Taxes & business banking for the self-employed


The 10% Rule: Savings for Freelancers

Last updated on Feb 21, 2020

Kate Bailey

Freelance Editor

Jan 30, 2020

One of the hardest things to do in a freelancer business: after all the tax, the payouts, the social security, your income, your expenses and so on - is save! Is having enough money in the bank for not just a rainy day - but perhaps a rainy six weeks! We are going to explore one of the easiest ways to start this - using the famous 10% rule! Of course, savings are a great alternative to unnecessary credit - which can burden you at the best and worst of times. Savings are also handy when it comes to figuring out your own sick leave or governmental based claims - something we have spoken about as necessary for the freelancer and self employed on the blog before.

Oftentimes the hardest parts of savings is number one ensuring that you are able to start this process - and setting up realistic terms to do so and number two is that you have to sustain the process of saving. Both things that are really hard to do. The 10% rule is basically the idea that you save 10% of your income no matter what. Of course, this includes paying all of your bills and being sustainable in that way, but also - having 10% to spare. You’ll know if this is possible or ideally when it is possible. However, the 10% rule is scalable - meaning the idea is you are able to save even EUR 10 from every EUR 100 made.

While it may not seem like a lot - it is about principally beginning with a concept and a commitment and sticking with it - as in, making savings more of a habit and routine than something you will start when you earn ‘enough’ - because even in this example there is likely something to the value of 10 EUR that you can go without that is the key to you starting. In fact, many financial planners and people who work with wealth-building often say the biggest reason people do not save is based on a psychological mindset rather than the capacity itself to save.

10% - since the beginning of time

One of the first concepts of money came from the ancient Babylonian culture - who used it as a symbolic method of indicating value or wealth. At that time, it was not exciting savings goals like a vacation or a new car that tempted people, but they saved to avoid the risk of becoming a slave. You know, the little things. For the person who ended up in debt to someone else and could not pay their debts, they became a slave. Today, you are fortunate not to be enslaved (though I imagine some of you freelancers will say employed people still are - and it’s not true but can feel like it!) but you can end up in a dependency situation if you have to borrow money from the bank to realize your savings goals.

The point is, saving 10 % of your income is a tried and true method of at least having something. There are many who do not think it is any idea to save because only the "rich" can afford to save. But it is by continuously putting money into savings that you become rich. In your business, let’s say you generate EURO 60.000,00 per year. If you save 10 per cent of your net salary, this means that you invest EUR 6.000,00 in savings per year. Which is a great start. And you can then look at ways to invest that sum once you have enough for an interest accruing account - and with an average return of 10 per cent per year in most Euro-banking accounts to that after, you’d have a great deal of money.

And the longer you save, the more help you get from the "interest-on-interest effect" when the money returns over time over return. Saving and investing your money as early as possible enables you to benefit from compound interest over the years. This is often referred to as a magical way of earning interest on the principal invested and the cumulative effect of earning interest on that interest. Compounding works to your advantage when it is your invested money. On the other hand, compounding works against you when you are borrowing long term like for your home.

Using 10% to get to a safe amount of ‘’Buffer Savings’’

Most people have probably experienced how difficult it can be if a sudden unforeseen expense turns up. Many freelancers ultimately today lack buffer and there are many opinions about how much buffer you should have. It is never too late to start a buffer saving for your business or even personally. A buffer is a sum of saved money that you can withdraw if you suffer a sudden unforeseen expenses. It may be that the refrigerator in the office breaks down, you need a new computer battery, or an unplanned major expense that you may not have anticipated. Whatever happened, it could be a matter of many thousands of bills that you suddenly have to pay. That's when your saved buffer becomes your financial lifeline.

Should be different to 10% in some cases, and why?

It is very different from person to person how much buffer you need. These are just general tips you can take along the way to your buffer:

  1. Single people should aim to save together a buffer corresponding to 2-3 monthly salaries (net). A single household may not have such high monthly costs, but you only have an income to rely on. Then you are more exposed to an unforeseen loss of income or if you get an unplanned bill /cost. 

  2. Couples without children should set the target a little higher and save up to 3-4 monthly salaries (net) as a buffer. If you are in a couple relationship, you are not as exposed as you usually have two incomes. However, if you are two, you may live larger and the common everyday costs are usually higher than for a single household.

  3. A family with two children should set goals to save up to 4-5 monthly salaries (net) as a buffer. Of course, the size of a family's buffer varies depending on how many you are and how you live. If you live in a house, the costs are usually higher than if you live in an apartment, as there are more unforeseen expenses that can be incurred in a house.

  • One of the best ways to get started is to set up a monthly savings that goes to a savings account or other low-risk savings from your payroll account. Allowing a sum to go automatically each month to a savings that you do not directly access with your bank card is both smooth and it reduces the risk of you being there and teasing it.

  • Put in the system that any possible surplus you have left of last month's salary, move it from the salary account to a savings account when the new salary arrives.

  • Try to reduce your fixed costs by reviewing your insurance policies , electricity contracts and ending unnecessary subscriptions. What you possibly save, you move to a savings account every month. Slowly but surely it will be a good buffer!

Some of you may be intrigued to know that current United States of America Presidential candidate Elizabeth Warren is regarded as a financial guru, and actually created a system that one ups the 10% rule. This could be really useful once you have begun the routine and rhythm and have met your goals when it comes to getting started with the 10% rule. It is a rule that reads: 50% Need, 30% Wants and 20% savings. It is a really interesting and realistic way for everyday people to manage their money. Let’s take a longer look.

50%: Needs

Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment and utilities. These are your "must-haves" including items that you are contractually obligated to like debt payments or bills. The "needs" category does not include items that are extras, Netflix and dining out. Half of your after-tax income should be all that you need to cover your needs and obligations. If you are spending more than that on your needs, you will have to either cut down on wants or try to downsize your lifestyle, perhaps to a smaller home or more modest car. 

30%: Wants

Wants are all the things you spend money on that are not absolutely essential. This includes dinner and movies out, that new handbag, tickets to sporting events, vacations, the latest electronics gadget and ultra-high-speed Internet. Anything in the 'wants' bucket is optional if you boil it down. You can work out at home instead of going to the gym; cook instead of eating out; watch sports on TV instead of getting tickets to the game.

This category also includes those upgrade decisions you make, such as choosing a costlier steak instead of a less expensive hamburger, buying a Mercedes instead of a more economical Honda or choosing between watching television using an antenna for free and spending money to watch cable TV. Basically, wants are all those little extras you spend money on that make life more enjoyable and entertaining.

20%: Savings

Finally, try to allocate 20% of your net income to savings and investments. You should have at least 3 months of emergency savings on hand in case you lose your job or an unforeseen even happens. After that, focus on retirement and meeting other financial goals down the road. Savings can also include debt repayment. While minimum payments are part of the "needs" category, any extra payments reduce principal and future interest owed, so they are savings.

Hopefully, you have some interesting ideas about how your can get started with savings or maybe some cool new ideas on how to better and enhance your savings - after all, it is hand to have and we will all need it at some point - so, start now?