Financial Management Tips for Freelancers
Most freelance designers are experienced and talented with their trade, but not so much when it comes to financial issues. In this post I’d like to share some things that I have learned through my own experience of being self employed that I think will be able to help others. I am in no way a financial professional and you should always seek the advice of someone qualified on the specifics of your own situation, but these are some general things that have helped me along the way.
1. Have Emergency Savings
If you haven’t started full-time freelancing yet, the best thing you can do for yourself financially is to build up an emergency fund that will allow you to pay all of your bills for at least a few months. Hopefully you won’t need this money, but if things don’t go as expected at least it will be there for you and you won’t have to go scrambling back to a job as soon as things slow down.
If you are already freelancing full-time with no emergency savings, it’s not too late to address the issue. This money will help to reduce the stress that you may be feeling to earn enough each month.
2. Set a Budget and Cut Out Extras
One of the difficulties of freelancing is knowing how to live on an income that changes frequently. In this situation it’s critical that you have an idea of where your money is going (this includes personal expenses as well as business expenses) so that you can cut out things that may be unnecessary. If you’re just getting started as a freelancer it’s a good idea to minimize your expenses wherever possible until you’re comfortable with how much money you will be making and the type of lifestyle that you’ll be able to support.
Budgeting is a key element in any type of financial management. Cutting out extra expenses doesn’t mean that you’ll have to do so forever, but focus on lowering your expenses so that you can concentrate on building your business without the stress of needing a large income.
3. Set Up Separate Bank Accounts
Another common struggle for freelancers is keeping personal and business money separate. My solution to this is to have separate accounts for business income and expenses, as well as an account specifically for money that will be used to pay taxes. As I have money come in I put it in the business account minus a set amount that I put in the tax account. I overestimate the taxes a little bit so I don’t wind up owing anything unexpectedly.
If you’re keeping all of your money in one account, do yourself a favor and set your business money aside. This will help to prevent unpleasant surprises from taxes and business expenses, because the money will already be set aside. Additionally, if you pay yourself from your business account (which I’ll get to in a minute) it can help you to live as if you have a steady, consistent income.
4. Hire an Accountant
Most freelancers aren’t experts at taxes, so it’s usually a good investment to hire an accountant. There are a lot of programs that will help you to do your own taxes, but dealing with business income and expenses can be more complicated than filing taxes as an employee. You’ll definitely save yourself a lot of time by hiring an accountant, and you’ll probably owe less money if you have an accountant that is experienced at working with clients who are self employed, plus you’ll have some help should you get audited.
5. Find a Good System for Time Tracking and Invoicing
Keeping track of time and invoices is not a strength of most freelancers, so it’s especially necessary to have a good system in place. There are a number of web apps and software options for this purpose, and most are reasonably priced. I have been using Fanurio and it helps me to know how much time I’ve spent on clients, how much I’m owed, what is overdue, etc. Other good options that I have personally used include FreshBooks and Time59.
Having an effective system will help you to minimize the amount of time that you spend on these activities and to easily identify situations where you are owed money. You’ll be able to easily and quickly see your financial situation at any given point in time, which will not be as easy if you are managing invoices manually.
6. Seek Guidance from a Financial Advisor About Retirement Savings
One of the major benefits of working as an employee is that you would most likely have access to a 401(k) or some other type of retirement account. Saving for retirement is easier when it’s something that you don’t have to think about, and when there are tax benefits. Many freelancers don’t save anything for retirement because it’s not as convenient as it would be for an employee. Although you won’t have a company 401(k) as a freelancer, there are options, including a SEP IRA. You’re options will vary depending on your situation and what country you live in, but a financial advisor should be able to help you find the right choice for you.
7. Pay Yourself a Set Amount
Living with a variable income can be a challenge for most people because you don’t know exactly how much money will be available to you at any point in time. Each person will have their own preferences here, but the most significant way I have found to face this challenge is to pay myself as if I were an employee. I pay myself (a transfer from the business account to the personal account) a set amount every two weeks. This helps me to have an income that is more like a set salary that I can use to develop a budget for my personal expenses. Of course, the key is to pay yourself less than you are actually making through your work so that the business account never gets completely depleted and so you’re able to continue to pay yourself. I’ve found that this helps me to make sure that I have enough in my personal account to pay bills, but it also challenges me to reduce unnecessary expenses so I can keep my “salary” down and have more money in the business account.
