Building a successful freelance business is totally dependent on how you manage your finances. How do you manage your finances if your income varies from month to month? How do you plan for growing your freelance business? What about health insurance and paying for unexpected events such as economic downturns?
Here is 10 financial tips for freelancers that will help you address the most common finance issues that freelancers may face.
1. Set Up A Business Budget…And Stick To It!
Running a freelance business (or any small business for that matter) is much like managing your household finances. You must have a budget set up that is built around your business goals.
Think about where you want to be in three to five years and build a budget to help you achieve those goals. Your budget should include everything from how much of your income will go towards marketing, retirement, taxes, business savings, payroll, etc.
Review and update your budget every month to adjust things as your business evolves.
2. Have A Separate Bank Account For Your Business
A separate bank account is absolutely necessary for managing your finances as a freelancer. Why? Because your business will have additional expenses required to maintain as it grows. Getting these expenses confused with your personal expenses will not only cause a major headache, but it will also make measuring your business difficult and managing your taxes will be a nightmare!
When you open up a separate bank account, you can choose whether to start with a personal or business account. It's not as important up front to incorporate your business, but if you wish to do so it wouldn't hurt. The idea is to simply have a separate account that all your freelance money goes into, and from there you pay expenses, marketing and payroll.
3. Always Set Aside Money For Growth
A major mistake many new freelancers make is using up all the money they make without setting anything else aside for company growth. Choose a percentage of your gross income to set aside each time you get paid, and have it automatically transferred to your savings account. Not to be touched for anything but company growth.
4. Set Up Basic Accounting Processes
One major difference from switching from a salaried employee to being your own boss as a freelancer is paying your taxes. This all starts with having a basic accounting process set up. Linking your bank account to a tax software like Quickbooks makes it easy to categorize your expenses and file your taxes when the time comes.
Quickbooks has multiple plans to choose from, and can cost as little as $10 per month, so it's cheap and absolutely necessary to managing your freelance finances.
5. Diversify Where Your Income Comes From
If you're dependent on just one platform such as Fiverr or Upwork for all your freelance clients, then you're at risk of losing all your clients at once should a major change happen to the platform you use.
This means that you should make sure you have multiple sources of income and clients for your freelance business. This could include being present on multiple freelance websites, having additional income through a subscription product, digital downloads, and even affiliate marketing income for your freelance website.
That way, should Fiverr or Upwork or whichever platform you get clients from decides to terminate your account or make a change in how they do business, you've got multiple sources of income and clients so the damage to your business will be minor.
6. Don't Forget To Include Taxes In Your Budget
A good rule of thumb to set aside money for taxes is to transfer 25% of your gross income to a separate savings account used to pay quarterly taxes. Do this each time you get paid and only touch it when you make regular tax payments. Chances are you won't need to pay the full 25% you set aside in taxes in the beginning phases of your business, but you don't want to be short on your tax savings.
Again, using a trusted tool like Quickbooks will help you estimate the amount of taxes you will need to pay based on your business expenses.
7. Build An Emergency Fund
Unexpected events can and will occur, it's just a matter of time. Consider major economic events such as the stock market crash in 2008, and the recent pandemic COVID-19. Businesses and freelancers who don't have an emergency savings account for trying times are sure to close their doors when similar events occur in the future.
How much should you set aside? The goal is to build up at least a few months of business expenses. If your monthly expenses are $500, then set aside three to six months which would equal $1,500 to $3,000.
8. Budget Ahead By One Month
To make your budget even more accurate, a good strategy is to budget a month ahead. This means using last months income to pay for this months expenses. All your money coming in this month will be used to pay for next months expenses.
It's a secure way to stay on budget and even be able to adjust things accordingly should you have a slower month and need to cut a few costs.
9. Remember To Plan For Retirement
After all, we're working so that hopefully some day we don't have to anymore. Did you know that if you plan to retire at age 65, and you're currently 30 years old and want a $75,000 income in retirement, you will need over $4,000,000 to retire?
Whether it's setting aside as little as $10 per week or even month, the idea is to build an automatic habit to save and invest for retirement. While you may not have the benefits of having an employer sponsored 401k, there are a lot of options available to set up a retirement account as a freelancer.
You can set up the following types of retirement accounts as a self employed worker:
- Traditional IRA
- Roth IRA
- Simplified Employee Pension (SEP) IRA
I recommend starting with a Roth IRA, and if you plan to contribute more than $6,000 per year, then consider opening up a SEP IRA due to the higher contribution limits.
10. Get A Good Health Insurance Plan
If you're a full time freelancer, you NEED to take into account a good health insurance plan. This is one of the larger expenses that you will pay because your employer is no longer offering you insurance benefits.
Look for a plan that covers all of your expected doctor and hospital visits, covers the right medications, and fits your budget. I suggest getting a “high deductible” plan which is any plan with a deductible over $1,500, and start contributing to a Health Savings Account which can grow over time to cover medical expenses.
To find a good insurance plan for you, take a look at eHealthInsurance.com to filter down your options for health insurance.
Build A Financial Process To Maintain Your Freelance Business
It all comes down to creating a basic process to follow, setting a schedule to review and take action, and then regularly updating your financial process as your freelance business evolves.
The goal is to take an action and turn it into an automatic habit that doesn't take any effort to think about or do, because its the way you do business.