If you want to be successful at freelance work and start taking larger clients with more substantial jobs, you’re going to have to know a thing or two about how to manage your money. Without approaching your cashflow with intelligence it’s going to be difficult to survive during the time in between paychecks.
Here are 5 tips on how to properly manage your money as a freelancer that will help you run a lean operation and build up a savings so you’re not scrambling for capital.
- Keep your money separated.
Most freelancers are operating solo, and if you have this sort of setup it means that you’re going to have payments from your work headed to your personal bank account. This process makes it easy to manage, and often faster to receive, your payment, but it can also lead to some mistakes if you’re not careful.
When you have money being added to a personal bank account – the one you draw from when you buy things unrelated to freelancing – it becomes much easier to dip into your business money without realizing it. This can end up giving you a really hard time and is just sloppy from an accounting perspective.
Consider opening a separate checking or business account with your current bank and using that specifically for freelance-related income. Alternatively, use a savings account to keep some portion of your income separate for large expenditures like expanding your business, getting an office space, or other long-term goals.
Keeping your money seperated will make it so much easier to manage, more organized for planning and forecasting, and prevent you from dipping into those funds unless you mean to do it.
- Reduce the chances of being paid late.
If you’re working as a freelancer there’s no avoiding it – you’re going to be paid late at some point. The problem caused by being paid late can really damage the quality of your money management, and, sadly, there’s not too much you can do to make sure you’ll get paid on time. That said, it’s not entirely out of your hands. There are a few things you can do to reduce the chances of being paid late.
Always promptly invoice your clients. When you send invoices late or delay sending them to clients, you’re adding more time between when the client gets what they paid for and when they have to actually pay up.
The cognitive bias of recency is working against you when you make this mistake. Simply put, people typically give attention to the most recent matter. With online invoicing, you’re risking the chance that your bill gets paid last or after the more recent debts are taken care of. Avoid this by sending invoices as soon as you’ve completed the work.
- Establish an emergency fund.
The reality of working for yourself, as a freelancer or a business owner, is that you will not be paid unless you have clients to work for. If you’re all-in with freelancing and not simply supplementing an existing income it can be a very stressful feeling if you have more bills than your current income can pay. Thankfully, being in control of your own income doesn’t have to include scrambling for more work every time an emergency pops up.
According to Mike Clum, the founder of a Facebook advertising agency, the first priority for new freelancers should always be to establish an emergency fund. If you’ve been doing this and you think you have enough saved up, think again. He says always add some percentage of your income to this fund, no matter how much might already be in it.
A good rule of thumb to go by is that you should have 6 months worth of your expenses saved up in case of emergency. My thoughts on this are a little different. I agree with the standard rule, but I suggest that you continue to add money to this emergency fund. I say this because 6 months of regular expenses might be the equivalent of 1 single large unexpected expense.
Whether you decide to stop at the 6 month savings mark or continue to add to your emergency fund, make sure you have one. It’s one of the best pieces of advice I’ve ever been given as a freelancer.
- Minimize monthly fees as much as possible.
Fees are the silent killer for cash flow. Investors know it and freelancers should know it too.
“As a freelance digital marketer focused on analytics, I’ve been battling fees for over two years. $100 a month here $50 a month there,” says Deep Patel, founder of Owlmetrics Instagram analytics. “You’re going to drown yourself in monthly fees unless you track and manage them, especially when you first start out.”
Depending on the type of freelance services you offer, you’ll need at least some services to help you get the job done. One way to minimize the cost of these tools is to properly look into each one before you buy to see if you’re missing out on something else that might give bang for your buck. For example, Buffer, a social media scheduling service, offers some basic analytics services in addition to the ability to schedule your content.
If you’ve been economical about picking the services that you will pay for and want to get some additional value, consider signing up for multiple months at a time. When you pay for a year of service up front the company will typically give you a discount.
- Prepare for taxes.
One surprise that usually catches freelancers off guard is the fact that the taxman will inevitably be asking for his cut sooner or later. In the US freelance businesses that earn more than $400 a year are required to pay both a self-employment and an income tax.
This situation is often considered double taxation. Working for yourself or as a 1099 contractor means you’ll be paying taxes as both an employee and employer. To figure out how much of your income will be subject to these taxes, subtract the ordinary and necessary business expenses from the gross income you earned. Generally speaking, 1099 contractors will be taxed at 92.35% of income.
Be smart about managing your money and keep track of the clients that pay you more than $600 annually because they will need to send you W2s come tax time. Doing this as well as managing the other aspects of freelance finances will help set you up for long term success and avoid issues with taxes later on.