see –  when you involve emotions figures have a habit of getting ignored or rounded down.

If you’re living at home after graduating and looking to move out, this will give you a reasonable idea of your current spending and what non-essential items you could cut if you decide to redirect that money towards a higher priority (e.g. rent on your new place).

Your app will give you monthly totals. Add these up and factor in your projected utilities, council tax (more on this below), rent costs and a savings buffer to get an accurate picture of how much you’ll need to earn on a monthly basis to support yourself.

Here’s a handy tool for estimating utility bills for a property, based on its location and how many rooms it has.

4. Get a full picture of your accommodation costs

Accommodation is one of the ‘big three’ expenses, alongside food and transport, so spending time to get it right will pay-off month after month.

We all have access to Rightmove and Zoopla, so it’s now easy to establish a reasonable rent for an area with a bit of online investigation.

“Council tax is not a sexy topic, but it never fails to surprise at least a portion of new graduates”

However, do make sure you investigate the area (talk to people who know the area, Google it, look at the transport options). Then book multiple viewings and spend a little time walking around there on the day – you’ll soon get a feel for whether it suits you and your budget. It takes a bit of effort, but it’s worth it.

Also worth noting: agents have a habit of showing you places at the top of your budget, so resist their tricks and be cautious about committing on a big rent payment.

As above, don’t forget to factor in utilities and council tax when you’re totting up the pros and cons. Council tax is not a sexy topic, but it never fails to surprise at least a portion of new graduates. It’s a tax on domestic property set by your local council and paid by the occupants of that property.

I have lived in five cities around the UK in the last decade and it’s varied wildly. My anecdotal experience is that it (perversely) tends to be higher in cheaper cities, because they are skint. Currently, I live in Liverpool (you should, too – it’s brilliant) and it’s about £130 a month for my house, which is… unpleasant.

If you’re living with others, council tax is an expense shared between all occupants, much like rent and utilities. So before taking on a rental room or property, make sure you find out what bills are included and what share you’ll be expected to pay. Note them down, so you can make a proper comparison.

Be aware that council tax, like most of these expenses, also has a nasty habit of increasing each year. This (and the fact you didn’t have to pay it a few months previous when you were young and carefree) is why everyone complains about it… You will get used to it, though.

5. Don’t fear your student loan repayments

There is a lot of noise around the student loan system in this country.

Agreed, it is not perfect and compared with your parents’ system, or even the system of 10 years ago the figures can seem astronomical. However, I’m in agreement with Martin Lewis (great video from him below) in that it behaves much less like a loan and is really a misbranded graduate tax.

“In England, you won’t start repaying your student loan until you are earning over £27,295 a year”

Tax doesn’t sound like much more fun, admittedly, but this is a ‘progressive tax’ (the good kind). This means that if you earn more you pay more and if you earn less you pay less.

That’s right: what you repay is based on what you earn, not what you borrowed and after 30 years, any unpaid amount is wiped.

This differs dramatically from a traditional bank loan, which is calculated on what you owe, not what you earn. In that situation, there’s always a fixed minimum payment, it’s up to you to setup and maintain those payments and it is never wiped (with the possible exception of declaring yourself bankrupt).

When do I have to repay my student loan?

You won’t start repaying your student loan until you have left full-time education and are earning over £27,295 a year (for April 21-22) in England.

If you’re self-employed it’s calculated as part of your annual tax return and if you’re salaried it’s repaid via PAYE (your monthly paycheque).

How much will my student loan repayments be?

In April 21-22, your student loan repayment will be 9% of any amount you earn over that £27,295 threshold.

For example, if you earned £27,395 (£100 over the threshold), you would repay £9 for the year.

£27,395 (your earnings) – £27,295 (the threshold) x 0.09 = £9

If you earned £28,295 (£1,000 over the threshold) you would repay £90 for the year.

If you want to get some sense of what this might mean for you and your potential income situation, pop your figures into this salary calculator (and select repayment plan 2 from the student loan options).

Bear in mind, too, that a significant number of creative workers won’t repay any loan. A poll by the Musician’s Union last year found that 87% of musicians expected to earn under £20,000 in 2020. If you’re repaying anything, take it as a good sign!

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Blogs Opinion

5 lessons learned from talking to creative students about money

Back in November, I launched a series of online workshops at music colleges across the UK, the aim of which was to help creative students to better manage their money.

