Freelancer Getting Started Guide to Finances
Riddle me this, freelancers – is a killer month when you earn $10,000 working on jobs or when you’re actually paid that $10,000?
If you’ve been working as a freelancer for any real amount of time, you know all too well that completing a job has very little to do with the timeframe in which you will get paid.
Some clients (who we love) pay immediately – for those who pay electronically, this is often literally true. Other clients (and we love you too – mostly) can take weeks, months or (gulp) even longer to get the money to you.
Because of this fact, it’s really hard to figure out things like what our weekly and monthly earnings are. You might complete that $10,000 job mentioned earlier, but the money that comes in that month is from a few dozen jobs the month before totaling around $4,000.
Knowing that this is probably going to be a fairly common occurrence, how do you plan for your budget, savings, and retirement accounts? What can you do to make sure that you always have money lying around that’s easily accessible?
Freelance Financing 101: Stay Liquid… Up to a Point
What it really boils down to is that living the freelance lifestyle means you’re going to have to keep more money in a form that can be accessed quickly. Translation: Use savings accounts.
No, they won’t net you big returns, but they are the easiest way to earn a tiny bit of income while keeping your cash close at hand. Normal 9-to-5 working stiffs are supposed to keep around three months of expenses in a savings account in case the worst happens. For freelancers, I recommend at least six months’ worth.
Budget carefully, making sure to include padding. Yes, you want to know how much you really, truly need to earn each month, but the padding is important because there’s a great chance those first several months will be tight as you build up a client base. If you’re aiming to make $5,000 a month to meet your budget but $500 of that is “miscellaneous expenses,” you’ll be a lot happier when you only make $4,450 and fall short.
Separate Work and Play
This is one of those things I wish I’d done right from the beginning, but instead it took a year and the advice of my tax preparer before I finally made the switch. What am I talking about? Creating separate checking and credit card accounts which are solely for the business.
When payments come in, deposit them into the business checking account. If you pay for anything related to the business, even those (ahem) business dinners, put them on the business credit card and pay it off from the business checking account. How do you keep enough money in this account?
Figure out your “salary.” Remember that budget you came up with? Well, multiply it by 12 to figure out your desired annual wages, then divide by the number of times you want to be paid – this is your salary. Just be sure you always leave enough money in the freelance checking account to cover things like paying…
Quarterly taxes and Health Savings Accounts
Yup, that’s right. Now that you aren’t working for an employer, no one is turning in regular tax payments for you, so you have to do it yourself – four times a year. Another reason why the big savings account is a good idea, just in case you’re running a bit low for one of those payments.
Get cheap insurance, then set up an HSA. Health Savings Accounts are godsends for freelancers because the money you put in them doesn’t count toward taxes and you can use it to pay off the ridiculously high deductible you get on your not ridiculously low-enough-priced health insurance plan. How much should you put in your HSA? I recommend the full deductible amount.
Looking Long Term
After you’ve done all this, you can finally start working on IRAs and other long term (and higher-yielding) investments. Hopefully you were smart enough to include them into your budget even if you didn’t have anything set up yet. If not, head back to the drawing board and see what you can move around. Remember, the most important things in a freelancer’s finances are availability and flexibility.
For those looking for more advice on freelancer financing, including in-depth and detailed advice on the topic, check out eBook Finance for Freelancers by Martha Retallick, which is available from Rockable Press.
Photo credit: Some rights reserved by gorielov.
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Get yourself an inexpensive line of credit from a decent bank. Unsecured or secured-up to you.
Where I live, in Canada, these can be had for 4-5% and in amounts of around 20K.
You will need it and it smooths out the bumps in the payment road.
A lot of freelancers cave in and go back to the salary grind, because they freak out about money that hasn’t come in just yet.
It takes a couple of years to see the annual results of your efforts. Give it time!
Thanks for that advice Jim! I must admit, I’m in the early stages of beginning freelancing and I often have days where I freak out and think about going back to the salary grind. Good to know it’s not just me thinking that, and that I just need to be a little more patient while I build up my brand. Good tips!
Another thing to think about is retirement savings; again, without an employer, you need to put away retirement money yourself!
Good post and nice tips, I usually pay quarterly taxes and that definitely helps. I remember one time I didn’t pay too much on that and at tax time I ended up owing a ton.
I think Dorothy Parker put it best: “The two most beautiful words in the English language are ‘check enclosed’.”
You wrote, “Get cheap insurance.” If only it were that easy.
Health insurance is extremely costly, particularly if you have any pre-existing conditions and if you’re insuring not just yourself but also your family (spouse and kids). It can be comparable to your monthly car payment or even mortgage!
“Cheap insurance” means a policy with a very high deductible, as in $5000+ per person, per year. So now you’re not only paying monthly premiums, you’re also paying for every doctor’s appointment you have and prescription you take. And, of course, “cheap insurance” doesn’t include dental coverage.
While an HSA account allows you to pay with pre-tax dollars, you’re still paying with your own, hard-earned money. Just wanted to clarify that info. because the picture you painted sounded much more rosy than reality.
Some excellent tips Joyce. I agree if possible it’s good to have a financial cushion set aside to protect against cash flow problems that may result from clients paying late.
All excellent advice, although I have to confess that I just let my accountant deal with all of this, then let them advise me on what I should save for a rainy day.
The only issue I had was growing my income to a level that allowed me to pay an accountant so that I could save more money.
Bit of a catch 22.
This is a pretty important concern especially because when you first transition from an employee to a freelancer it’s hard to even calculate the difference in income because freelance income is non-pre-taxed income.
Some clients (who we love) pay immediately – for those who pay electronically, this is often literally true !!
Easy to take for granted the amount of work that goes on behind the scenes for a 9-to-5 worker to get paid (tax calculations, super contributions, etc). Definitely recommend getting a decent accountant to take care of your books unless you’re very very good at calculating things like tax yourself. Far too easy to miscalculate it and end up with a huge tax debt to pay off the next year. Also important to make regular contributions to your superannuation, I’ve talked to people in their 50s who’ve been self employed all their lives and are thinking of retiring but have no super at all to fall back on.