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CoinsI know, I know, financial planning – the very thought is enough to make you yawn… and yet, is it? It may sound as dull as ditchwater, but I firmly believe that careful financial planning underpins every successful business. I should perhaps confess that my father worked in finance and I started off as a graduate trainee for one of the major banks when I first left university, many, many moons ago – but never gave up hope of following my dream and becoming a translator, so only spent a year in the world of finance myself. Enough, perhaps, to give me a sense of organisation and a need for order in all things, but especially where money is concerned.

It’s hardly rocket science to regard finances as the basis for a business, but so many people don’t seem to plan accordingly. From matters as elementary as record-keeping and cashflow, to which bank you choose and how you provide for tax bills, holidays and ultimately retirement, there is a huge amount of scope for optimising the way you work. Inevitably, my methods will apply specifically to UK-based translators, as that’s the self-employment system I’m used to, but the general principles still apply wherever your business is based.

Regular record-keeping

As a refugee from the pre-digital, pre-internet era, I am probably terribly old-fashioned in keeping my work records in a good old ledger, backed up by a system of Excel spreadsheets and Word templates for invoicing. Doubtless there’s scope for improvement with the latest accounting software, but I have looked and I haven’t found anything that suits me or beats my existing system, honed to streamlined efficiency over the years! However you do it, keeping good records of work in and out is essential. I tend to invoice on a monthly basis for most clients, the exceptions being clients who I know may be a little dilatory with regard to payments, or, for that matter, clients who pay ultra-promptly: it’s always worth boosting your cashflow if you know a client is prepared to pay within days of you submitting your invoice! Invoicing monthly reduces paperwork and makes it easier to keep tabs on income received at the end of the month. Double-checking against my ledger with the spreadsheet for each client means I never miss an invoice.

Choosing your bank

Choosing your bank is also crucial: I used to bank with NatWest, mainly because I used to work for them and they were my first bank. For many people, that’s as far as it goes: changing banks can seem a time-consuming and fiddly process, but where your business banking is concerned, it can mean a huge difference if you make the right decision. I don’t have a business account as such – monthly invoicing means that I actually don’t have that many transactions in or out and there are limited loan considerations in a business where your main capital is what’s in your head.

What is important, in the UK at least, is finding a bank that doesn’t charge the earth to receive (or send) payments from (or to) the Eurozone, where a large proportion of my clients are based. NatWest used to charge me £7 per incoming Euro payment (£1 if it came to less than £100), which added up to quite a considerable sum over the year, even with monthly invoicing. I considered setting up an account with a bank in my source language countries, but they all involved a monthly fee. I also investigated Euro accounts with a British bank, but in most cases you had to keep a relatively large sum of money in the account, not earning interest, plus they wouldn’t give you a debit card, so were of limited use abroad. Finally, I hit upon the perfect solution: I opened an account with First Direct, who don’t charge anything for incoming Euro transfers made via the SEPA system, and only £4 for outgoing transfers within the Eurozone, far cheaper than many of their competitors. They also use a commercial bank rate when exchanging currency, so I never feel I’ve lost out on the exchange rate either. Other banks offer similar benefits, including HSBC, but it certainly pays to ask the question if you work for clients in other countries.

Setting aside for tax

When I receive inwards payments, I try and work out roughly how much tax is payable and transfer that immediately to a tax account I’ve set up for that very purpose. That way, I know I’m always on top of my tax liabilities and won’t end up in the situation a freelance colleague of mine got into, when she suddenly found she had a £4,000 tax bill to pay, and no spare cash to pay it…. My tax account is with my household bank, with which I also have an offset mortgage, so my savings towards my tax bill neatly go towards offsetting the interest payable on my mortgage – no bad thing given the pitiful interest rates available at present! However, even in a savings account with minimal interest, at least you know the money is set aside and it somehow seems less painful having to pay the tax bill from a dedicated account, rather than from your general savings or current account, where you’ve already got used to the idea of it being “your” money!

