How I Manage My Income As a Freelancer

It is quite difficult to manage your money while receiving a stable, regular income. When your income changes from month to month as a freelancer or self-employed person, it becomes even more difficult to keep order in your finances. In my experience, you need a system. Install it once and it will protect you forever. Here is the system I am using.

What you need to know before becoming a freelancer

I’ve been a freelancer for a few years now and my clients were mostly regulars, but there were months of “holiday or hunger” when I first started. Even now, my income can range from several thousand dollars a month, especially if I took a vacation to go on vacation, or something else distracts me from work.

In hindsight, I made a few mistakes when I started working as a freelancer. I had no idea how freelancing was different from a regular full-time job. Here are some financial problems that I had to solve in advance:

• Save twice as much in case of an emergency . I’ve always had a contingency fund, but I underestimated how big it should be when I switched to freelancing. As you adjust to your new work situation, something will inevitably arise: business expenses, taxes, health insurance, client loss, and all the other benefits of self-employment. In my first year as a freelancer, I ran out of my emergency fund . It was scary.
• Prepare for taxes and insurance . The main reason I depleted my emergency fund was because I had no idea how much I owed in taxes. I’m used to my employer taking a portion of my salary, so I didn’t pay my estimated taxes , which is what you should be doing. The cost of health insurance also caught me off guard. (I only have $ 200 a month, which is nothing compared to other bonuses.)
• Keep a pillow in case of irregular expenses. When your income is unpredictable, the last thing you want is unpredictable spending. You can get an idea of ​​your irregular expenses by looking at your banking transactions over the past year, but something will always catch you off guard, even if it’s just a business expense like video editing software or a course you want to take. In addition to a larger emergency fund, I had to save a pillow to cover such expenses.

Bottom line: freelancing can bring a lot of financial surprises. Get ready.

Share your business and personal finances

Most experts and seasoned freelancers recommend keeping separate business and personal accounts. For a long time, I just kept everything together, and to be honest, my system worked fine. However, as my freelance business grew, I hired subcontractors to help me manage things like video editing, transcribing documents, keeping my schedule, etc. I also started buying a lot more stuff for my business – software, apps, and so on. like that.

In other words, things got more complicated. Managing your money was no longer as easy as juggling multiple client salaries; Now I had to plan for several other expenses. Moreover, I had to track these tax expenses. Separating my work and personal accounts made it easier to organize it all. Here are all the bank accounts I currently have and what they are used for:

• Business Verification : My main account for customer payments and business expenses.
• Savings for business : not necessary, but it comes with a checking account, so I use it to save taxes.
• Personal control: all my personal expenses, from mortgages and utilities to restaurants and other non-business expenses.
• Personal savings: An emergency fund that I never touch (well, unless it’s an emergency).

There seems to be a lot to keep track of, but once you get the system set up, it’s easy. And when it comes time to write off my business expenses , I can easily find them by looking at my company’s transactions.

Note: Some bank accounts are exclusively for businesses and may require you to be a Database Administrator or LLC. They may offer some perks, but other than that, you don’t need a business account for your business expenses. You can use any other account – the idea is to split your expenses.

Calculate your average monthly income

The glue that holds my entire system together is based on one simple idea: pay yourself a salary. Every month on the same day, a portion of my business income is automatically transferred to my personal checking account. It’s like getting paid from a real employer, but that employer is me!

Many tips suggest working the other way around: Calculate your monthly core expenses, and then figure out how much freelance income you need to pay for those expenses. However, this is not very helpful when it comes to budgeting the recurring income that you are already earning .

Instead, I’ve found it helpful to use your average income over a period of time: for example, the last 12 months. My income has been pretty stable over the past year, so this time frame suits me. If you have quite a lot of jumps, you might want to adjust your own mean. In the months when my salary is above average, I have money left in my business account after I paid myself. In the months when my salary is lower, I get out of the remaining money when I pay myself. I also review every few months and adjust my salary in case my income drops.

You can also split your monthly payment into biweekly payments, which is standard for many full-time workers (at least in the US). Personally, I like to keep things simple, so I pay myself one monthly payment.

The first step is to determine your average monthly income. However, before you can calculate exactly how much to pay yourself based on that amount, you must spend the money on a few other expenses that are necessary when you are self-employed.

Pay for basic business expenses and then pay yourself

When you’re self-employed, you don’t have an employer to help you save money for retirement or save money for taxes. Therefore, before calculating your salary, you should also consider these costs.

Personally, this is where my own monthly freelance income goes, as well as the percentage of my average monthly income.

• Health Insurance (3%): I have set up a monthly automatic monthly payment to my insurance company. Payment is received directly from my checking account.
• Taxes (20%) : Every month I also transfer a portion of my income into my tax savings account. I calculate this amount by multiplying my average monthly income by the expected tax head. Here is a tool to calculate your own tax category. Qapital , the budgeting tool we reviewed earlier, is great for this. You can set up a rule to save a percentage of every deposit deposited into your account, allowing you to automatically save on taxes.
• My personal Vanguard IRA (10%) allows automatic transfers and I pay monthly to my Vanguard Individual Retirement Account (IRA) directly from my current business checking account. For my finances to really be organized, I should probably set up this transfer from my personal checking account, which will make things easier during tax time.
• Business Cushion or SEP-IRA (15%): I prefer to have the opportunity in my business account whenever possible. I think of this as a backup fund for my freelance business. Thus, if I want to invest in a tool, product or service to improve my business, I have the money to do so. After taxes are paid quarterly, if there is a surplus in my checking account, I transfer funds to my SEP-IRA .

That leaves about 50% of my average monthly income for a paycheck, and luckily enough to cover my budget. If this were not the case, I would have adjusted my retirement accounts or business pillow. These last two expenses are slightly less important to business, but important to save for retirement.

Of course, actual percentages may differ too, as my income varies. Your own percentages may differ too. If you are just starting out and are earning little, you may not be able to save as much for retirement or hold a pillow like I did. I didn’t do this when I was just starting out (and there are a few months I still don’t). Your own tax rate will differ too. However, I think these are solid categories to strive for, even if you have to adjust the percentages to suit your situation.

Moreover, all these translations are automatic. I arranged transfers through my banks, Vanguard and my insurance company. The only thing I have to do is remember to pay taxes every quarter, and for that I use simple Google Calendar alerts .

Determine your payday (or days)

Whether you pay yourself once or twice a month, you must determine exactly when to receive your “paycheck.”

I define my payday based on when my clients usually pay and when my bills are due . Most of my bills are due at the end of the month (if not, I call them to adjust the due date ). And most of my clients pay before the 20th of every month, so that’s my salary. I set up an automatic transfer knowing that I would have enough time to receive money and pay bills.

Any amount remaining on my personal check after paying the bills, I can spend until the next 20th.

In short, this is my method of earning income as a freelancer. Divide your business and personal accounts, determine the average income, assign yourself a salary, and then automate your other expenses. Sounds simple enough, but it took me a while to figure it out. The details of your own system may vary, but you can use this as a guide to customize what works for you.

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