8. Set Income Goals for Each Month
Most freelancers are at least somewhat goal oriented. Designers are used to working constantly with deadlines and meeting goals on client projects. I’ve found that I get a little bit of extra motivation when I have a monthly income goal that I am reaching for. The goals don’t need to be monthly, they could be quarterly or yearly if that works better for you. However, I think you’ll find your income increase a little bit if you set an aggressive but reasonable goal.
9. Plan Your Budget Based on a Conservative Income
Because your income is likely to fluctuate, it’s best to plan your budget based on the lower end of what you are likely to make. If you budget this way and your income is higher than expected, you’ll just have extra money. However, if you plan your budget based on what you’d like to make rather than a more conservative amount, you may find that you have trouble paying bills during slower times of business.
10. Get Signed Contracts
Signing contracts with your clients is a good idea for several reasons, and it also impacts your financial management. Having a signed contract doesn’t guarantee that you will get paid on time, or at all, but it does give you some recourse and it causes most clients to be more concerned with paying you on time. It can lead to less time wasted chasing down money that you are owed, less lost income due to clients not paying, and more time to spend on income-generating services.
11. Organize Your Time/Schedule
The most valuable asset to a freelancer is time. If you are wasting time because of a lack of organization you are essentially wasting money. Getting organized will help you to have more time to do work for clients, which will increase your income or possibly reduce the number of hours that you work. Respecting your time is a great start to managing your business and your money more effectively.
12. Buy Health Insurance
Like retirement savings, health insurance is another benefit to being an employee. Many self-employed people go without health insurance, but that leads to risks that may not be worth it. The ideal situation is to have a spouse who works as an employee so that you can be on their insurance plan, but that is not possible in all situations. There are insurance plans available that may not give you the best coverage in terms of co-pays, deductibles, etc., but they can at least protect you in case of an emergency that could be very expensive without insurance.
13. Live a Healthy Lifestyle
While we’re on the topic of health, staying healthy also plays a role in your income because there are no paid sick days as a freelancer. When you are not able to work you are not getting paid. Taking care of yourself will lead to less missed time for sickness, and time to produce income throughout the year. Eating right and exercising are struggles for most of us that work from home, but they should be a priority if your income is tied to your ability to stay healthy.
14. Have Savings Goals
Because of the challenges involved with earning a living as a freelancer and being able to live with an inconsistent income, it’s easy to get caught up in being able to pay the bills and forget about the need to save. When you’re developing your budget be sure to plan to save at least a little bit each month. Saving is a habit that needs to be developed even when it is with small amounts. One option is to use automatic withdrawals to take money from a checking account and put it in a savings account.
15. Evaluate Your Rates
One other factor, which we have not covered, that plays in to your financial situation is your rates. Knowing what to charge can be a major challenge for designers and it’s a big topic that I’m not going to cover in detail here, but you should make it a priority to evaluate your rates from time-to-time. If you haven’t increased your rates in a while you may find that you could stay just as busy and make more money by doing so.
If you have existing clients that are used to paying a certain rate for your services, the best thing to do is to test out your increases on new potential clients. That way you can get a better idea of the impact it will have, and you’ll know if it’s a rate that some clients are willing to pay. Then once you are confident that the new rates are fair and reasonable you can notify your existing clients of an upcoming increase. This will help to avoid situations where you’re rates aren’t realistic and you lose clients.
What Advice Do You Have?
As I said at the beginning of this article, these tips are based on my own personal experience. I’m interested in getting feedback from others with some tips of their own, so please leave a comment if you have something to share.
For more business and freelance-related content please see:
- 13 Principles of Effective Time Management for Freelancers
- 15 Tips for Breaking in as a Part-Time Freelancer
- 17 Tips for Designers on Starting a Freelance Business
- Foundations of Customer Service for Freelance Designers