Wealth Check: 'How can I control my varying income?'

As a freelance writer, it's hard to plan ahead and put some money away for emergencies or deposit on a house

The patient

Freelance writer Sarah Wray's New Year's resolution is to get a firm grip on her finances. The 34-year old from Newcastle-upon-Tyne, earns around £30,000 a year. "But," she says, "this varies as my income fluctuates. I would like to feel more in control of my finances by getting a pension and savings account in place, and to work towards home ownership."

But she adds: "Freelancing makes this hard, because paying a fixed amount out each month – such as into a pension or into a savings plan – could leave me short during a quiet period. On the other hand, if I have a lot coming in I might spend in celebration when the money should be budgeted for the long-term."

Setting aside money each month can prove a struggle given the rising cost of living. At present, she has just a few hundred pounds in savings in a basic current account. "I know I should open a savings account but it almost doesn't seem worth it," she says.

Sarah rents a three-bed house with her boyfriend, paying £650 before bills, which they split between them. "We'd really like to buy somewhere but it seems unlikely that this'll happen for some time," she says. Her boyfriend is an administrator for an arts organisation, on £18,000 a year. "We have no plans to get married or have children," she adds.

Turning to debt, Sarah has a small amount of credit-card debt with £1,000 on a Barclaycard at 0 per cent on purchases until September next year. She applied for the card to buy furniture for the house, and hasn't yet managed to wipe out the debt.

"I think a budget would help me because I don't have a good plan in place, so I'm hoping the advisers can help with this," she says.

For longer-term needs, she has yet to start saving into a pension. "I have no idea where to start, particularly as a freelancer," she says. "Although I know it's something I need to start thinking about – I worry about pension planning because without a house or any investments, we have no security for the future at all." Sarah has no protection policies in place.

The cure

Our panel of independent financial advisers praised Sarah for making it her goal to sort out her finances. As a starting point, ridding oneself of debt and setting aside regular cash savings while self-employed is wise in case of emergencies, and to meet tax bills – let alone medium or longer-term goals.

However, given her status, it is important also to consider protection to cover outgoings. Longer-term goals may have to be put on hold while immediate needs are tackled.

Dealing with debt

In the short term she should focus on clearing her debts and building up a reasonable emergency fund to prevent the need to use her credit card, stresses Caroline Walsh from Pavilion Financial Services.

"But Sarah shouldn't be too hard on herself," she says. "Although she has some debts, these are relatively small and by choosing a 0 per cent card, Sarah has avoided having to pay any interest, so far."

Sarah has also identified her main problem of spending what she earns and not planning for the future. "She's been brave in facing up to that and asking for help," says Ms Walsh. As a priority, Sarah should concentrate on clearing the credit-card debt before the interest-free period ends. Another possibility is shifting this sum to another interest-free card, but she is likely to incur a fee of up to 3 per cent to do this.

Drawing up a budget

The first step is for Sarah to write down all her outgoings and identifying which are essential and which are luxuries. Then she can set herself a budget and monitor her spending. There are many budgeting tools available online to help, such as Money Saving Expert's.

"It would also be worth visiting www.moneyadviceservice.org.uk and going through its various calculators and budgeting tools," adds Kusal Ariyawansa from Appleton Gerrard Private Wealth Management. "The cumulative value of small savings can rapidly become significant." She can also see if it's possible to cut any of her regular households bills, and use cashback websites such as Topcashback and Quidco when shopping online.

Setting aside savings

As a building block, Sarah should open an individual savings account to earn tax-free interest, says Duncan Carter from Clearwater Financial Services.

It is wise to save 10 per cent of your salary, says Mr Ariyawansa. A good starting point would be for Sarah to save £250 per month into a cash ISA, or as much as possible, using www.moneyfacts.co.uk to find the best rate. She is able to contribute up to £5,640 this tax year to a cash ISA, rising to £5,790 for 2013-14.

If Sarah and her boyfriend want to boost their income, they could earn money under the rent-a-room scheme, with up to £4,250 a year tax-free, say the advisers.

Protecting income

For Sarah, life cover is unlikely to be an essential, unless she has children, but income replacement can be invaluable, stress the advisers who recommend speaking to a specialist broker such as Lifesearch to see what policies are available.

Income protection ensures an income until retirement in the event of being unable to work for a prolonged period. Ms Walsh says: "Many mistakenly think this cover is just for employees. However, the self-employed are often the most vulnerable if they are unable to work.

"Most insurers will calculate average earnings over a period of time, in order to cater for people like Sarah who has fluctuating earnings."

Buying a first home

Turning to getting a foot on the property ladder, the average house price in Newcastle-upon-Tyne is around £180,000, according to Land Registry figures for September, says Mr Ariyawansa. He adds: "As a first time buyer Sarah would need a deposit of £18,000 to get a mortgage. But given the potential for house price inflation and other costs involved in buying, the amount is likely to be higher."

However, with some discipline, patience, and careful budgeting Sarah and her boyfriend can gradually start to save this sum.

Saving for retirement

Although at the age of 34 pensions should be the priority, Sarah has other goals to meet before turning to retirement planning. Pension contributions attract tax relief but alternatively a stocks and shares ISA could be incorporated to add flexibility to Sarah's retirement planning. "When she decides to invest in stocks and shares she could look at a low-cost, global-index tracker for as much diversification as possible," says Mr Carter.

Mr Ariyawansa adds: "It would make sense for Sarah to focus on building up an emergency fund through cash ISAs and directing a small portion into equity ISAs before considering a pension. Should her earnings increase significantly, a pension contribution would become undeniably important."