Financial planning software

I use Microsoft Money to track my income and expenditure, a legacy of my divorce planning, when I needed to know exactly what I was spending, but actually a really useful exercise in financial discipline, both in and out of the work domain. I don’t think that particular software is available any more, but I know many of the banks offer similar programmes and they are invaluable in keeping track of spending. I also use the data to quickly calculate my home expenses (electricity, telephone, etc.) when doing my business accounts, and even to calculate statistics on the amounts received from individual clients each year. I do have TO3000 for that purpose too, but haven’t mastered its intricacies sufficiently well to produce the reports I want, so it really is just a glorified statistics programme for me, although I suppose it also represents a digital trail of my work as a back-up to my old-fashioned ledger system.

Bookkeeping and accounting

I do my own bookkeeping as my accounts are relatively simple, with very few business expenses, but I do make sure I do my accounts on a monthly basis so the final year accounts aren’t a big deal. I know of so many colleagues who leave it all until the last minute and then wonder why it takes so long to do their yearly accounts… I do, however, pass everything over to an accountant at that stage for the final tax return, if only so she can make sure I’m up-to-date with the latest rules on what you can and cannot claim. I pay a one-off fee each year and am pretty sure that the amount I pay is worth its weight in gold – and tax-deductible, of course!

Retirement planning

On the subject of taxation, one of the best things you can do to minimise your tax bill is to contribute to a pension – especially in view of the recent changes to the pension taxation system in the UK. Admittedly, as freelancers, we don’t benefit from employer contributions, but payments into a pension are eligible for 20% tax relief, so for every £80 you contribute, the government adds another £20. If you earn over the 40% tax threshold, the total amount you contribute to your pension is added to the 40% threshold, thus raising the level at which you pay 40% tax – so it can be well worth bearing in mind!

Recent changes in pension taxation in the UK also make saving into a pension a no-brainer as they have implications for inheritance planning too. The 55% death tax on cash pension funds will be abolished and pensions will either be free from tax – and exempt from inheritance tax – if, heaven forbid, you should die before the age of 75, or taxed at your heirs’ marginal tax rate beyond that age. If, as I do, you live in the affluent South-East, where my modest 30s semi already takes me beyond the inheritance tax threshold, it makes pensions real contenders in the financial planning stakes.

Mistral pool 2I, like many other freelance translators, can’t imagine myself retiring for a very long time, and intend merely to scale down my workload as I get towards retirement age (whenever that is by then!), but if ill health makes that impossible, having a pension will still be essential. I only started saving into a personal pension well into my thirties, but my advice to any younger translators just setting out would be to start a pension as soon as you can, even if you don’t pay very much into it at first! The rewards of paying into a scheme over a longer period are immense – as my 22-year-old son informed me the other day! He has time on his hands at the moment whilst waiting for his graduate job to start and had read an article comparing the pension pots of someone who had paid a lower amount for a longer period and someone who’d paid a lot more, but started later – a huge difference in favour of the early starter….

Rainy-day fund

Quite apart from planning for retirement, when you’re self-employed there will inevitably be times when there are limited funds coming in – whether you’ve hit a dry spell (which happens to the best of us), want to go on holiday or are laid low with illness. To cover such eventualities, I like to have between 3 – 6 months’ income set aside in an accessible savings account. There have been times, such as when I was out of action for over a month with swine flu, when I’ve been very glad of my cushion! I know it’s hard to put aside such a large amount when you first start out, but if you can make the most of the better interest rates on regular savings accounts (good old First Direct offer an amazing 6% on their regular savings scheme), it’s a relatively painless way of drip-feeding money out of your current account and into savings to build up that security blanket. Income protection policies are of limited use for freelancers, so far better to create your own fund for use in an emergency.

I know this has all been dry, factual stuff and I hope you’re still awake! I’ll be delighted if my own tricks and tips help others to move in the right direction, but I should also love to hear of any other pointers you might like to share in the dusty depths of financial planning. Keep calm and carry on saving!