The idea being that if they can figure it out during their studies they might have an easier time while in education and start their professional lives on a stronger footing. As a result, I have spoken to students from Manchester to Brighton, London, Bristol and Birmingham. It’s been really interesting to see how this stuff connects with people.

“I always ask people who come to the workshops what financial education they have received. The most common answer is ‘I haven’t had any.”

Like many of us, I am what you might optimistically call a ‘multi-hyphenate’ freelancer. Alongside my main role in music journalism, I also spend a day a week teaching budding music/media types and I do Creative Money stuff about one day a fortnight. The workshops have felt like a good way to bring all these threads together.

What’s more you learn pretty quickly as a tutor that your knowledge is highly subjective. So, with the first iteration of the workshops, I tried to be a good listener. Now, as I go into the second run of these workshops, I’ve been pondering some of the main points I’ve learned from the first run. Here’s what I’ve found…

1) Fix the cause, not the behaviour

It probably won’t come as a surprise that students worry about money, however, the proportion still surprised me. An astonishing 71% worry about making ends meet, according to Save The Student’s annual money survey. Money gets quite intertwined with our emotional state sometimes and many of them tell me that they have experienced anxiety when checking their balance.

I can get on at them about using a budgeting app, but if someone feels they can’t check their balance in the first place, it’s not going to help. Instead, I’ve realised that helping people to think about the causes of that anxiety (be it self-judgement, role models, or a simple knowledge gap when it comes to money) needs to take priority before you can change those behaviours.

2) We still have a major issue with financial education

I always ask people who come to the workshops what financial education they have received. While a few have had some tips from parents, the most common answer is ‘I haven’t had any.’ Again, Save The Student’s annual money survey backs this up, with the vast majority (71%) saying they wish they’d had a better financial education.

Martin Lewis has made some good strides in partnership with Young Enterprise and this stuff is now on the secondary curriculum, but it seems it’s still potluck when it comes to the depth and resources devoted to the topic by different schools.

The majority of the young adults and adults in this country (i.e. those with almost ALL the earning and spending power) have had no financial education outside of the ‘university of life’, ‘school of hard knocks SON’ etc. Talk about the blind leading the blind…

I have written before about the fact that you can not be inherently bad with money – most of the time we’re just not educated. However, the more I consider the lack of educational infrastructure around this utterly essential topic, the more the situation strikes me as completely insane. And that’s before we try to get our heads around the misbranded student loan system…

3) Location matters

Because I am A COOL GUY, I surveyed students at the beginning and end of the five week course. They were asked to gauge agreement or disagreement with a number of statements, for instance, “I know what to do if I run out of money.”

One thing that struck me was that students in London and Brighton were noticeably more anxious about their finances. Those students’ biggest gains in the course came from alleviating anxiety points. For instance:

  • “I am confident avoiding or getting out of debt” = 50% increase
  • “I know what to do if I run out of money” = 68% increase
  • “I worry about running out of money” = 46% decrease
  • “I feel anxious about student debt” = 53% decrease

While I’m pleased to see the course helped them, I think it’s telling that they made noticeably greater gains in these areas than their counterparts in Manchester.

Of course, many students already consider living expenses when picking a university, but the numbers would suggest that those in places like Manchester were generally happier about their finances.

Given money’s ability to affect everything from our mental health, to our diets, relationships and even our ability to focus on education, the financial impacts of the location are worth serious consideration when picking a place of study.

4) Most of them know much more than I did

I was not great with money at university and I had good financial role models around me.

“The students I meet rate far, far lower on the ‘financial tool-o-meter’ than I did at their age. This is a good thing.”

My typical day at university went something like: wake up too late to make breakfast. Eat a disappointing plastic sandwich on the way to my lecture. Sit through engage fully with a lecture and seminar. Break for lunch (baked potato from the canteen). More lessons. Go to the pub. Eat a gigantic cheeseburger. Drink. Go to another bar. Drink. Give £20 to one of a series of guys with suspect nicknames. Order pizza. Fall asleep in front of the DVD menu of Alan Partridge.

Essentially: it was the best of times, it was the worst of times. My approach was fun and fairly typical, but the consistency of it was, err, sub-optimal…

The current generation have only known the world, post-financial crisis, and are aware of the need to not-be-tools when it comes to money. Even if they haven’t got all the answers, they’re taking this stuff seriously because they have been left without the comfortable cushions of fully functioning welfare, healthcare and employment opportunity enjoyed in the previous two or three decades.

