Financial Planning for Freelancers & Self-Employed in Singapore

In freelancing, you may be the boss, but you’re also the employee. You are the one owning and running your business. So, whether it is marketing or accounting, you are required to get the work done.

Many freelancers and self-employed individuals have a hard time managing their personal finances and expenses. There are also a lot of things to take note of when planning for your retirement as there is more work needed on your part as a freelancer.

If you’re thinking of doing financial planning as a freelancer or self-employed individual in Singapore, we’ve written this guide to help you with money management and retirement planning.

Healthy Cash Flow Management

A steady flow of cash is vital for any business to grow. But for the business to stay afloat and thrive, you must know how to manage your cash.

Learning how to manage cash flow becomes even more crucial as a freelancer as you don’t have a finance team keeping your finances in check. So, here are a few tips to keep your cash in check-

Open a separate bank account

As a self-employed individual, accounting becomes a tedious part of your work. You will need to record the precise data from your bills and invoices. With these data, you will then need to produce financial statements.

Financial statements are incredibly crucial as it is a regulatory requirement that helps determine the income tax you have to pay while providing an analysis of the health of your business.

But the task of bookkeeping and accounting requires accuracy and routine maintenance. So, having only one account for both personal and business expenses may confuse you.

You will not be able to produce accurate records as your finances are mixed. This imprecision will hinder your tax payments and also affect your work review. Therefore, it becomes essential to create a separate account only for work. In doing so, managing cash flow becomes easy.

When Engaging Clients, Be Clear About Everything

Whether you’re a beginner or a professional freelancer, you must always be clear about your cash inflows and outflows. In doing so, you will learn how to avoid making mistakes that may result in non-payment from your clients.

Before providing a service, you and your client need to be clear about the price set, the payment terms involved, and the deliverables for each project. This should be made in contract and signed by both parties to protect yourself from non-payment.

After delivering the service, most freelancers dread delayed payment or no payment at all from the client. If you have clear payment deadlines set, use this to remind your client. Maintain proper communications with the client and politely ask for your fees.

Remember, clients are businesses as well, and they might face cash flow issues too. Proper communications ensure that relationships are not soured and ensure you quick payments when your client resolves their finances.

Setting aside cash for taxes

Yes, even freelancers must pay their income taxes. And if you don’t, then the tax laws will look for you with a comparatively larger bill. Therefore, take the legal and less expensive route by regularly paying your taxes.

For the traditional worker, most of the tax work is done behind the scenes. They have auditors and bookkeepers who take care to deduct the required amount from the salaried employee’s monthly income.

For the self-employed, it is up to you to put aside a percentage of your income for taxes. Depending on your declared annual trade income, as of 2020, the cap for income tax is currently 22%.

Most experts would advise you to save aside 25% for income tax. This suggestion is good as Singapore practises a progressive tax model, and as a freelancer, you will likely experience fluctuating income.

Saving 25% of your income guarantees that you will have more than enough for your tax payments

Initially, it may not be easy to part away with the money set aside. But it’s a necessity to prevent tax issues that will land you a larger income tax amount if you don’t pay up.

Don’t worry, soon you’ll learn to appreciate Singapore’s ‘tax haven’ as businesses pay relatively lower tax in Singapore than in other countries.

Also, take care to update yourself with any changes in the tax laws as well.

Check out our tax planning guide to help you with this.

Setting aside cash for CPF

The Central Provident Fund (CPF) is a savings scheme made compulsory for every working Singaporean. Its chief focus is to help build a retirement fund, pay for medical expenses, housing, education, and many more.

As a freelancer, you are required to contribute if you’re earning more than $6,000/year.

You aren’t required to contribute to your Ordinary (OA) & Special Accounts (SA).

However, you will still be required to top up your Medisave Account (up to 8% of your annual trade income).

But as a freelancer, you decide if you want to declare your full income and pay the amount.

There are a handful of freelancers who contribute less or don’t contribute to their CPF at all. We’re not here to judge as everyone has their reasons.

However, saving for retirement is not a day’s work.

It is a continuous life journey.

It is recommended that you contribute relative to the amount you earn as your CPF acts as a safety net for you when you need it the most.

Run out of cash to pay for your medical fees? There’s MediSave.

Want to buy a new home? There’s your Ordinary Account.

Spent all of your retirement funds? There’s CPF Life.

Freelancers have no scope for a pension system. And that’s why CPF becomes even more vital for you.

However, for CPF to help you, you’ll have to help yourself by regularly contributing to prevent insufficient funds.

Now, there are four CPF accounts into which you can save your money. And apart from the ordinary account, the other three accounts (special, retirement, and Medisave) provide a high interest of 4% – 5%.

Contributing to your CPF now means that your funds will be compounded to an even larger amount by the time you retire!

