In today’s high-tech world, working as a freelancer has never been easier. With all of the freedoms that freelancing allows for, it’s hardly surprising that its popularity has grown exponentially. Freelancers largely have the flexibility to choose how and when they work – which projects to take on, what to charge, when to work and of course, the luxury and convenience of choosing to work from home.
Despite all of these advantages, freelancing can come with challenges – especially when it comes to cash flow and managing your finances.
Here are some key points to help you handle your freelancer budget.
Create a workable budget and stick to it
Making and following a budget as a freelancer can be difficult due to inconsistencies in freelance income and cash flow – but not impossible.
Since no two weeks are ever exactly the same, you will have to work from an average monthly income figure. Make sure to make provisions for a hard month here and there, i.e. the quieter times, and ensure you don’t blow too much money in the better months. Try to make savings where you can, such as always utilizing coupons and deals when you shop, as well as pocketing your extra savings for a rainy day.
It’s important when budgeting to track all business expenses and keep a record of all work-related receipts. It is also up to you – as a self-employed person – to pay your own taxes, so estimate your taxes every quarter and set money aside. This way, you won’t have the stress of struggling to pay a large tax bill when the financial year ends.
Separate your business and personal finances
What is incredibly helpful, is organizing your finances so that your freelancing funds are kept separate from your personal funds. Doing this will make it easier to track your income, as well as spending, by having separate accounts. This can also maintain cleaner records, clearly presenting what business expenses you have incurred and deducting them when submitting your tax return.
Being responsible for your own taxes can seem daunting at first, but so long as you keep organized records of your finances, with help from the right financial software, (and maybe even set some freelance income aside to cover your tax obligations) then it can be quite straight forward.
Pay yourself first
The general consensus among financial experts regarding being self-employed is to pay yourself first. This may seem obvious, to ensure that you get a cut of your own earnings, but a surprising number of freelancers find it difficult to pay themselves or put themselves first.
You might think that paying everyone else first is the responsible thing to do, as a business owner, but failing to prioritize your own income can create significant financial consequences personally. Even if it’s the bare minimum to get by, it’s important to do and aids organization to pay yourself first and stick to a workable budget.
Build an emergency fund
Because freelance income can ebb and flow somewhat erratically, it’s imperative to create an emergency fund – helping you through the times when the cash just isn’t flowing.
An emergency fund is there for any unexpected expense, such as a car repair, medical bills, last-minute flights etc., or even to tide you over if you come up against a client who doesn’t pay.
Ideally, you should start with an initial cash injection of whatever you can manage (e.g. a few hundred dollars), then incorporate an amount in your budget to regularly add to it. This will build up over time, giving you the peace of mind to navigate the highs and lows of freelancing, with a little more financial confidence.
Pay off your debt
The volatility of freelancer income can sometimes cause people to panic, saving it all instead of reducing their debts. Whilst it’s important to save for emergencies, paying off your debt is essential to lowering your interest payments and keeping your credit score healthy. Overall, it’s putting you on the path towards greater financial freedom. Once it’s gone for good, those payment amounts can start going back into your business, or towards a well-deserved break for you!
Don’t forget about retirement…
It is so important for a self-employed person to remember to plan for retirement. It’s true that being employed comes with the benefit of having your retirement fund automatically contributed to on your behalf, but freelancers still have plenty of options. For example, you could contribute manually to an individual retirement account (IRA) or a solo 401K.
… and insurance
It is also a freelancer’s responsibility to ensure that they are adequately insured to protect themselves and their family. Failure to ensure that you hold the right insurance can put you and your family at financial and medical risk, so it’s crucial that you get the right coverage in place. This includes a health care plan, car, life, and any other business-related insurances you might need.
Although it’s tempting to avoid being insured due to the premium costs, it’s an essential component of protecting your financial situation in the bigger picture.
Managing your finances as a freelancer can seem stressful whilst you navigate the highs and lows of your income flow. However, this is what makes it all the more important! Putting these organizational actions in place will greatly reduce your worry and empower you to feel in charge of your finances.