The students I meet rate far, far lower on the ‘financial tool-o-meter’ than I did at their age. This is a good thing.

5) The best solutions are the simple ones

Many people think learning to handle their finances will be a dangerous combination of the complicated and the mind-numbingly boring. It doesn’t need to be either. People can be suspicious of simple principles, but my experience thus far has told me they tend to work best because it makers them much easier to communicate, adopt and turn into habit.

Once you can address the causes of your financial behaviour, the basic solutions to any financial goal almost always comes down to the following…

  1. Track your net worth, income and spending
  2. Find a way to spend less than you earn
  3. Save or invest the difference

Tracking your net worth might sound fancy but it is essentially just asking ‘What have I got?’ (i.e. your cash, savings and investment balance minus your debts) once a month and noting the total.

There’s an abundance of apps that can track your spending and income without demanding you switch accounts. Then, once you know what you’re spending, you can see where the fat is and trim accordingly, making way for that burgeoning savings habit.

Sometimes I tell people how I go about the above and I can see them switch off, as if it’s too simple or obvious to be really helpful. It needs to be simple, though, or we don’t do it, at least not consistently. To the doubters, I ask, “But are you really doing all of this?” Most are not. Keep it simple, students – and everyone else, too…

Want me to talk to your students about running their personal finances? Get in touch!

Creative Money Blogs include principles, resources and opinion pieces relating to personal finance for creatives.

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How to sort out your personal finances in 5 stupidly simple steps

Keeping track of your personal finances can be confusing and painful, so let’s try to layout a path that’s easy to follow

The problem with money is that it’s everywhere. It is in your fridge. Your shoes. Your education. The very screen you are reading this on. It is zapping from your smartphone in myriad micro transactions. Amid this endless swirl of decimal points, it’s really easy to lose yourself in the details and miss the bigger picture.

You know the drill: we think nothing of buying lunch at work or university, but don’t start a pension. We stress daily about our fluctuating incomes, but do not set aside cash when it does come in.

We might even spend some time beating ourselves up about this. But none of this is your fault. You are not bad with money. Rather, as a quirk of evolution, the human brain is just not wired to deal with this stuff.

“Everyone has their own priorities in life, but there are some principles that apply no matter who we are”

Our brains are capable of a lot, but at our deepest level of mental programming, we think we are still hunter gatherers. As creative freelancers in 2020, that means we mostly hunt for work and gather sandwiches. We are trained to acquire and quickly consume the things we need because, historically, the things we need have been perishable.

However, the perishable items we need are now easy to acquire. We do not need to down a mammoth before we can make dinner. Money is not something we can directly physically consume and it is usually intangible, meaning our brain’s default position is to file these things away in our bulging ‘stuff to deal with later’ folder.

Map it out

In order to tread a better path for the longer term, it helps to use a map. Everyone has their own priorities in life, of course, so these maps will vary for us all, particularly as creative workers, but some principles apply no matter who we are. These are what I call (in annoying-but-catchy blog parlance) the five stupidly simple steps to financial freedom.

These steps are…

  1. Spend less than you earn
  2. Save the difference
  3. Pay-off debt
  4. Build an emergency fund
  5. Invest to support your goals in life

They are simple ideas, but they have huge pay-offs. Making ourselves conscious of these steps, periodically checking the map and taking some action to progress along the route, stops us from getting lost, or worse, into debt cycles or nasty financial outcomes.

Below, I’ve broken down each step and listed some of the resources you can work through that might help you with each stage.

Take it a step at a time. Bookmark this page and return to as and when you can. I don’t expect anyone to digest it all and fix their problems overnight, so don’t expect that of yourself, either!

Nor is this an exhaustive list (yet!), this page will act as a bit of a hub and I will update it as I get more relevant material on the site.

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What if I don’t do this stuff?

If you’ve got this far in life without thinking about these steps, again, I get it. We’re all here because we want to make our living from creative work, not sweating over spreadsheets.

The issue is that money problems absolutely will raise their head at some point in your life and if you’re not prepared for them, the outcomes are not good.

The upside to following these steps is huge. The potential downside that comes from ignoring them is far, far greater

At the milder end, you could wind-up forced-out of your industry, missing out on personal and professional opportunities, or ruining your parents’ retirement.

