How to Budget As a Freelancer
So you’re a freelancer who leaves home in the morning , explains to his roommates that you have work to get done, and knows when to actually stop working . It’s time to get your freelance finances in order.
Order lunch, fire up Slack, and schedule an afternoon shower. Work from home week! From our sofas and local coffee shops, Lifehacker gives you tips to keep you productive, balanced, and sane, whether you work from home all day or your entire career.
Whether you’re a full-time employee or a freelancer, the basics of budgeting serve as a solid foundation: you want to know where your money is going, cut costs as much as possible, live beyond your means, save at least 10 percent of your income, and invest earlier.
But there are many circumstances that you will face as a freelancer that are unique to your position. Here’s what to keep in mind.
Know your customers
Find out when your customers are inclined to pay so that you don’t have any overdue invoices because someone didn’t come in as quickly as you thought.
“You have no control over your customers, but you will likely find that in the future, many of them will behave in the same way as in the past,” writes Due.com , an online payment platform. “This means you can take on new costs or manipulate accounts depending on when you know more funds are coming in.”
Maintain a document or notebook with information about when they pay and how often they are late or miss payments. Consider giving them up if this happens all the time. To learn about the different methods of charging customers, check out this article .
Separate personal and corporate accounts
The most important thing you can do as a freelancer is to separate your personal and business expenses. This includes opening a separate commercial bank account (preferably a high-yield one) as well as a business credit card. Also consider tracking your spending in a different money app than you are tracking your personal spending.
Separating business accounts and personal accounts makes it easy to keep track of all the income and expenses associated with your business without any additional guesswork, Upwork writes. “Using a corporate bank account and credit card can cut the hassle of trying to figure out what costs are what costs when you’re balancing your ledgers.”
And keep a separate list or spreadsheet of all your financial accounts, including name and login URL, so you don’t lose your account.
Give yourself a paycheck
Once you set up your business and personal accounts, it will be easier for you to pay yourself a salary and put the rest into your business (or the “master account,” which we’ll talk about next). You can base your salary on:
- Percentage of Your Profit: This is best for new freelancers and people starting their own business.
- Set salary: Once you get a job and earn a decent income, you can set a specific salary for yourself.
Especially at first, you’ll want to leave as much as possible in your business accounts (especially if you’ve never paid taxes as a freelancer, which can be tricky and may end up owing a decent amount of money), and only take what what you need for life, save a little and invest. The more you earn, the higher the salary.
Once you have a paycheck, it should cover your fixed costs: housing, food, insurance (including prescription costs), utilities, internet / phone, and transportation. Set aside another amount (about 20 percent ) to pay taxes.
Create a “Trunk” account
This is obviously a tip for just about everyone, but it’s doubly important for freelancers to create a cash cushion that you can use when things slow down. You don’t know when / if customers will pay on time, whether you will lose them or they will reduce the amount of work required. You will also need a cushion for quarterly taxes or any other sudden emergencies.
Upwork is referred to in this article as a “backbone” fund, but it is essentially an emergency fund. Whatever you call it, it’s all about being able to choose – yes, when you lose your job, but also so that you don’t have to take on a job that you find stressful or impossible.
As noted above, you will want to keep your “main” fund separate from your personal accounts, a bit like a savings approach . This way, you will be less tempted to spend money on whims.
This can seem overwhelming – this is a lot of money to save. But as other freelancers have written , you need a big cash cushion when you go alone, especially in your first year when you get it right.
Save for retirement
Freelancers aren’t automatically included in a company’s 401 (k) plan, which means you need a little more effort to save for retirement when you’re alone, and it’s easy to delay. But it’s equally important to start saving money. You should aim to save at least 10 percent (or more), but if you can’t afford it, save what you can. It’s important to develop a habit, even if it’s $ 50 a month.
This could mean an IRA or a Roth IRA through which you must invest in low-cost ETFs, index funds, or fixed date funds. It could also be through employee simplified retirement plans or SEPs, which we will get more information about later this week.
Track everything throughout the year
If you’re a freelance writer or contract coder, you need to view your work as a small business, which means you need to keep track of everything. For tax purposes, you will want to keep all 1099 (if you are audited, the IRS asks for three-year forms, although they may come back further if they suspect you are underpaid or commit fraud), and if you have an IRA and need to keep a record of all your contributions.
Your records should include the date you made your contributions, the amount invested, the date you opened the IRA, and the source of any money you transfer to the account, in accordance with Beth Koblinger’s Guide to Getting a Financial Life .
Also, you will want to keep business-related credit card receipts (easy to do if you open accounts for a specific business), union dues, etc. If you want to deduct your laptop or smartphone, keep track of when you use them. for work purposes.
Last but not least, keep track of your cash flow. Launch a spreadsheet or Google Doc, or use an app to track invoices, billable hours, who paid what and when, where all your money goes, and more. Remember, you will never regret tracking too many things, but you will be sorry if you don’t know what is happening with your money.
Hire an accountant
Hiring a certified accountant, especially during the tax period, is likely to be worth the money. They will make sure everything is aligned and that you are not missing out on your taxes, which tend to be more difficult for freelancers than for full-time employees.
But don’t just talk to them about when to pay taxes. “Talk to your CPA early in the year to know what to look for when managing your taxes,” suggests Upwork .
An accountant can also help you come up with a realistic retirement plan and detailed strategies to achieve your other goals, although this will likely require a second visit .
Automate your financial plan
Unless you’re a freelance accountant, you probably don’t want to spend a lot of time on your finances. This is why automation is so useful.
Consider automating the following:
- X percent of your personal income in your savings account
- X percent of your personal income to your Main Fund
- X percent of your personal (or business) income from an IRA, Roth IRA, or SEP IRA
- X percent of your business income towards tax assessment
- Payment of bills, including rent, loans, insurance, Internet / cable TV, mobile phone, etc.
- Expenses, Income, Bills, etc. (Nerdwallet offers several apps / softwares that do this, including QuickBooks , FreshBooks, and Wave )
- Monthly budget app review reminders
Also, as suggested here , let your bank (or an app like Digit) automatically send you updates on your account balances daily (or whatever works best for you) so you know where you are, and don’t face unexpected overdraft fees. …
Raise your stakes
Freelancing is tricky, but it also gives you the ability to raise your stakes if and when you see fit. It’s not that this decision should be taken lightly – you should be conscious about your value and which customers you should charge more from.
According to the Freelancers Union , just as a full-time worker demands a raise, you can raise rates when you are doing more value to your clients:
- You have gained more experience, which you apply in your clients’ projects.
- You learned new skills
- You are offering new free services
- You offer the same service with a higher quality
- You pay more attention to your customers
Most importantly, know your worth and don’t underestimate yourself. And go get your money.