Being a freelancer today requires you to wear a lot of hats, with one of them being your own financial planner and decision-maker.
You’ll need to strategize when it comes to both business and personal expenses while also keeping up with your workload.
For example, freelance marketing careers allow you to focus on creative endeavors, and although you prefer to spend all your time on these, you’ll need to carve out time to establish and monitor your financial affairs.
Why is this so important?
For freelancers, projects can vary month by month, income can rise or fall during certain periods, pay from clients can be delayed, and unexpected expenses can arise needing payment right away.
With all this in mind, you may find money management daunting or even overwhelming.
Yet, you can set yourself up for success by incorporating the following nine best finance tips for freelancers into your plan.
1. Create a Realistic Budget for Personal and Business
The reality of freelancing is that you won’t have a guaranteed income each month. Cash flow will fluctuate depending on what projects you work on and when.
As a freelancer, a budget is a beneficial tool that can help guide decisions, keep you on track, and ensure you meet all your obligations, both professional and personal.
Begin by creating a realistic personal budget.
If you’ve been a freelancer for a while, try dividing the previous year’s total income by 12. This calculation will give you the average monthly income.
From there, you can look at your personal expenses such as rent, internet, utilities, or car payment and plan accordingly.
In addition to your personal budget, think about what freelance business expenses will be due throughout the year.
Do you travel a lot for your business? Do you need certain software that requires a monthly fee, such as QuickBooks?
Also, include in your budget those expenses that show up annually or quarterly, like the estimated tax bills.
Outlining a monthly budget for these will let you know how much you need to make to cover expenses. You can set your freelancing income goals based on this and strive to go above and beyond them.
2. Plan for and Pay Quarterly Estimated Taxes
An important part of your financial responsibilities as a freelancer is to plan for and pay freelancer taxes.
These include what’s called quarterly estimated taxes and are due four times a year — April 15th, June 15th, September 15th, and January 15th.
Since you are not a typical employee where taxes are taken out of each paycheck, you’ll need to set aside amounts to pay the estimated taxes each quarter.
Paying on time can help you avoid penalties imposed by the IRS, state, or local tax agencies on tax date in April.
To help you calculate what you need to plan for and pay each quarter, look to the IRS tax form 1040-ES.
You can also divide last year’s income tax liability by four and use that as your estimated tax to pay each quarter.
Adjust as you see fit to accommodate new business coming your way, a potential loss of clients, or a change in the amount of time you devote to your freelancing business.
3. Plan for Retirement
Now that you are finally your own boss, you need to consider your future and how you will pay for it.
Having to plan your own retirement savings strategy is a big transition from your days working for someone else who did most of this for you.
You may have participated in a matching 401(k) plan or something similar but now are on your own and responsible for ensuring you have adequate retirement savings going forward.
Be proactive. You have plenty of options available, such as setting up any of the following:
- Roth IRA
- Traditional IRA
- SEP IRA
- Solo 401(k)
If you need help, consult with a financial advisor.
Once you decide which route to take, the best practice to ensure you meet your retirement savings goal is to choose automatic contributions. This way, you don’t have to think about it or take any other action.
4. Go Beyond Health Insurance
Carrying health insurance is a requirement in the US today.
Yet, to maintain stability, especially during hard times when your health is challenging, you’ll need to figure out how to fill the gaps in that health insurance.
Begin by finding the most affordable health insurance you can. This insurance may be through your spouse’s employer, healthcare.gov, or an association or source you are somehow attached to.
You also need to look beyond that health insurance and consider what will happen if you are unable to complete projects due to sickness or injury.
As a freelancer, you won’t have company-sponsored benefits or co-workers to take over your work.
In such events, you could rely on an individual disability policy to provide you with at least a percentage of your income.
You may also want to consider a critical illness insurance policy. This type of supplemental insurance pays out a lump sum for major illnesses such as cancer, strokes, and heart attacks.
The payment is meant to cover expenses your personal health insurance doesn’t, such as deductibles, co-pays, lost income from your freelance work, and even living expenses.
5. Create an Emergency Fund
Freelance finances can fluctuate mildly or wildly throughout the year. One minute they’re up; the next, they are sinking and staying low.
You’ll need to be prepared for this and for anything that comes up that you didn’t account for in your budget. Unexpected events may include:
- Emergency medical expenses.
- Broken equipment or appliances in need of repair or replacement.
- Car tires or repairs.
- A short-term disability that limits your working capacity and there’s a delay in disability insurance benefits.
The best preparation for such scenarios is to create an emergency fund and add to it monthly.
The popular recommendation by various financial planners and influencers today is to have at least four to six months of savings (living expenses) at your disposal should you need it.
Here are a few guidelines:
- Set realistic savings goals at first, and increase these as you’re able.
- Stick with your budget, whether your monthly income increases or decreases, and leave the emergency fund for true emergencies.
- Separate your emergency fund into its own account, but easily accessible if you should need it quickly.
- Stay loyal to yourself by not dipping into the fund every time you need a few bucks or want to purchase that new software version.
6. Separately Track Business and Personal Financial Files
It’s important to keep your business and personal financial files separate, and there are definite benefits for doing so.
Tracking personal financial expenses can help you identify where you may be able to cut costs or eliminate them altogether.
One of the benefits to tracking your business expenses is that you can deduct these from your yearly tax burden.
For example, be sure to keep records on expenses surrounding your home office, marketing and advertising, office supplies and equipment, travel and transportation, professional memberships, education, and training.
7. Consider the Benefits of Opening a Separate Business Account
Weigh the advantages of having a separate bank account for your freelancing business.
Not everyone will find this necessary, and it will depend on your own personal preferences and needs.
With one, you can more readily track business-related income and expenses, which will be highly beneficial come tax time.
It can also provide you with clues on where to potentially save money.
8. Be on the Lookout for How to Cut Expenses
Always be on the lookout for how to cut freelance business expenses and put more money back in your pocket or reinvest in yourself.
Constantly evaluate subscriptions (software, magazines, news sources, etc.) and memberships. Really look at how much value you receive from each one. Are there other options available, potentially for free or at a lower cost online?
For example, are you using that Grammarly Premium version, or would the free version serve your particular needs?
Have you let any free trials turn into monthly fees? If so, are you finding them valuable enough to keep paying?
How about your workplace? Maybe instead of renting an office, look for other options that cost less but still provide what you need, such as a co-working space, local coffee house, or library quiet room.
You may also want to consider using discounts, coupons, and special offers. Shop around, compare prices, and choose what will work best for you and your budget.
9. Look for Ways to Diversify Your Income
To help with finances, consider ways you can diversify your income.
If your freelance work keeps you busy already, consider other passive income opportunities, such as publishing an informative eBook and putting it up for sale.
Examples of other ways to diversify your income include:
- Creating an online course based on what you know and do.
- Promoting yourself for speaking engagements.
- Adding graphic design skills to your service offerings.
Also, you always want to diversify your client base, never relying on just one or two to keep you busy.
The more diversified your income sources, the more stability you can create in your cash flow as a freelancer.
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Being your own boss, setting your daily schedule, and choosing what projects to work on with which clients are highly rewarding.
While it’s true that freelancing can be exciting, it does also require planning and discipline when it comes to financial matters.
These top finance tips for freelancers can put you well on your way to a successful start and keep you there for years to come.
To manage your freelancing career, consider adding these best freelancer tools as well!