Going Freelance? Here’s How You Should Plan Your CPF & Finances For 2022

freelancer self employed cpf contribution

Back when I started freelancing full-time in 2014, the only friends who were free to meet up with me at midnight were home tutors.

Fast forward to 2020 and it seems like everyone is a freelancer. The growing gig economy has been driven by a greater demand for flexible work arrangements, disruptions caused by the pandemic, retrenchments and so on.

The most obvious example is gig work like driving Grab or doing deliveries. But there are also more people ditching traditional jobs after having had a taste of WFH during the pandemic. After all, if you’re going to sit alone at home in front of your computer all day, might as well do it on your own terms.

Should I go freelance?

First of all, if you think becoming a freelancer is going to be the start of a rosy life where you spring out of bed in rapture every morning, don’t kid yourself. Every job has its dark side, and freelancing is no different.

Cons

Freelancing has its fair share of downsides, of which the most well-known is the lack of a stable income and the need to hustle to find work.

You definitely won’t be getting a fixed paycheck every month, but the degree to which your income fluctuates depends greatly on your line of work and how established you are in your field. Some trades lend themselves better to long-term repeat clients, which can actually be quite stable.

The unpredictability of your working schedule also varies depending on the nature of your work. Grab drivers might be able to work at 3am if they want to. But some freelancers might be on contracts lasting several months, during which they have to go to their clients’ premises during scheduled office hours.

One clear downside is that unless you charge by the hour, you won’t get paid to just “show up” at work, have two hour lunches or watch YouTube on the sly.

Pros

As mentioned earlier, freelancers’ working situations can vary considerably depending on the job. Not every freelancer is a digital nomad or Grab driver.

But in general, freelancing gives you SOME degree of flexibility that can’t be had in a normal job, whether in terms of schedule, location, the freedom to choose your clients and projects, or being able to adjust your workload. Just be aware that this can vary and it’s not all rainbows and unicorns.

Another potential advantage is that in many jobs, the lack of a stable, permanent contract is sometimes compensated by higher hourly earnings. If you’re a software engineer, developer or social media manager, you could find yourself getting paid more for working the same number of hours as your in-house counterparts. Even freelance cleaners and nannies make more per hour than those hired by an agency.

Calculate your daily expenses

Before diving into freelancing full time, you should know the bare minimum you must earn in order to make ends meet.

To get a more accurate picture of how much you spend, look at your past credit card bills and bank account statements.

Here are some expenses to consider:

  • Loans – repayment of home loan, car loan, etc
  • Insurance – health insurance, life insurance, etc
  • Children’s needs – School fees, tuition fees, etc
  • Accommodation – utility bills, rent (if renting), town council fees, condo management fees, etc
  • Food – grocery and restaurant expenses
  • Transport – Public transport fares, Grab/taxi fares, petrol
  • Other recurring expenses/subscriptions – Netflix, Spotify, gym, etc
  • Discretionary expenses – entertainment, holidays

Billing & Invoice

If you identify as a “freelancer” rather than a “CEO”, you and not your secretary are probably handling all billing and invoicing.

Stay on top of this by setting a fixed date to do all your invoicing and chasing for completion/payment, whether weekly, bi-weekly or monthly.

You should set a clear deadline for payment on your invoices and keep track of clients’ payment dates. Once the deadline has passed, you can start chasing those who haven’t paid up.

Finally, take note of which clients always pay late, require a lot of chasing or let projects drag on and on. You can either drop these blacklisted clients once you have the bandwidth to pick and choose, or raise your fees to the point where you are still willing to work for them.

How to manage my finances as a freelancer

1. Set up a new ‘business’ bank account

In almost 8 years of freelancing, one thing I’ve learnt is that clients never ever follow instructions to indicate the invoice number when making bank transfers, resulting in a cluster of unlabelled transfers.

Confine this chaos to a smaller sphere by setting up a separate bank account for your earnings. It just makes record-keeping a bit easier and less messy. You can just open a second account at the same bank as your regular savings account so you don’t need to deal with new ibanking passwords.

2. Set up standing orders for all your insurance + bill payments

As a freelancer, you’ll want to keep all the unnecessary admin to a minimum. So, I highly recommend that you set up standing orders to have all your insurance, credit card bill and other bill payments made automatically by GIRO or credit card.

It not only frees you from having to waste time manually monitoring deadlines and paying these bills but also forces you to prioritise paying them rather than overspending and rolling over a balance or being charged late fees.

3. Income tax

You need to pay income tax whether or not you have registered with ACRA as a sole proprietor or some other business structure.

Tax filing is compulsory if you have earned more than $6,000 in a year. However, you only need to pay income tax if you earn more than $20,000 in a year.

IRAS will send you a yearly alert to file your taxes when tax season roles around. This is fairly straightforward, you usually just need to declare your income for the year and IRAS will work out the amount of tax to pay in your tax bill.

4. CPF contributions

Contributions to your Ordinary Account (OA) and Special Account (SA) are not compulsory for freelancers, but you will need to make a compulsory annual contribution to your MediSave Account after filing your taxes each year so long as you have made more than $6,000.

CPF will send you a letter indicating the amount to transfer to MediSave. If you find paying a lump sum every year too intimidating, you can sign up for the CPF Board’s Contribute-As-You-Earn (CAYE) scheme.

So, should you make voluntary contributions to your OA and/or SA? Depends on your financial discipline. If you already have a well-thought out investment portfolio and have decided that CPF will not be part of the picture, then you don’t have to.

On the other hand, if you’re just letting your money sit in the bank, consider making a voluntary transfer to CPF, as unlike savings account interest rates, CPF interest rates are actually good.

If you’re doing it solely for retirement income, you can contribute to your SA (or RA) through the Retirement Sum Topping Up Scheme and also enjoy the added bonus of tax relief.

If you wish to top up your OA, you must top up all three accounts at the same time or make monthly CPF contributions via GIRO. The CPF Board will divide contributions based on these ratios:

Age

OA (ratio of contribution

SA (ratio of contribution

MediSave (ratio of contribution)

35 and below

0.6127

0.1621

0.2162

Above 35 to 45

0.5677

0.1891

0.2432

Above 45 to 50

0.5136

0.2162

0.2702

Above 50 to 55

0.4055

0.3108

0.2837

Above 55 to 60

0.4286

0.1964

0.375

Above 60 to 65

0.1893

0.2432

0.5675

Above 65 to 70

0.0715

0.1785

0.75

Above 70

0.08

0.08

0.84

The annual limit for combined CPF contributions (including compulsory MediSave) is $37,740.

5. Savings & fixed deposit accounts

As a freelancer with a variable income, you’ll need a bigger emergency fund on hand for unexpected expenses.

So, it makes sense to plonk your non-invested cash savings in a high interest savings account or fixed deposits. Here are our recommendations.

Best savings accounts for freelancers:

HSBC Everyday Global Account (Personal Banking) – Multi-currency account which supports foreign clients and other currencies. Great if you’re an expat or have clients paying in different currencies.

– CIMB FastSaver – Some of the highest interest rates in town, with few strings attached.

– UOB One – Gives you a decent interest rate without requiring you to credit your salary.