Freelancing is risky without a financial plan. In a perfect world, clients pay as regularly as you work. But most freelancers know that payments fluctuate and often arrive later than promised.
To survive and even thrive as a freelancer, you’ve got to take charge of your money. If you think you don’t earn enough to have the security that you want, you need a plan more than anyone else.
Savings Isn’t Optional
The stress of undependable income is lessened when there’s backup money in the bank for emergencies. Even normal expenses such as groceries or a utility bill can transform into an emergency when the money isn’t there.
CNN Money explains that Chris and Jane Peterson, married freelancers living in Minnesota, met with financial planner Colleen Weber for advice about how to get and stay on track. After years working for television stations, the Petersons struck out on their own. Like most freelancers, they love their new freedom. Also like many freelancers, it’s been difficult to replace dependable finances with those that can change overnight.
Weber suggested that the Petersons need four months of income as savings. Some financial planners recommend six months. The more your income fluctuates and the higher your expenses, the more savings you need.
Pay Yourself First
It’s long been the advice of financial experts — pay yourself first. It seems logical, but it’s not as easy as it sounds. It also might not mean what you think. With looming bills and thin income, paying everyone besides you might seem like the most responsible choice.
Paying yourself first doesn’t mean letting other responsibilities slide. It’s just an organization technique, not an idealistic suggestion. In an employer / employee situation, the paycheck you’re issued is yours free and clear. With freelancing, there’s a lot more to consider.
Separate Accounts Keep Finances Organized
Separate bank accounts let you compartmentalize your finances into manageable chunks, which helps avoid overspending and the highs and lows of erratic earnings. Here is an example of accounts that could benefit freelancers:
Business Account: This account collects payments from each of your freelance clients. It’s the landing point where all of your earnings go. Imagine that this is an “employer” account from which the employer gives her employee a steady paycheck.
Personal Account: This account is for personal income, which comes from the pool in the business account. Consider this an “employee” account. Transferring everything from the business account into the personal account defeats the purpose. Decide on a steady paycheck that your business account can support, and transfer only this amount into the personal account at regular intervals. This is how you pay yourself and create a more dependable income.
Taxes: Freelancers don’t have the luxury of an employer that withholds taxes. You’ll have to do this on your own. A separate account for taxes means the money will be there when Uncle Sam wants his share, whether you pay quarterly or annually. As with an employer / employee situation, taxes come from the business account or your total earnings, not from your personal account after you’ve been paid.
Savings: Every freelancer needs at least one savings account. You might have more than one if you have several goals, such as a college or vacation fund. The primary savings is your safety net with 4-6 months earnings that you can draw from if you lose a client or payments are unusually sluggish.
How to Make Money Appear
The biggest freelance challenge might be building up the savings safety net. If you already struggle, how can you save what you don’t seem to have? This is where you’ll need a discerning eye, frugal mind, and healthy dose of honesty.
David Bakke, a blogger for Money Crashers, tells Freelancer’s Union that there are many ways to save that you might not recognize. More important, they add up faster than you might think.
Perhaps you can refinance your home and get a better rate with lower monthly payments. The difference goes into savings, not into your disposable income. Discretionary spending might also need a few tweaks. If you dine out once a week and spend $50 each time, dine at home much cheaper and add nearly $2,000 to savings in a year. Anywhere you can trim off fat, use it to pad your savings.
Once you have a comfortable savings account, you won’t need a thrifty mind every day of your life. With a safety net, you can splurge sometimes without putting responsibilities at risk.
Don’t Put it Off
Financial management probably isn’t at the top of anyone’s Favorite Things to Do list. It takes time, and the bold facts that might emerge can be intimidating. One thing is certain: the sooner you get started, the better off you’ll be.
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