Going freelance can be a brilliant career path. It gives you the freedom to start your own business and run it exactly the way you want. It also affords you the flexibility to work according to your own schedule, anywhere in the world, and choose the clients and employers you work with. You are effectively your own boss, and in total control of your life.
The only downside is managing your finances. As a freelancer, you don’t have a helpful HR department totting up your hours and sorting out your paychecks. You are solely responsible for your own financial situation. For some, this may be liberating, but others may find it overwhelming and terrifying. In addition, you no longer have the safety net of a predictable income and you miss out on employee benefits.
Whether or not freelancing is right for you is a different story, but for those who are giving it their all, you may need help when it comes to managing your money. Fortunately, you don’t need a degree in financial planning or be a chartered account to do it right. With a few simple tips, you will be fully equipped to run your own freelance business without incurring any visits from the IRS.
Separate personal and professional
When managing your accounts, it is crucial that you separate your personal finances from your business finances. This gives you better visibility of your income and expenses and makes it easier to access the right information when it comes to submitting your tax return.
Create a budget
When you have variable income, you need a way to keep track of your cash flow. By creating a budget, you will always know whether your income is exceeding your outgoings. Every freelancer should have a document detailing all of their income, separated by jobs and clients. It should also include, in either the same document or a separate one, a list of all monthly outgoings, including overheads, employee wages, rent, mortgage payments, bills, and shopping. Once you have this crucial information down, you will know exactly how much money you have left to spend each month. You should stick to a budget, both on a personal level and a professional level, to make sure your business stays profitable and you can live comfortably. This budget will help you to spend more carefully and avoid getting into trouble.
Many freelancers forego insurance because it is a significant cost, taking the risk that nothing will go wrong. However, when disaster strikes, they will have no backup and may end up in dire financial trouble. Without access to employer insurance plans, you will need to fork out for your own health and life insurance, on top of any business, car, home, and other insurance you might have. Don’t risk it all. Getting insured is a worthwhile investment.
Don’t forget your taxes
When you get paid as a freelance business owner, it’s all fantastic until you remember you have to pay your taxes. When your taxes aren’t automatically taken from your income, it adds the extra hassle of having to pay them yourself. Ensure you keep a portion of your earnings set aside in a savings account for when you are ready to pay your taxes.
Have emergency money set aside
What are you going to do when things go wrong? When business dries up, or unforeseen expenses arise, you will want some money in the bank to bail you out. Therefore it’s essential that you have access to an emergency fund to help you cover the costs. Ideally, you should have six months of expenses saved for just such a scenario.
Save for retirement
When you work for yourself, you miss out on the employee retirement plans that most people enjoy. This means you have to start thinking about your retirement now. You won’t be able to work forever, so you want some money in a retirement fund to help you when you’re older. There are plenty of financial solutions for freelance workers to save for the future.
As a freelancer, your financial situation is unlikely to ever be 100% stable or steady. There will be ups and downs, so you must be prepared for some level of unpredictability and willing to go with the flow. By managing your finances as best you can, you will put yourself in the best financial situation possible. If managing your finances seems too daunting, you could always outsource your accounting needs to take off some of the pressure.