Any good indy mentor will tell you that your newfound independence also comes with an ever-changing workload and a fluctuating income stream. That’s why it’s critical to learn how to manage your hard-earned income. Want some financial advice from experienced soloists who have been in your shoes? We’ve rounded up some essential finance tips for freelancers.
1. Give Every Dollar a Job
As a freelancer, you can experience various feast or famine cycles. That’s why author Emily Guy Birken suggests having a system in which you designate exactly where your hard-earned money is going.
“The best thing I did when I started was set up a system for all of my income,” she says. “I set aside 20 percent for retirement, 35 percent for taxes and the rest was ‘free-to-spend’ income. Always sticking to this breakdown — even if I was receiving a check for just $50 — means I’ve never been caught flat-footed when quarterly taxes roll around, and I’m always able to set money aside for retirement.”
Start thinking about your own budget and how you can distribute your income appropriately. “Getting into this habit early as a freelancer helps develop the discipline to maintain this system,” stresses Emily.
2. Track Your Business Expenses
As you’re launching your freelance career, you may be tempted to invest in a variety of tools, resources and equipment that can help you take your business to the next level. But don’t get caught in a trap: Keep a mindful eye on your costs and investments — especially in the early stages.
“Be wary of spending too much on your business,” says freelance writer Zina Kumok. “It’s easy to get roped into buying courses, books and conference passes without seeing a ROI on your money. I spent so much money on conferences that led to no new clients, and I had to cut back. Sometimes, spending money on your business isn’t a good idea.”
3. Keep Your Pricing Model Updated
When deciding how much to charge your clients, you need to keep in mind that, as a freelancer, you’re in charge of covering your own tax payments, retirement savings and business-related expenses. Make sure that your initial payment structure is fit to meet your financial needs. And don’t forget to reassess your pricing model on a regular basis. As you gain more experience and recognition in your field, your services will be worth even more to existing clients and new prospects.
“Based on the advice of other freelancers, I started asking for more money because they seemed confident I’d get it (even if I didn’t feel confident),” says freelance writer Lindsay VanSomeren. “Surprisingly, most people are totally fine with it. Asking for more money is allowing me to double what I’ll earn this year over last year.”
4. Find New Ways to Boost Your Earnings
Many freelancers focus on one service or niche. While it can be beneficial to develop an expertise in a particular area, it’s important to diversify your offerings a little, too.
“To keep a more stable stream of income, I’ve always found it really helpful to offer a range of services within one area,” says virtual assistant and writer Joseph Hogue. “You can book clients faster on smaller projects or rote tasks and then upsell them into bigger projects after developing a relationship. It’s also a great way to grow your monthly income over time as you move more customers into your higher value services.”
The key is to think strategically about how you can boost your earning potential. By doing so, you can keep your business agile and healthy. “Always look for ways to make more money,” stresses Martin Dasko, blogger at Studenomics. “You can charge your current clients more for a better service, or you can find higher end clients.”
5. Have a Robust Emergency Fund
Some of the most valuable tips for freelancers involve preparing for slow seasons — when you may experience a sudden dip in assignments. Of course, these cycles are inevitable, so you shouldn’t panic. But what you can do is create a separate emergency fund to help you out financially if and when you hit a lull.
While many experts recommend saving three to six months’ worth of expenses, freelance writer Eric Rosenberg argues that indys need to save even more. “Freelancers need a double-sized emergency fund compared to those with a traditional day job,” he says. “You should have at least six to 12 months of savings just in case you go through a slow patch, or something changes in the industry. That’s the price of the freedom of freelancing.”
As a best practice, you should strive to set aside a portion of your income every month — with the exact amount being somewhat dependent on your current project load. “When freelance gigs are plenty, that’s when you [should] beef up your fund,” suggests Jason Vitug, an entrepreneur and author.
6. Save for Taxes
Take it from me: You don’t want to mess up your self-employment taxes. If you’re just starting out as a freelancer, you may not realize that you actually need to set aside money for taxes and pay them quarterly. To avoid any trouble down the road, Lance Cothern, freelance writer and blogger at Money Manifesto, suggests that you “set aside a percentage of each payment you receive for taxes in a separate savings account. This way, when it comes time to make your estimated tax payments, the money will always be available.”
The Bottom Line
Freelancing is filled with perks, like the freedom to choose your own projects and clients, and the ability to work when and where you want. But it can also be tough to grasp the new financial aspects of your career. By following the six money tips outlined above, you can keep your financial life in order — allowing you to continue doing the work you love.