Managing finances as a freelancer is challenging: feast or famine projects, covering self-employment taxes and dealing with the ups and downs of variable income. Reaching six figures is often seen as the holy grail of hitting your professional stride and ultimate financial stability. The first time I achieved that income level as a freelancer, it began to feel like anything was possible. But, understanding my goals, how hard I was willing to work and what it would take year after year to keep that income were all factors that I seriously needed to consider.
Bloomberg reports that just 24.7 percent of households make six figures — and here you are, making it as an individual and running your own business to boot. However, just because you’re making six figures doesn’t mean it’s time to spend with reckless abandon. Here’s how to keep this upswing in perspective and use it to fuel future success.
Celebration and Perspective
Achieving a six-figure income is a big deal — and you should celebrate. On the table: Fancy dinners, happy dancing in your office and telling your parents that freelancing is a legitimate job. Yet, it’s important to keep it in perspective: What do you need to know about organizing and allocating your finances when your income is on the upswing?
The Tax Question
As your income climbs, there’s a chance your tax bracket will, too. If you’re making more than $100,000 as a freelancer, paying self-employment tax, have a high-earning spouse and live in a state with income tax, you might be facing a big tax bill. Do a tax check-up and find out what your effective rate is. It could be anywhere from 35 to almost 50 percent, depending on your deductions. Make a plan for how you’ll put that money aside as the year goes, so you’re not hit with a bill you’re unprepared for.
Create a Savings Plan
One of the realities of the freelance life is that work levels can fluctuate. I’ve had months that were so busy I pulled 12-hour days six or seven days per week, for weeks on end. Then, the next month, workflow would slow down and I’d have a more normal schedule. Freelancers often describe variable workflows — and income — as feast or famine. Create a savings plan as your income rises. Set aside money for personal goals, like vacations or a new car. But, it’s also a smart idea to create an emergency savings account that holds three to six months of expenses: a “slush fund” for your business. If opportunities decline, you can use that cash buffer while you rebuild.
Continue to Build on Your Success
A while ago, I met a writer at a conference who told me about the mistakes he made once he hit six figures. The previous year, he had hit a six-figure income, and his performance began to slide. Looking back, he realized he’d stopped marketing, missed deadlines and generally felt that his newfound security gave him an edge where he didn’t need to be as professional or focused. Here it was, a new year, and several of his clients had moved on — and his pipeline was empty. He had the talent and the drive to go on and rebuild, but his story is an important caution. When you hit six figures, keep that momentum going:
- Continue to market: Even if you can’t take on new projects now, focus on building your platform, connecting with new prospective clients and getting your name out there. A great reputation is the cornerstone of a six-figure income, year after year.
- Be the consummate professional: Hitting six figures usually means you’re working hard, hitting your deadlines, building great relationships with clients and delivering excellent quality work. Continue to do that — and make sure you show appreciation to the people funneling work your way.
- Don’t let it go to your head: In reality, reaching six figures may put you in a position to be more selective about your clients. If you choose to move on for higher pay, easier clients or more rewarding work, take the time to thank the people who have gotten you to this point. Give adequate notice and exit graciously. You never know, these relationships could help you in the future.
Invest in Future Growth
When your business is thriving, it might be time to consider reinvesting. Is now the right time to replace aging computers, sign up for a training course or fund a creative retreat to take your work to the next level? By investing back into your business, you’ll ensure you have the tools, knowledge and insights to continue growing — which can help increase your income and diversify your project opportunities.
Hitting six figures with your income is a serious milestone. Use this as an opportunity to be a successful, responsible business owner, and put plans in place to make the most of that income. From strategy development, to managing finances, to reinvesting in your own growth, reaching a higher income can open many possibilities towards creating a sustainable, long-term business.