The 10% pot
Many writers I know are very sensible about looking after their money. They do their taxes throughout the year, so they’re ready to go at tax time, and they save up to 25% of their income to cover the tax bill – and often more, if they have very lucrative deals and contracts.
However, there are also many writers I know who struggle. Income is erratic, they have to do other jobs just to make ends meet, and the savings (if they have any) are eaten into every time an unexpected bill – or even an expected one – comes in.
Once upon a time, when I was very prolific, I belonged to the former group. However, as time went on, and as I realised I could offset a lot of my expenditure against taxes (and national insurance), I started to get a bit lax about saving my 25%. It went down and down and down until it eventually reached 0%. And anyway, at the time I was pretty much living hand-to-mouth – and that was on a good month.
Writers’ clients are notoriously difficult payers. Yes, the big publishing houses have set schedules and routines for paying advances and royalties. But the smaller clients, the magazine publishers, the smaller presses, some of the newspapers, all seem to take as long as humanly possible to settle an account.
In my day I got to be quite savvy on the money side of things and now most of my clients are on a 14-day settlement. And yes, I realise I’m in the minority as far as this goes, but there really was a time when I couldn’t afford to put all the hours of the week into something and then wait for three months to be paid – longer for some of the short story markets.
It is true, there are still writing clients who are very set in their ways, but at least you know that they will pay eventually. And if they’re providing a regular stream of work, then that ‘s fine. It’s swings and roundabouts, if they want something quickly, they may arrange to pay a lot quicker.
Incidentally, notoriously bad payers who make a regular habit of making me chase them or who drag out payment for months and months and months get the sack from me now. I really, really can’t afford to work for nothing. Nor do I think I should have to. And when there are other clients out there who will and do pay on time, that’s where my energy and time is best spent.
In the past, I have had absolutely no qualms about taking someone to the small claims court, or threatening to, or even invoicing them for late payment admin charges and interest up to so many percent above the base bank rate. I lost just one client doing that, but they still paid what they owed, plus the admin charge, plus the interest. Other clients have paid up, pulled up their socks, apologised and continued to send me work.
When you add up the time spent chasing bad payers (when you could be working for someone else), and then calculate lost interest, it really is often better to just simply cut your losses and not work for that client ever again.
If you were on a regular wage and your wages suddenly stopped, would you carry on working indefinitely? More importantly, do you think that excuse would wash at the supermarket? “Could you just hang on another month for me to pay for those groceries I’ve already used?”
End of temporary aside
At the end of last year, with a good pool of regular work now in the bag, and still a few speculative jobs coming in, I decided I really needed to start a dedicated savings account again. Not just for the tax and NI, but also – and more importantly – for times when the money does get held up for whatever reason.
Many experts will say that you need to have at least a year’s income in the bank before starting out in the world of freelancing, or even starting up in business. Sadly, this often isn’t possible or even practical. *I* believe a little one-man-band like me should aim at 3 – 6 months’-worth of income, with smaller, achievable targets along the way.
I don’t work it out on income, either. I work it out on fixed or regular expenses. I work out how much money I need each month to meet my financial obligations and my share of household costs (which the poet covers anyway if cashflow is a bit lax – I’m very lucky in that he does support my work in every way).
(Incidentally, this is where I start when I’m working out an hourly rate too, plus number of hours I’m able to work, plus a percentage profit margin to help with the low periods – all taught to me by the business manager!)
I don’t know yet what my car insurance will be when it comes up for renewal in November/December. Nor do I know yet how much my road tax will be when it comes up for renewal in June/July. I don’t know either how much I’ll spend on shopping or petrol or car maintenance. But everything else is pretty much fixed, and I have a weekly budget for the shopping.
When I have a year’s-worth of costs for the car bought last summer, I’ll have more of an idea of how much that will average out. But for now, for this purpose, I’m leaving them out.
And I have a monthly figure.
With online banking now, it’s easy to open new savings accounts for different purposes: a holiday, a home extension, a new car. Some building societies allow you to open several savings “pots” within one savings account, so that the investor benefits from tiered interest rates.
In my case, while a year’s-worth would be fantastic, I’d like to start with having 3 – 6 months’-worth of fixed expenses in the can. For that I opened a “10% savings pot”.
When I’ve filled that pot, then I’ll open another account for tax and NI. My ceiling for this may well be something like 25% of what I earned last year.
When I’ve filled that pot, I’ll open another account, possibly for “pet expenses” or “holiday fund” or “retirement pot”. This third pot may not have a ceiling at first. Or, if successful, I may decide on a nice, round figure and then open another pot for when that one is full – if you get my drift.
The 10% pot will always be the one that’s kept full first. Any additional savings will then overspill, like a waterfall, into the next pot, the tax/NI pot. When that pot is full, the savings will then fall over into the next pot. And so on.
But the first two are always topped up first. That way, if I do find myself waiting for payment, or if I suddenly find myself unable to work for whatever reason, at least I can still meet my financial obligations for the next 6 months. (The tax man really will wait so long as you keep him in the loop and maybe come up with some sort of payment schedule that you can afford.)
Now, whenever I get any income, wherever it comes from, I immediately transfer 10% to my 10% pot. If that income is less than £10 (apx $13 but I’d use ten dollars too), it all goes into the 10% pot, mostly because my account doesn’t let me transfer less than £1 anywhere.
So if I get a fiver for a survey, the whole £5 goes into the 10% pot to help me reach my 6 months more quickly. Anything over £10, I transfer 10%, even if it’s just £1.01. Anything over that initial 10% – for now – goes towards paying for things now.
This isn’t something I can do straight away, though. I need to do it in baby steps. So my targets are as follows:
- start saving 10% of all income (including gifts, competition wins, everything)
- aim at the first month
- have 3 months
- have 6 months
- open tax/NI account
I also decided to start immediately, with the very next payment that came in. And that was at the beginning of December 2017. I did very well too.
Over Christmas, due to banks and organisations closing down for holidays, I did have to dip into the 10% pot. However, as soon as I could, I started to pay it back – once I’d covered my 10% and paid for whatever else had to come out that same week.
I still owe it £100 ($138), but looking at the work I currently have in, the invoices already out, invoices waiting to be raised (to fit in with payment schedules – see, I do try to make it as easy as possible to pay me on time) and future work promised, I’ll soon have that first month’s-worth covered.
If you had savings pots, what would they consist of? Answers below, and thank you for reading!