Setting aside cash for business growth

Marketing

Whether you’re working as a freelancer or as a regular employee of a multinational company, marketing is a game of strategy and finesse. And when you want to draw up a marketing plan, there is no doubt that there are expenses to be made.

Firstly you need to track and be aware of your average revenue, which you might have an idea of if you’ve been freelancing for a while.

Most freelancers have a flaw in not recognising the importance of tracking their revenue. Some find it tedious, but trust me, it helps a lot when you do it.

Make a spreadsheet of your revenue and assess how much money you can allot for your marketing.

And this means that you need to make budgets. Yes, budgets! You cannot plan for your marketing, rather anything, without chalking out a budget.

Budgeting helps you to chart out the plans of how and where you could spend on marketing.

For example, you may not need a big budget to market on social media, but if you plan on marketing through third parties or service outlets, an account helps keep you in check.

Planning on the finances for marketing does not come overnight; it takes time and assessments to get it right within your financial capacity.

Knowing your average revenue and setting aside cash through budgeting helps you run your business smoothly without unnecessary chaos.

Business Software

20 years ago, freelancers or entrepreneurs did not have the software tools to help them save costs as freelancers have now.

Thanks to the internet, the world is connected digitally, but its advancements have made it easy and efficient for today’s freelancers to save on their business expenditures.

There are many excellent, user-friendly, and efficient software tools available now, which can help you cut business expenses by doing the job for you, rather than hiring a person to do the same job.

It would help if you didn’t work hard alone, but also work smarter. This way, you can grow your business alone literally from scratch.

For example, software tools like WaveApp, YNAB, Freshbooks, etc. are great at helping you with mundane and monotonic jobs.

You don’t necessarily have to hire an assistant or a specialist to do the work you’re not good at.

If you’re not well-versed in accounting, then an accounting software can save you time and money from hiring an accountant!

No need to drive your head crazy on budgets for your freelance business.

So, get business savvy, see what works for you, and learn to prosper cost-effectively.

Setting aside cash for emergency use

Being a freelancer means being a boss. And that’s precisely how you need to behave, think and plan too – like a boss.

Being your own boss doesn’t give you the right to spend your money however you want. Remember that as a freelancer, you can have bad days and good days. So, it’s wise to make an emergency saving fund for those bad days.

Here are a few beneficial ideas on how you can plan and arrange your emergency saving fund-

• Track your income: As mentioned earlier, track your income – this will help you know how much you need to budget for your personal and business needs.
• Be realistic: When making a budget for your emergency fund, be mindful of creating a realistic one. By specifying a realistic amount, you remove the need to fish out money now and then from the emergency fund for other purposes. Doing this will make cash flow tracking difficult and create unnecessary issues in your finances. So, in simple terms, set a realistic budget, ideally, 6 months’ worth of revenue to be set aside for emergency funds. It will help you not to touch the emergency fund for other expenses.
• Regular expense checks: Conduct regular checks every month. Yes, it is a very tedious thing to do, but if you want to have an emergency fund, you’ve got to do what it takes to take care of yourself. Checking your expenses will let you know where the necessary expenses are and identify your major spendings. This way, you can look for ways to improve your finances.
• Be smart: Don’t go planning on budgets or purchasing items based on future income. It doesn’t help save anything this way; instead, it can cause you to have financial shortfalls. Bear in mind to stay away from planning on future incomes.

Insurance for Freelancers in Singapore

Many self-employed workers underestimate the importance of having adequate insurance coverage for themselves.

Yes, as a Singapore citizen, the government already covers you with essential health insurance through MediShield Life.

But do you think that’s enough coverage for when you end up in the hospital?

What about your family for when you’re not working? Who is going to provide for their living expenses?

As much as you don’t want it, you can’t control what happens to you and your business.

But with the correct insurance products, you can cushion the impact of these unforeseen financial burdens.

Health Insurance

As a freelancer, you do not have an employer or company’s safety net to give your medical benefits. This means that you do not get paid medical leaves, and there are no reimbursements for your consultation fees.

Furthermore, your other medical expenses have to be footed by yourself.

Yes, you may argue that there’s the MediShield Life providing coverage. However, coverage from MediShield Life is basic and only covers hospitalisation, surgery, and certain outpatient treatments.

With MediShield Life, you can only stay in Class C and B2 wards in public hospitals. If you’re looking to stay in better wards or private hospitals, expect to pay a much higher amount as MediShield Life payouts are not much.

Furthermore, if you’re not hospitalised, it might not provide you with adequate insurance coverage at all.

So you make the choice.

Suppose you want to have coverage beyond what MediShield Life provides.

In that case, you can have other private insurance plans like Integrated Shield Plans (IPs) and also have the option to add ‘riders’ to your IP for more extensive coverage.

