Managing your finances as a freelancer or digital nomad

If you’re just starting out as a freelancer or digital nomad, one of the most daunting prospects is how to manage your finances correctly.

As a freelancer, you are your own boss, and that comes with a bunch of legal responsibilities. However, it’s much easier than it sounds. While this article mainly covers the responsibilities for UK freelancers, it’s generally the same across the board: you just need to keep track of all of the incomings and outgoings for your business.

The incomings minus the outgoings result in your profit, and it’s this profit on which you will pay tax. Simple. The tricky part is making sure you keep track of everything you’re spending and invoicing.

Let’s look at a basic example.

You’re a freelance website developer and you charge your clients a total of £30,000 for websites in the 2018-19 tax year. In that same tax year, you spend £2,000 on office rental, £500 on subscriptions (Adobe CC is expensive!) and £300 on hosting. You’ve had a bunch of meetings with clients and racked up a total of £1000 on trains and buses. That’s a grand total of £3,800 in expenses.

Congratulations, your overall profit is £26,200, and it’s on this profit that you will need to pay tax.

So how do you keep track of all of these costs effectively, so that you can give all of these figures to the tax authority (IRS in the United States, HMRC in the UK) when the time comes?

Table of contents

  • A bank account – An integral thing for any business, you should have a separate account to allow you to keep track of exactly what money has entered and left your business
  • Exchanging currency quickly and cheaply – if you’re planning on living the digital nomad lifestyle, you need to be able to move money between currencies without losing out on crazy fees
  • Bookkeeping software – The holy grail of making sure everything’s recorded, learn what bookkeeping software is and what some of the most popular options are
  • Receipts – You’ll collect plenty of receipts as you run your business, whether it’s for train tickets, meals at a conference or entry to a networking event. Learn how to record these
  • What can I claim for? ­– Ensure you’re claiming everything you can as an expense, so that you’re not paying tax. You’ll want to make note of everything you spend that is a legitimate business expense. We’ve got a very quick and dirty guide to what’s allowed and what’s not.

A bank account

You’re going to need somewhere to keep the money you’re earning, and somewhere from which you can pay your suppliers. A bank account seems a much better place than under the bed.

In the UK, unless you’re setting up a limited company, it’s perfectly fine and legal to use your personal bank account for your business money. However, while this might seem like the easy option when you start off, it’ll quickly turn into a nightmare.

If you’ve got both personal and business expenses coming out of the same account, and a mix of business income and money from other sources (other employment, gifts, transfers from savings accounts, etc), it’ll quickly become very difficult to keep track of which money is business-related and which isn’t.

That’s why a separate bank account is the first thing you should set up when deciding to freelance, start your own business or be a digital nomad.

There’s no need for this to be a dedicated business bank account unless you’re either starting a limited company, or want payments to show the name of your business. You can quickly and easily set up a second personal bank account and use it for nothing but your freelance income and expenses.

By having a separate account, you know that everything going in and out of the account is related to the business. The money that comes in is your income, the money that goes out is your expenses. The difference between these is your business’s profit (or loss!).

In many cases, this is the only information you need to send to the tax man every year, so if you just add this all up once every tax year (the UK tax year runs from 6th April to 5th April of the following year) then you’re sorted.

There are plenty of banks offering free current accounts in almost every country, so you can either set up a second account with your current bank, or shop around and find the account with the best perks. If you’re in the UK, Money Saving Expert is one of the most trusted resources for finding out which is the best account right now.

Exchanging currency quickly and cheaply

If you’re planning on living the digital nomad lifestyle, there’s a good chance you are going to be spending your money in a different currency from which you’re invoicing (e.g. you’re invoicing UK clients in pounds, but plan on working from a beach in the Mediterranean and spend Euros for most of the year).

By far and away the best way to do this is with TransferWise. Gone are the days of popping to the Post Office or Thomas Cook and paying an extortionate exchange rate to change your money from pounds to euros or dollars. These days you can do it online at a fraction of the price, and have your money on a debit card and ready to spend within a matter of minutes.

With TransferWise, you can send money between bank accounts in different countries and get the money exchanged between currencies for crazily low fees.

