Being a freelancer can be a gratifying job experience—being able to dictate your own hours, cherry picking the clients and projects you prefer to work on, or simply enjoying a higher income than traditional office jobs in your industry.
However, being your own boss and handling all aspects of your job—from seeking out clients and carefully coordinating projects until closing to the minute task of handling your paycheck and settling taxes.
Trying to manage your own money as a freelancer can be a challenge
Unless you’ve had prior experience with financial work, trying to manage your own money can be a challenge.
Here is a step-by-step guide for managing your money as a freelancer.
1. Set Financial Goals
Before you can begin, you need to tell where you’re headed, both in the short and long term.
To help you decide, ask yourself the following questions:
- How much do you want to make in a month?
- What are you aiming to do with the money you make?
- Where do you want your finances to be after a year?
Once you have the answers to these, you can begin planning your goals and how best to achieve them.
It’s important to keep your financial goals S.M.A.R.T.—Specific, Measurable, Attainable, Relevant, and Timely. Make sure to document your goals and plans for future reference.
Aside from this, it’s important to set your freelancing rates competitively.
Do your due diligence and find out the industry standard for the kind of work you offer, then estimate the number of work hours you’ll be rendering in a year.
From there, you will have a good approximation to tweak and adjust later on.
2. Create and Follow a Budget
Once you have your financial goals and plans in mind, it’s time to set a budget.
You will need to base this budget off of your average monthly income and expenses, given the inconsistencies in income.
From there, you can set allocations for your money, like through the 50/30/20 technique, to keep your spending in line.
This technique allots 50% of your net income for necessities, 30% to wants and other non-essential expenses, and 20% for savings and paying off debt.
You can track expenses using mobile apps to monitor your cash flow better and stay within budget. If you have any work-related expenses, you may need to keep track of those separately.
3. Separate your accounts
It’s crucial to separate your freelancing finances from your personal ones. Creating individual savings accounts for your business expenses, taxes, personal expenses, and savings will benefit you in two ways.
First, you can get a better grasp of how much money you have for your work needs and personal expenses.
Second, it keeps your cash flows separate and easier to keep track of later on.
Consider opening a savings account for your emergency fund to keep it safe and secure until such time that you may need it.
4. Set Aside an Emergency Fund
Unlike traditional jobs, freelancing pay can be unpredictable. With that in mind, it pays to be prepared for an emergency or a dry spell of client work.
Ideally, the amount your emergency fund has should be enough to cover approximately six months’ worth of living expenses.
You can start with a lump sum, and then continue to set aside money to keep growing it. Make sure to clearly define to yourself what constitutes an emergency before spending your fund.
5. Prepare for Taxes
In a more traditional job, the company’s Finance department takes care of preparing your paycheck, ensuring your monthly taxes and other deductibles are applied.
As a freelancer, you will have to learn how to do these things by yourself.
Make sure to review all the necessary laws and regulations so you can correctly file your taxes and other government contributions.
Double-check your computations and paperwork before submitting them. If you have any questions or doubts, do your own research through the internet or consult with the relevant government department.
6. Track Your Income
As a freelancer, one of the most important things to keep track of is your earnings.
Being able to give an estimate of how much you make will help you file taxes correctly, plan your budget for both business and personal expenses, and aid in tracking your progress towards your financial goals.
Make sure to carefully document your invoices for various clients, as well as the due dates for payments.
Your system can be as simple as an Excel spreadsheet, or you can opt for a more sophisticated and robust bookkeeping software.
Invoice your clients promptly and be diligent in collecting to avoid any delays in your cash flow.
7. Explore Investments and Other Sources of Revenue
One way how freelancers can maximize their income is through investments.
There are a variety of financial and investment products that suit different kinds of risk appetite, budget, and expected returns. Make sure to canvass your options before deciding on one that’s right for you.
Consider purchasing separate tools and equipment for work use.
When you invest in refurbished Macs and other work-related equipment, you prevent unnecessary wear-and-tear on your personal items, prolonging their lifespan and saving you money in the long run.
Plus, you may be able to count these purchases under business expenses when filing your taxes.
If you feel that your freelance work may not be earning you enough in the meantime, explore other sources of revenue like casual, part-time online work and selling products.
These will provide much-needed cash to help you stabilize your finances.
8. Get Insurance
Don’t underestimate the need for safety and security.
Getting health insurance coverage can help you avoid financial distress when an unexpected event occurs.
Additionally, if you are supporting your family, the right coverage prevents putting you and your loved ones at medical and financial risk.
Nowadays, health insurance plans are abundant, with different types of benefits and coverages.
Make sure to shop around for one that works best for your needs and factor any premiums into your monthly budget.
9. Make Bookkeeping a Habit
Developing a regular schedule for bookkeeping helps you stay on top of the state of your finances.
Taking 30–60 minutes at the start of the week to update your paperwork, followed by conducting financial reconciliation on a monthly basis, can help keep your accounts consistent and reduce the overwhelming feeling that comes with dealing with finances.
Again, you can use a simple Excel spreadsheet to keep track of everything.
If you need a system with more features and functionality, there are bookkeeping apps and programs that can ease the burden of accounting.
Being self-employed can be stressful, especially when you’re trying to manage your finances.
However, it can also be very empowering and liberating to have control over all aspects of your work. With good organization, vigilance, and dedication, you can master financial management and pave the way to reach your goals.