One of the trickiest parts of being successful as a freelancer is figuring out how to manage your money well. Financial management is hard for most people, but when your income is inconsistent and your tax liability is higher than it is for the average person, it gets even more complicated.
If freelancing is your goal for the long term, the only way for it to be sustainable is if you get good at managing your finances. Here are seven steps get on the right path.
- Make sure you’re charging enough.
The first mistake that many freelancers make in the beginning is not charging enough. If you start out thinking in terms of what you made as an employee, you’re already cutting yourself far short of what you need to be making.
Freelancers have to cover a lot of expenses employees don’t, including:
- Your own office space – whether that’s a space in your own home or a co-working space you rent.
- All materials and office supplies you need to do your work, such as your computer, software, printer and paper, etc.
- Service providers you’ll need to hire for business needs you can’t manage on your own, such as an accountant, web designer, lawyer, or any subcontractors you hire.
- Taxes, including your self-employment tax.
- Health insurance.
- Vacation time and sick days – you won’t be getting any free time off anymore.
- Retirement savings.
- Any business-related insurance you need.
You also need to consider that not all your time is billable. You’ll need to spend time promoting your business, networking, and doing administrative tasks like checking email and tracking your expenses. That’s all work that no one will be paying you to do.
And you can’t expect a full slate of work at any given moment. Clients leave or cut back on how much they need all the time. You should absolutely expect there to be periods when only a small percentage of your time will go toward doing work that pays. You need to charge enough when the paying work is there to help cover you in the times that it slows.
If you find it easiest to start by thinking about what you made as an employee, go ahead and double that number. Make that your new starting point for thinking about what to charge.
If it sounds like a lot, then talk to other freelancers in your area. Get an idea for what a normal number for the area looks like. If you live in Austin (or even if you don’t), check out our pricing survey results for an idea of what Austin’s freelancers generally charge.
The numbers that sound high in the beginning will start to look reasonable pretty quickly after you pay your first tax bill as a freelancer, or the first time the cost of replacing a broken computer falls entirely on your shoulders.
For every other tip on this list to make a difference, you have to start from a place of charging enough to make your freelance business sustainable.
- Set up a business bank account.
I’ll admit, this is a step I was slow to take myself when I started freelancing. It’s just so easy to keep using your personal account. Why bother taking the time to go to the bank to set up a new one, especially since it increases how many accounts you have to keep up with every time you do your accounting?
There are a few reasons this is important to do:
- Having a separate bank account for your business is a powerful psychological step to seeing your business as something real. It helps you start thinking about business expenses as separate from personal expenses, and your earnings as money for your business, rather then just your money to spend as you please.
- It makes your accounting process cleaner. Not easier, mind you, you now have more accounts to keep up with, but you’ll have an easier time separating out your business earnings and expenses from your personal spending.
- It limits your liability. In the unlikely chance that you get sued for something related to your freelance business, having your business funds clearly separate from your personal funds and belongings makes it harder for them to get at the latter.
It doesn’t actually take that long to get a business bank account set up, so call your bank and set up an appointment to get it done.
- Invest in good accounting software.
Being a business means you have to get responsible about accounting. There are lots of accounting solutions out there that allow you to create invoices, track your income, and input your business expenses as you go. Spend some time browsing your options. A lot of accounting software products include a free trial, so you’ll have a chance to see how intuitive you find the interface and functions before making a decision.
- Set aside a third of your income for taxes.
This is important, even though it’s hard.
Employees have the option of having their taxes taken out of their paychecks each month so they don’t have to make a special point of saving for them. Freelancers don’t. And you really don’t want to be caught unprepared at tax time.
The exact amount you’ll have to pay on your earnings will depend both on how much you make and where you live, so really it’s best to ask a local accountant what you should set aside. If you haven’t found a good accountant yet, then a good rule of thumb for now is to calculate a third of what you make each month and put that in a savings account for tax day.
- Set aside at least another 10% for savings.
The feast or famine cycle means that your income could dry up completely with no warning. For a freelancer to be able to stick with it for the long-term, you need to be prepared when that happens. That means making a special point to always save money whenever you do have paying work.
In addition to the 33% you set aside for taxes, put another 10% toward savings. This can be divided between an emergency fund, an IRA, a health savings account, or any other form you want your savings to take. Just make sure you do it. You need money to fall back on when things get tight. You need to be prepared for the financial emergencies life so frequently throws our way. And even if it feels far off now, you will want to retire some day. A good freelancer has to be a good saver.
- Keep track of all your business expenses.
Ideally, you should use a different card for your business expenses than for your personal one. That makes it easier to track how much money you spend on your business. If you don’t have a separate card devoted to that use yet, still make a point of logging all the money you spend that’s related to your business in your accounting software.
This includes everything from the phone bill for the number you use for business calls to your website hosting to the drinks you buy at a networking event. You should also keep track of your mileage whenever you drive to business meetings or networking events.
Every bit of money you spend that has something to do with your business or professional development is worth keeping track of. Get in the habit of logging it all so you can easily send it over to your accountant when it’s time to prepare your taxes. Which brings us to our final point…
- Hire an accountant.
Unless you’re lucky enough to know a gifted CPA who goes by “mom” (hi, mom), you need to find a local accountant to work with. It’s an expense you just can’t skimp on when you have your own business. If you don’t have a good accountant yet, then talk to other freelancers in your city to see if they have recommendations, or do some Googling for terms like “small business accountant” and check out any reviews or testimonials you can find.
A good accountant will make your life easier and make sure you don’t spend more than you have to for your taxes. In most cases with the money an accountant will help you save, they’ll pay for themselves.
If you’re in Austin and want to know more about how taxes and accounting work for freelancers, you’re in luck. Local accountant Mari Ramirez will talking about what freelancers need to know for tax time at our Freelance Austin meeting on March 8. Be sure to register so you don’t miss it.
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