A rider would help to alleviate the financial burden due to the rapidly rising costs of healthcare (medical inflation of up to 10% per annum), as it can effectively help reduce your medical bills by 95%.

This applies to riders purchased after March 2018. For those who have purchased riders before March 2018, you will have 100% of your medical bills written off.

You don’t need to buy all the health insurance in the market, of course. See what your essential needs are for the future, what the insurance policy covers, and your personal budget.

Click here to read more on Health Insurance in Singapore.

Life Insurance

The next most important insurance you should get is life insurance. Life Insurance, more affectionately dubbed as final expense insurance is important for you if you have dependents that rely on you for income.

There are 2 types of life insurance – whole life insurance and term insurance. Whole life insurance provides coverage for your whole life.

Term insurance on the other hand provides coverage for a particular period.

In the unfortunate event of death or total permanent disability, having life insurance or term insurance coverage will provide your dependents with some monetary payouts that will take care of the final expenses (for death) or living expenses (for total permanent disability).

If planned right, the payout coverage should be able to take care of the short to mid-term needs of your dependents as well.

Even though no one likes to live with the thought of death in mind, we should definitely plan and prepare for the worst-case scenarios.

Click here to read more on Life Insurances in Singapore and here on how much life insurance you’ll need.

Income Protection Insurance

Not to be confused with life insurance, but due to the rise of the gig economy, there is a new type of insurance that caters specifically to freelancers.

This is called income protection insurance or income replacement insurance.

What does income protection insurance do you might ask?

Income protection insurance compensates you, depending on your coverage, specific amounts daily for when you are not able to work due to sickness or hospitalisation.

There are currently 3 plans for this type of insurance, Freelance Income Protection (FLIP) GigaCover (underwritten by Etiqa Insurance), Prolonged Medical Insurance (PML) Plan A, and Prolonged Medical Insurance Plan B by NTUC Income.

Edit (Jan 2022)

Giga has changed the GigaCover to GigaProtect, offering the same type of coverage but with different terms. Click here to read more: https://gigacover.com/sg/freelancer-earnings-protection/

Due to the limitations of the payouts, this might be enough for you in the short term. However, it might not be sustainable if you are sick for long periods.

Therefore, this insurance should supplement your health and insurance policies. As you can tell, having income protection insurance as a freelancer is beneficial as you get paid for when you are ill. However, there are limitations to this as well.

Edit: 28 October 2020

1 week after posting this article, it was brought to our attention that China Life has introduced their version of the income protection insurance called China Life MediCash Guardian.

The China Life MediCash Guardian comes with 3 plans, all of which are different from the above.

Apart from the coverage provided, the main difference between the China Life MediCash Guardian and FLIP/PML is that they only provide cash benefits if you’re hospitalised.

FLIP and PML provides both medical leave and hospitalisation leave coverage, albeit with lower cash benefits, stricter conditions for payouts, and lower caps.

Therefore, make sure to understand your needs prior to purchasing one. It’s best to discuss with a financial advisor if you are unsure.

It’s also important to note that income protection insurance is not a health insurance plan – they do not pay for your medical and hospitalisation bills.

Critical Illness Insurance

Critical illness insurance provides you with multiple payouts or a lump sum payout upon diagnosis of a critical illness such as stroke, heart disease, or major cancer.

As a rule of thumb, your critical illness coverage amount should help replace up to 3 to 5 years of your annual business revenue.

This is because in Singapore, it is recommended to have between 3 to 5 years of your annual income as CI coverage.

If your business is growing yearly with increasing revenue, including the projected earnings in your financial considerations will be helpful.

A person struck with critical illness would generally take 3 to 5 years to recover from one.

For instance, if you are earning $5,000 in average monthly revenue, you should opt for 0,000 to 0,000 worth of critical illness coverage. This should also help cover your running business overheads/expenses as well.

Furthermore, some critical illness (multipay) plans payout a small percentage of coverage in the event of diagnosis of early-critical illness, such as diabetes or even free diabetes & dietary programme worth $2,500 per annum.

Click here to read more about Critical Illness Insurance in Singapore.

When you’re thinking of critical illness insurance, perhaps you should consider getting yourself covered for early critical illnesses (ECI) as well.

ECI protects you against even more critical illness conditions, but it can be pretty pricey.

Thankfully, you only need 1 to 3 years on your annual income as your ECI coverage – so that reduces the cost a little bit for you.

Disability Income Insurance

There are different types of disability insurances in Singapore – disability income insurance, TPD, and severe disability insurance. As compared to other disability insurances, disability income insurance has the most lenient criteria for you to claim your benefits from.

Disability income insurance provides you with payouts for when you are unable to work due to a disability. Although it is similar to life insurance, disability insurance varies slightly.

Disability insurance only provides you with coverage if you are unable to work.

