Article by: Nipapan Poonsatiansap CFP® Independent Financial Planner
Before we start with freelance financial planning, let’s us first familiarize ourselves with “freelance” or “independent” career.
There are many definitions for “freelance”. Here, we will define “freelance” as self-employed who owned and managed their own work and absence of employer or monthly salary from employer. A freelancer may have an operation team of less than 5 people and the income is not limited to margin of business operation. The unlimited income depends on skills and knowledge an individual or simply put, they receive the amount of perceived value of their work.
Being a self-employed means responsible for the business in all facets if it would fail or become successful. As a profession, they have to accept the outcome none the less. Hence, managing work schedule, appropriate financial plan and discipline are crucial for the success of every freelancer and independent career.
What are the financial planning areas of a freelancer?
- Cash flow: Firstly, maintain a robust cash flow budget since a freelancer have fluctuates income (income based on skills, different for employees with fixed income or salary). Therefore, having sufficient cash flow for 8-12 months expense projection (higher than our typical recommendation for 3-6 months baseline expense). In addition, a freelancer should have a good accounting record to enable them with financial expense projection to determine an appropriate emergency funds.
- Health insurance: Medical expense for freelancer is usually out-of-pocket. There is no group insurance or health insurance paid by employer company. Hence an appropriate health insurance planning should determine from an average expense based on frequently visit hospital pricing. Selection of health insurance should cover the estimated medical budget.
- Life insurance: Self-employed usually operate their business alone. Sole income generator is our own body not other assets, shop or other equipment. Therefore, do not neglect the important of life insurance and health insurance. Insurance coverage must be sufficient for debt obligation or expenses. An appropriate insurance should be term life insurance or unit link to maximize insurance benefits.
- Retirement plan for freelancer
should come from tax benefit funds such as LTF, RMF and retirement pension
insurance. Keep in mind, a freelancer does not have provident fund or
Government Pension Fund (government officers). We are responsible for our own
retirement plan. Save up at least 10-15% of income to invest in LTF or RMF on
monthly basis. If possible, max out tax benefit allowance or 15% of the income.
- Irregular income of freelance
occupation would result in inflexibility of investment plan in high risk market
i.e., stock market. Freelancer is subjected to undesirable selling price or
sell at loss in emergency use of fund. Therefore, refrain from investing in
stocks of companies operating on similar business of freelancer occupation. Do
not put all your eggs in one basket, diversification is a good risks
- The last important area is
tax planning. Freelancer should study on how to move away from section 40(2) income
which income is deductible by 50% of expense but not exceeding 100,000THB to
income section i.e., 40(5), (6), (7) or (8) instead. These alternatives has no
expense ceiling and offer higher benefit than section 40(2) with actual expense
or a lump sum expense deduction.
On the last note, being a freelancer or a self-employed gives you autonomy but the freedom requires a good financial planning. A robust financial planning acts like a Life Compass to tackle potential financial challenges caused from leaking money (no savings despite high income). Therefore, enjoy a carefree freelance lifestyle with a sound financial planning.