So if you’ve got a Spanish bank account for your new digital nomad life in Tenerife, but your clients are paying your business’s UK bank account, you can transfer the money straight from your UK account to your Spanish account in seconds using TransferWise, converting it from GBP to EUR as you do so.

Another great feature of TransferWise is that you can set up a Borderless Bank Account in a range of currencies. You can currently set up accounts in USD (US Dollars), GBP (Great British Pounds), AUD (Australian Dollars) and EUR (Euros), and you’ll get a full set of bank details for each currency.

So if you’re a European freelancer invoicing US clients, you can invoice them in US Dollars and have them pay you straight into your USD TransferWise bank account. You can then transfer this money into your business’s standard European bank account and have the money transferred at the current real conversion rate, minus TransferWise’s really low fee.

We work with clients in the UK, Australia and the USA, and TransferWise has saved us thousands of pounds of lost revenue by reducing the fees we were paying.

Bookkeeping software

Bookkeeping software is what you use to keep track of what’s coming in and out of the business, i.e. what you’re spending your money on, and how you’re getting money.

It’s via bookkeeping software that you’ll produce invoices for your clients. Often, the software can automatically send these invoices to your clients as well, and even remind them when the invoices are due.

You’ll also want to enter in any bills you’re sent by suppliers – e.g. for office space, computer equipment, software – as well as any day to day expenses such as your car mileage or anything you’ve spent when you’re travelling for business purposes.

It’s important to keep an accurate record of all your expenses. These reduce the amount of profit your business makes, so reduce your overall tax bill. As such, there’s a chance HMRC will want to see evidence of what you’ve spent your money on.

You need to keep records for up to 5 years, so using bookkeeping software means you don’t have to worry quite so much about where you’re storing all your records.

While it’s important to keep back statements and any paper copies of anything you’re sent, at least if everything is recorded in your bookkeeping software then it’ll make your job a lot easier when it comes to figuring out what paperwork you need to dig out.

There are plenty of bookkeeping options out there, and some of the most popular ones are Freshbooks and Xero. Both are feature-rich and work perfectly for businesses of any size, whether you’re a UK business, US business, or based anywhere else in the world.

However, the software we’ve used for running our business for the last 4 years is Wave. It’s completely free and contains everything you need to keep track of all of your invoices, expenses and bills. While it isn’t quite a feature-rich as its paid equivalents, I couldn’t actually tell you what it’s missing, as it does everything we need to keep our business’s finances in order.

You can invoice customers directly from it, and even choose to allow them to pay you by credit card (note, Wave will take a small fee for this). You can run off all the usual reports and see how much you’ve invoiced each customer, on what you’ve spent your money, and who owes you what.

Receipts

While a lot of your expenses will come in the form of bills from your suppliers – i.e. an invoice for the 1000 business cards you’ve just ordered, or a monthly phone bill – many of your expenses will come in the form of receipts.

That coffee you grabbed during a conference, or the last-minute train ticket to go meet a client, these are things for which you’ll have paid for on your debit card and not been sent a bill.

Thankfully, all three pieces of software also allow you to scan receipts from their mobile app, and have them uploaded directly into your account. This saves having to scan them manually or enter all the details yourself. Just scan, categorise and carry on with your day.

Note, although some countries allow you to just store records electronically, it’s best you keep your receipts somewhere safe even once you’ve scanned them in, just in case. You may have entered them wrong or the app’s scanner may have recorded them incorrectly, so it’s always good to have a copy to look back on in the future.

What can I claim for?

A word of warning – you can’t always claim everything as a business expense, even if you’ve bought it on your business debit card. This is very country-specific, so contact your country’s tax authority to find out exactly what you can claim (HMRC for UK freelancers, the IRS for US freelancers).

For example, in the UK you can’t claim transport to and from your place to work. However, you can claim transport to and from a client’s offices or to and from meetings. If you’re working from a coworking space, you can happily class the rental cost as a business expense, but if you’re working from a coffee shop then it’ll be a no-no to to claiming your daily latte as an expense.

The general rule is, if it’s a necessary cost to the business then you can claim it – but make sure you could justify it in the unlikely chance that you ever need to. Speak to an accountant or your country’s tax authority for more information on exactly what you can claim.

Is there anything we’ve missed? How do you keep track of your finances as a small business owner, freelancer or digital nomad? Let us know in the comments!