Money Management for Freelancers – Tips and Mistakes to Avoid
The world is changing, and it’s no longer business as usual. With every single day proving to be different, more individuals are turning to freelancing. Whether you made a conscious decision to start freelancing or circumstances forced you into it, your number one priority might be finding work at whatever costs, after all, there are bills that need to be paid.
While life as a freelancer may sound appealing, working in your pajamas, setting your own schedule, and taking breaks whenever you deem fit, things may not be as rosy as they sound. While it’s an amazing experience to be able to have control over your work-life balance, discipline especially in money management is key.
As a freelancer, you are on your own when it comes to certain benefits that are normally provided by the employer in a traditional work set up such as retirement plan saving, health benefits, etc. On top of that, you’re also required to, file your taxes, manage your income, avoid bad debt and maintain a good credit score to be able to qualify for a loan if you ever need one in the future.
While having many freelance gigs is crucial to stay afloat, you need not neglect other business aspects like keeping track of your expenses. Remember, if you are not careful, small money mistakes can cost you a fortune.
As a freelancer, what are some of the money management mistakes you should avoid? And what do you need to do in order for your business to flourish as you enjoy the perks of being your own boss?
Manage your income
For a long time, people have always looked down on freelancers. But did you know in most cases, freelancers make more money than those in traditional full-time positions? This realization however sets some off and they end up not managing their income correctly.
Charging below market rates
Most freelancers when starting out, charge very low rates in order to get their foot in the door. While this might be a good idea to help you build your portfolio and gain some real life experiences, it’s always advisable to ditch this practice as soon as you can. You may not be able to command expert rates from the word go but charging extremely low rates will have you working for longer hours and risk burnout. A CEO who isn’t able to run their business isn’t what people are looking for. If you’re not charging an hourly rate, it’s advisable to keep track of the number of hours spent on each project so as to be able to calculate and know if you’re making profits or loses.
Mixing Business and Personal Finances
You probably don’t have a finance degree but that doesn’t exclude you from paying taxes or reviewing your budget. If you’re working for multiple clients, have all your invoices organized, and don’t rely on your memory as this may fail you at a crucial moment. If you keep everything separate, it’ll be easy to ascertain which expenses are personal and which ones are business-related. Where possible leverage on accounting software like Quickbooks, Mint, or just the normal MS excel spreadsheet. Take into account the structure below on how you can separate your accounts and keep track of your income:
- Business Savings Account:
You can put money here for quarterly taxes. By keeping this money separate, you’ll have a better idea of the amount of money your company has.
- Business Checking:
This business account is used for customer payments and business expenditure.
- Personal Savings Account:
This emergency fund should be significantly larger because as a freelancer, sometimes income fluctuates. You should only use it if there’s an emergency.
- Personal Checking Account:
This is your normal checking account for all individual expenses.
Budgeting for slow months
On the upside, freelancing has a lot of perks like earning more than your neighbor who works in a brick and motor store or being able to travel across continents whenever you feel like, it also has its own downsides.
While the industry veterans may be accustomed to the ups and downs of freelancing, new freelancers may find it stressful during slow months. A little bit of stress on how you’re going to settle your internet bill may not be worrisome, having to worry about how you’ll settle your rent for the next couple of months doesn’t sound appealing though.
Before you spend, make sure you set something aside that will cushion you for at least four months or so in case things are a bit slow.
Save for your retirement
Some may argue, since you’re working from home you can work even when you’re 70 years old. This may be true, however, the question is, is this something you would want to do? Or would you prefer at that age to be enjoying some quality time with your loved ones? It doesn’t matter at what age you start freelancing, planning for your retirement, should be at the top of your list from the word go.
Broaden Your Sources of Income
The more diverse your sources of income are, the more carefree you’ll be. Variegate your work profile; upskill if you have to, for instance, you can be a:
- Social Media Manager
- Content Writer
- Graphic Designer
If your skills allow, consider investing in ways you can generate passive income. You can also try to generate additional income through leasing part of your house (if you own it) or selling things from your closet that you no longer require or use.
Consider Yourself as an Ordinary Employee
As a freelancer, you should think of yourself as a normal employee. The whole idea of “paying yourself first” helps in this. The cash you pay yourself by depositing it in your account is what you’ll use for your normal expenses.
The enterprise’s major focus is to make sure that there’s a uniform distribution of money over the period required for consistent availability.
For instance, it shouldn’t be that in one month, you can afford a tour while the next you don’t have sufficient funds to pull through. An ordinary employee won’t be faced with such issues.
Set Your Business Budget
Setting a business budget means you’re intelligent! It helps in money management as you’ll plan your monthly business earnings and expenditure before the month commences.
The simplest method of managing your small freelancing business’s budget is to utilize the zero-budget technique. This technique is flexible enough to manage your varying income and it’s, therefore ideal for freelancers.
If you have a zero budget, you’ll plan out the cash you anticipate to get before you get it. This way, you’ll keep your spending and expenses low.
How Does Budgeting Help Your Business?
- You can plan what you can or cannot do with your freelance work as you can see where your money goes
- Each month you’ll see where you’re spending too much or underspending
- You’ll have a better idea of how much earnings you need or how much expenditure you can cut out
If you’ll earn less in a certain month, the zero-budget technique helps you figure out what you’ll reduce before you find yourself with an invoice and no cash to pay for it.
If you earn more, you should use that extra cash for savings or in the business. With a business budget, you can spend less than you earn. This is an intelligent rule to follow for your business to be successful.
Set Aside Part of your Income Earnings for Taxes
If you earn a living as an employee, your employer automatically prepares and explains to you your income so that you can file your taxes.
However, as a freelancer, you’re now operating your own company and this implies that the tax management and tracking burden is your responsibility. Healthy cash flow is as crucial as operating any business and paying taxes on time.
Ensure you have enough money for taxes and if you spend more and you’re left with inadequate money to pay your tax duties, you’ll most probably violate tax laws.
Therefore, it’s good to prepare in advance by earmarking 20-30% of your income for taxes. This way, you can adequately prepare when the time comes to file your taxes.
Are your Invoices Piling up or they’ve been Paid up?
Freelancing comes in different forms. In some instances, invoices are automated like when using job boards or freelancing platforms and you never have to worry about following up. However, if you’re working with direct clients this may not be the case.
Sending that invoice is just but the first step in the whole process. A sent invoice is not an automatic check in your bank account, you need to follow up to get paid. Following up with your client as soon as you can remove all the hassle from both ends.
Managing your money as a freelancer may sound like a lot of work but with a little bit of planning everything is manageable. If you can, leverage on available apps, and once established, you can even consider hiring a professional to help you with your money management as a freelancer.
