There are a lot of great things about freelance life. You’re your own boss, you have a flexible schedule, and you don’t have to sit in hours of meetings that could have been covered off in a quick email.
But one of the primary differences is that you no longer have a set income arriving each month. It can be hard to budget and figure out if you can really afford that trip to Italy – especially now that you no longer have paid time off – when you don’t know how much money you’ll make that month. So we’ve put together some tips to help you manage your money so you can spend more time focusing on building your business (and planning for that vacation).
You might not know the exact amount you’ll make each month like you did when you were getting a regular paycheck, but if you track your income, you can at least figure out an average. Streamline the process by creating a separate bank account and credit card for your business-related income and expenses. Instead of having your income go into your personal account or joint account, pay yourself by transferring money from your business bank account to your personal one. This will also come in handy when it’s time to pay your taxes. You’ll be happy you stayed organized and don’t have to scramble to figure out exactly what you made and spent throughout the year.
Estimate your taxes.
Speaking of taxes, the process of paying them is different when you’re a freelancer. When you have one employer, your taxes are withheld from each paycheck so you don’t have to do the math or really think about it until April. When you’re a freelancer, you have to estimate your annual and quarterly taxes. If you use a service like QuickBooks Self-Employed to track your income and expenses, it can help you determine your business deductions and estimate your annual and quarterly taxes. You can also hire an accountantor tax preparer to help you with your taxes, which is a good idea because there are lot of rules and regulations to get your head around.
In order to create a budget, you also have to know how much you’re spending on what would traditionally be part of a company’s employee benefits package like health insurance, life insurance, and a 401(k). Insurance is generally more expensive when you’re freelancing, but if you have a medical emergency or even a checkup, you’ll be glad you’re covered and don’t have to pay often astronomical out-of-pocket costs ($600 for a checkup or standard sick visit? Hard pass!). And even though no one will be matching your contributions to it, it’s a good idea to establish an individual 401(k) to save money for retirement. Just imagine how you’ll feel when you’re retired and relaxing on the beach with a piña colada!
Now that you have an estimate of how much money you’re actually putting in your bank account per year, you can set up a budget that works for you. A good rule of thumb is the 50/20/30 guideline. Spend 50% of your money on fixed bills and expenses such as rent, mortgage payments, utilities, and anything you commit to paying monthly such as office space and a gym membership. Use 20% toward payments or contributions that help you gain financial security like paying your credit cards, saving for retirement, building an emergency fund, and saving up for goals like buying a car or home. Budget 30% of your monthly income for everything else you want to do that month, like shopping and going out to eat.
Okay, okay, this “tip” seems obvious, but it’s something to keep in mind. When you’re a freelancer, you don’t have a set income and you have to find keep finding new clients, so it’s important to make sure you’re getting paid. Send invoices on-time and keep track of whether or not they’ve been paid. Always be on the hunt for new clients and figure out your rates – but also know that they aren’t set in stone. You can re-evaluate after scoring wins for clients, getting industry accolades, or even realizing that some clients pay exponentially more than others. (Oh, and time is money, so it can be valuable to see which tasks and to-dos you can delegate to Fiverr freelancers.)
What are the top personal finance tips you’ve learned from being your own boss? Let us know in the comments!
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