However, it’s also not uncommon to face spiralling mental health problems (the link between money and mental health is well-established, while depression is three times more likely among creative workers), relationship issues (money worries are the biggest cause of divorce) or even homelessness.

Even if you’re confident that someone will bail you out, how long will that be the case? And how long will you feel comfortable taking that support?

The upside to following these steps is huge. The potential downside that comes from ignoring them is far, far greater.

Most of us would agree that the hour or so a month it will take you to avoid these outcomes feels entirely worth it when you consider it in this context. What’s more, that time will help you to not just avoid that pain, but very likely give you a disproportionate return in terms of improving your longterm happiness.

Here we go, then, the five steps…

How to spend money
Photo by Igal Ness on Unsplash

1. Spend less than you earn

If you take away one principle from this post, or indeed this entire site, make it this one.

Cracking this is key to the whole thing. Consistently spend less than you earn and you can make horrible investments, blow your life’s savings at the roulette table and still likely come out ahead of over half the population of the US.

How do I do this?

You have two methods at your disposal: it’s all about reducing your spending and increasing your income.

Reduce your spending
Boost your income
Photo by Fabian Blank on Unsplash

2. Save the difference

We often tell ourselves that building savings is a process of rigorous, joyless discipline. However, thinking in those terms is really unhelpful.

Instead, think about how you can make it easy for yourself to do the right thing. For me, I’ve associated a savings habit with some fairly motivating, positive ideas: mainly the freedom to turn down work I don’t like and the desire to comfortably sustain myself in the down times associated with freelance/creative work.

How do I do this?

  • Just make a start – remember any savings are better than no savings. The main thing is to get used to getting that money out of your current account (where it might easily be spent) and putting it to better use elsewhere. You might find this piece How to start saving (when you don’t think you can) helpful here.
  • Know why you’re saving – a deep, personal motivation can make a huge difference to your ability to start saving some cash. Some people want an emergency fund (see below), but sometimes reframing it as ‘the freedom fund’, or ‘the f***-off fund’ can really help. This piece from The Billfold lays out a compelling case for having a f***-off fund.
Photo by Jp Valery on Unsplash

3. Pay-off debt

If you’re in high interest debt, redirect the money you’ve started saving towards repayments. Treat this as a priority – and I mean a genuine priority.

Think about your wealth as water in a bucket. Most of us in creative work have little desire for infinite wealth, but we do want to raise the water level in that bucket to a point where we have a sense of freedom and security.

The bucket - a metaphor for your personal finances

In this instance, our income is like the tap, sometimes flowing fast, sometimes slowly. However, each debt is a hole in that bucket and if you’re paying interest on those debts, then not only are you losing water, but each of those holes is growing bigger every day. The sooner you act the easier it is plug the holes.

Ignore them, though, and they will grow to the point where the bottom drops out. That looks like bankruptcy, homelessness, relationship breakdown and other things that we very much do not want in our lives.

The excellent US blogger, Mr Money Mustache says you should treat high interest debt as an emergency – as if “your hair is on fire”, so hurl everything you’ve got at it.

How do I do this?

  • Move high interest debts to lower interest accounts (e.g. a 17.9% interest credit card to a 0% balance transfer card) – this will slow the growth of the debt and mean you can direct more to the actual repayment.
  • Focus on paying off the highest interest debt – Make minimum payments on the others, when that’s paid off, roll the same payment amount over to the next highest interest debt and so on. This is the time to tighten the belt, maximise that gap between your earnings and spending and funnel everything you can to the debt.
  • Struggle with motivation? Try Dave Ramsey’s ‘debt snowball’ technique – This approach asks you to order your debts by total owed and pay off the smallest one first, then roll all the payments over to the next smallest and so on. Some people find that clearing those first few small debts is really motivating. One caveat is that it is usually not the best option mathematically, because it can leave you paying more in interest.
  • Learn to differentiate between good debt and bad debt – not all debts are equal. Taking on a mortgage for the right property might represent a great investment, while racking-up high costs debts on a Buy Now, Pay Later service (Klarna etc.), or putting pints on a credit card, are signs you’re taking on bad debt. These are the ones to jump on ASAP and avoid in the future.
How to start saving money - build in steps
Photo by Damir Spanic on Unsplash

4. Build an emergency fund

Everyone should have an emergency fund, but if you’re a freelancer or on a variable income (like the majority of creative workers) you absolutely need one.