This means that if you are a writer, only disabilities that affect writing will be eligible for insurance coverage. If for instance, you’re unable to walk, you are still able to write and therefore will not be eligible for payouts if you’re a writer.

A photographer who is unable to walk, however, may receive monthly income from this insurance policy – making it highly attractive to protect your income in difficult times.

Click here to read more about Disability Income Insurance in Singapore.

Personal Accident Insurance

Personal accident insurance compensates you with payouts when you encounter an accident. Some policies may call this insurance a ‘temporary disablement benefit’ or an ‘income benefit for temporary total disability.’

Some policies may also offer rider add-ons, similar to those of Integrated Shield Plans.

Having personal accident insurance helps you get compensation for the income loss made because you couldn’t work due to an accident.

It typically pays about a few hundred dollars each week and might last for about 6 months, depending on your policy.

Click here to read more on Personal Accident Insurance in Singapore.

Equipment Insurance

As a freelancer, your equipment can be the most sacred tool in your business. Any equipment damage can break your personal income stream and might cause you to incur unexpected expenses.

If you’re lucky enough, your emergency fund can offer a quick replacement for your equipment.

However, you’re still using funds directly out of your pocket.

Equipment does not come cheap. That is why it is important to have a plan for when such incidences occur. Look into getting insurance policies that cover equipment insurance as well.

For a start, you can get an extended warranty on your equipment when you buy them, especially if it’s expensive.

This will help you save money if your equipment unexpectedly fails or gets damaged, and wouldn’t cause a bomb to replace!

Professional Indemnity Insurance

Professional indemnity insurance helps you guard against legal liabilities. Sometimes, mistakes may occur on your part that might cost your client money. If your client decides to take legal action, defending it can be expensive.

You’ll also have to take into consideration the damages that you have to pay for on top of defending the legal action.

Therefore, this insurance will prove to be beneficial for you as a freelancer.

Setting aside cash for retirement plans

On top of insurance, you’ll also have to take into account the costs of purchasing a retirement plan. No financial planning is complete without planning for your retirement.

As mentioned previously, if you have been contributing regularly to your CPF, you will receive many benefits throughout your life.

Yes, there is CPF Life, a retirement plan that provides you with monthly payouts until you pass on.

However, CPF Life will only provide you with monthly payouts as low as $580 to as high as $2,180. This, of course, depends on the amount you have in your retirement sum and the payout plan that you opt for.

Most Singaporeans, unfortunately, will fall under payout plans that give them $580 to $1,490 per month. To some Singaporeans, yes this might be enough for retirement.

However, for many, this sum is merely sufficient to survive; especially with inflation (benchmark rate of 2.65% per annum compounding) and the rising cost of living.

Of course, you can create a savings account where you contribute a percent of your income regularly. Or you can opt for retirement plans from private insurers.

This provides you with additional retirement income on top of CPF Life.

As a freelancer, you’re working harder and doing more things than regular employees. Most freelancers we meet have high expectations for when they retire due to the busy and tiring lives they lead.

Setting sufficient cash aside for retirement plans will be beneficial for you if you are a freelancer.

Click here to read more about retirement plans.

Not Sure How To Allocate Your Cash? Try the “Cash Flow Allocation Scenario”

Let’s say you’re a self-employed digital marketer earning a net trade income (after business expenses) of $5,000 per month. This means that your yearly personal income (or your salary) will be $60,000.

Assuming after paying for all of your personal expenses (inclusive emergency funds and short term needs), you have a monthly surplus of $1,000, your total yearly surplus would be $12,000.

The general rule of thumb is:

1. Up to 10% of your income should be set aside for insurance using the surplus you have
2. 50-75% of your surplus after insurance should be set aside for financial planning

Therefore, with the scenario above, it is recommended that $6,000 should be allocated for insurance yearly ($500 monthly). With the $6,000 left in your surplus, 75% of it ($4,500/year or $375/month) is recommended to be used for your retirement funds. The remainder of your cash can be used to reinvest back into your business.

This is the simplest way to allocate your cash. However, this is just a rule of thumb. Feel free to use other methods for your personal budgeting.

Conclusion

As a freelancer, you are sure to face many financial challenges. You will need to be prepared and conduct proper financial planning if you were to overcome the adversities that you are about to face.

Yes, it may seem daunting to part with your hard-earned money for taxes, CPF, emergency use, insurance, and retirement plans.

In actual reality, all Singaporeans undergo the same things – freelancer or not.

The only difference is that salaried employees have half of it done for them through their employers while freelancers and the self-employed will have to do it themselves.

Perhaps reading our retirement planning in Singapore guide will help too!

As everyone will have different scenarios, it is recommended that you speak to a financial advisor to conduct proper planning of your finances.

After all, even financial advisors are regarded as self-employed individuals (and thus freelancers).

Try to incorporate the suggested methods; it’ll likely help you more in your financial planning than you think!