If you want to pursue a life doing something that you’re truly passionate about, then freelancing is a good decision. However, it’s not as easy as it seems to be a freelance worker. Among challenges like keeping yourself motivated, and avoiding procrastination, you’ll also need to think about how you’re going to keep your finances in check.
Remember, as a freelancer; you’re also a sole proprietor – which makes you a small business owner. As such, you need to make sure that your business is a sustainable operation that can help you to pay the bills. To do that, you’re going to need a budget and the right attitude towards your personal finances. These quick tips will help.
1. Avoid Burying Your Head in the Sand
As a freelancer, you probably don’t want to worry about money. Instead, you want to focus on doing what you love, and working on what you’re good at. However, the unfortunate truth is that you need to be aware of your finances at all times – even if you don’t like it. The more you understand about your incoming and outgoing cash flow, the easier it will be to make the right decisions about your financial future, and how you’re going to invest in your business.
The good news is that there are tools available online to help you with managing your finances, like QuickBooks and Xero, so you can avoid confusing yourself with endless notes and spreadsheets.
2. Plan for Business Ups and Downs
Often, freelancing is a feast or famine situation for many professionals. There will be times when you can barely cope with the amount of work that you have to handle each week. However, there will also be months when you’re barely earning anything at all. Ultimately, you’re going to need to have a way of balancing your earnings out over the course of the year.
During the months when you earn more than usual, focus on putting extra cash aside for your future. This will give you an emergency cash fund that you can tap into when you’re not earning as well as usual. As time goes by and you learn more about the seasonal dips in your sales, you’ll be able to make sure that you’re more prepared. You can even arrange vacations during the times of the year when you’re less likely to be busy.
3. Get to Grips with Taxes
As a standard employee, you would probably have your taxes taken out of your paycheck before you have a chance to worry about them. However, as a freelancer, you’re going to need to deal with that part of your finances for yourself. Make sure that you’re depositing a portion of your incoming cash (usually 20% or more) into a separate savings account whenever you earn something from your business. This will ensure that you don’t end up in a difficult position when tax season rolls around.
If the whole concept of taxes confuses you, then it’s probably a good idea to work with an accountant or professional bookkeeper as well. Although this means spending some extra money, it can save you a lot of cash on deductible expenses too.
4. Track Everything
For both tax purposes, and the sake of your own state of mind, you’re going to need to keep track of everything that comes into your business, and everything that goes out. Start by getting separate business and personal bank accounts, so you don’t get confused. This will make it easier to understand exactly how much you’re spending on your company each month. It will also mean that your accountant has an easier time finding things to use as tax write-offs.
Tracking all of your expenses will also give you a visual representation of your spending habits as you move through the year, so you can highlight areas where you might be wasting too much cash. You’ll even be able to see where you need to get extra money in the form of a business loan to invest in new opportunities.
5. Look After your Future
Finally, remember that when you pay yourself as a freelancer, no-one is paying towards your future retirement fund for you. With that in mind, it’s important to ensure that you’re putting extra cash away for the years to come. Whenever you pay yourself each month, set up an automatic bank transfer that puts some of your earnings into a retirement fund for your family and yourself.
It’s also worth putting some extra money away into an emergency savings fund, just in case. After all, you’ll never know when a lost client or a problem with your work could leave you struggling with money as a freelancer.