There is a reason that all good financial advisors and personal finance experts recommend this: you can’t predict what an emergency will look like or when it will come, but it will happen.

Vehicles breakdown. Technology turns on you hours before a show starts. Things get lost or stolen on tour. A work or personal relationship sours suddenly. Houses flood or go on fire. There’s a bloody great pandemic and all work dries up. You get the picture.

How do I do this?

  • Pick an achievable target – the common advice, and I think it’s solid, is to save £1,000 or a month’s expenses. If things go well with that goal, you can then build that up to three to six months expenses over time.
  • Keep it somewhere accessiblenot in a shoe box, but in a savings account that you can reach with a few hours or at most a few days notice. You will earn horrible interest on it. Accept this.
  • Do not skip this step – some people think they can do without the emergency fund and move on to the fun ‘make me money’ investment stuff. I have totally tried this approach and am here to tell you it totally does not work out. If the investment drops at the same time as an emergency expense* you are forced to withdraw your money at a point when it’s worth less than you paid-in.

*Finances seem to operate on a ‘Sod’s law’ basis, so if you gamble that it won’t happen, it probably will…

Sort out your personal finances so you and enjoy doing the work that you love
Photo by Alice Dietrich on Unsplash

5. Invest to support your goals in life

Most people who have built their own wealth have done so via investing or creating businesses. It’s very, very difficult for most of us to simply save our way there.

Investing is the process of buying assets – things that hold some value and can be expected to produce an income (for instance, stocks and shares, which pay a share of a company’s profits, or a property which pays you rental income). In other words: putting the money you save to work making more money.

If you’re not in love with the idea of investing, the trick is to pick something you understand and keep it simple. I have not covered investments on this site yet as I’ve been focussing on some of the previous steps in this list. This will change in the future, but for now here are some key pointers…

How do I do this?

  • Get going ASAP – the hackneyed phrase in financial circles is that “the best time to invest was 10 years ago, the second best time is today”. This is annoying but also true. As soon as you’ve got debts in hand and some emergency savings, direct that cash to investments.
  • Start a pension – there is a pensions crisis looming in the creative industries and it’s going to hurt a lot of people. Only 24% of the self-employed save into a pension. The current UK state pension is just £134 a week and likely to fall in real terms over the coming decades. If you don’t have a workplace pension with a company, consider opening a SIPP (Self-Invested Personal Pension). Any amount on top of that state pension is better than no amount. What’s more, even if you’re self-employed, the government will automatically top up your payments by 20% in the form of tax relief, meaning that if you pay in £100 it becomes £120 – and that’s before any return from the investments you put it in. Don’t miss out on that.
  • Diversify your investments – it’s a very good idea to spread the risk of your investments, so that if things don’t work out then you’re not at the mercy of one market or firm. For this reason, it might be wise to invest in whole markets via low cost index funds (in which you buy a single fund which automatically invests your cash into a small share of every company in the index or stock exchange of your choice). Have a look at Alan Donegan’s guide to index funds. It’s really not hard to get set-up.
  • Invest for the long-term – if you invest in stocks and shares, think long-term – like 10 years plus. You’re not locking that money away forever and (if you use something like a Stocks & Shares ISA) you can often access it within a few days if need be, but leaving it in there for the long term gives you a far better chance of a decent return. The stock market fluctuates wildly day-to-day, which is why picking individual stocks and so called ‘day trading’ is tantamount to gambling for most. However, it almost always goes up over the long term.
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Acknowledgements

The thinking in this piece has been heavily influenced by a number of financial gurus.

Dave Ramsey we owe for the debt snowball and his renowned concept of the seven ‘Baby steps’, some of which has filtered through here (I don’t agree with it all). Mr Money Mustache continues to influence a lot of my thinking about saving, dealing with debt and investing. Alan and Katie Donegan’s Take Control Of Your Finances course was also really helpful to me in terms of simplifying this overall journey. They were both very generous with their time and humour. They deserve much praise and Mars bars.

Disclaimer

The information does not constitute financial advice or recommendation and should not be considered as such. Creative Money is not regulated by the Financial Conduct Authority (FCA), its authors are not financial advisors and are therefore not authorised to offer financial advice.

Investing carries risks – the value of investments and any income derived from them can fall as well as rise and you may not get back the original amount you invested. Always do your own research and seek independent financial advice where required.

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