One of the great things about being a freelancer is the ability to manage your time the way that fits your lifestyle outside the daily 9-5 routine.
One of the not-so-great things is the lack of financial security — what happens when one project winds down and you haven’t booked your next project.
Here are some tips to organize your finances to help you weather periods of uncertainty.
1. Do Your Taxes
“If you’re earning more than $600 per year as a freelancer, you have to report all of your income to the IRS,” explains Sabah Karimi, author of Financial Fitness for Freelancers: How to Survive and Thrive on an Irregular Income. “Avoid paying an underpayment penalty by making quarterly tax payments on time.”
Most tax preparation software programs can estimate your quarterly payments based on previous yearly income. You can also download estimated tax paperwork directly from the IRS.
The reason why you want to do your taxes is twofold. First, it is the law. Going to jail has other costs than avoiding your share of taxes. Second, reporting your income will be applied to your social security benefits when you’re old.
2. Fund a “Rainy Day” Reserve
Things might be going great in getting work, but don’t assume the good times will always continue to roll. Like with any business, there are down cycles. To prepare for them, always invest a portion of your earnings to cover expenses when you’re between assignments. Remember the Aesop fable about the “Ant and the Grasshopper“: Save for the days of necessity.
3. Don’t Overload Your Credit Cards
It’s tempting to rely on your credit card for cash when you need it. We’ve all heard stories about entrepreneurs who’ve maxed out their credit cards right before they made it big. Problem is, there are plenty more stories of people who maxed out their credit cards, didn’t hit it big, and now don’t have any way to “unmax” those cards. General rule of thumb: If your checking accountcan’t cover the monthly expenses you’re charging to your credit card, you need to cut back on your expenses.
4. Keep Small, Regular Expenses in Check
Every coffee shop with free Wi-Fi is chock full of freelancers. Most feel a little guilty about freeloading — especially if it’s an independently owned shop! — and figure they should buy something. All that coffee and pastry sure is tempting, and adds up. As MoneyWatch writer Farnoosh Torabi points out, “I figure each visit to the ‘bux costs me north of $7 or $8… A couple days of this per week and the expense can certainly add up.”
Consider that you can get a reasonably fast DSL at home for about $50 a month, probably less than what you’d pay making a daily visit to the coffee shop. If you can’t work from home for some reason, most public libraries may not have a barista, but do offer free Wi-Fi.
5. Set a Budget and Stick to It
“Because your income is irregular, you will need to determine an approximate monthly income to use for your budget,” notes Dona Collins, freelance writer and IT specialist. ”Total up your previous year’s income and divide that amount by twelve, then use that figure as a measure of what you can and cannot afford.”
You may find it helpful, and motivating, to figure out the costs of your daily overhead. Add up all your average living expenses and divide by 30 days for the month. That’s your daily nut.
6. Get Organized
You are your business, so you need to organize yourself like a business. “The most important part of your organization dictum is making sure you keep track of your receipts… [T]his will help you if your get audited, but it will also help you keep track of things you can write off of your taxes,” advises Genevieve Coates, blogger at She Writes.
Organization affects everything. Create a workable system that gives you easy access to client files, invoices, bills, and other important information. Get organized and save yourself time… and time is money.
7. Embrace a Frugal Lifestyle
When the jobs are rolling in and revenues are high, it’s tempting to enjoy the fruits of your labor. It would be nice to think this will always be the case. Problem is, it typically isn’t. One way to ride out the slow periods and still pay your bills, says Yuwanda Black, blogger at Inkwell Editorial, is to “[...] learn how to live frugally; embrace it as a lifestyle (not just something your do when you first start out or when things are slow). If you do this, you’ll be able to set aside enough to always cover your bills as a freelancer.”
8. Maintain Separate Personal and Business Bank Accounts
For tax reasons, you’ll need to keep separate accounts. Deposit client checks into your business account and then pay yourself into your personal account. This is important because mixing money can get you into trouble.
Lisa Drake, CPA, advises:
“[E]stablish a separate bank account for your business. Dedicating a credit card to only business transactions is a great idea as well. There’s nothing worse than having to separate out transactions at the end of the year to figure out whether you’ve made money or not. It’s cleaner this way (trust me).”
9. Save for Retirement
Unless you want to work forever (and even if you do), set up a retirement account and make regular contributions. Kirk Shinkle, Money writer for U.S. News & World Report, says:
“There are [...] plenty of options for go-it-alone types who are looking to keep their savings on track, including a variety of individual retirement accounts, 401(k) plans, and even a version of that corporate stalwart — the pension. With a little research, there’s no reason the freelance life can’t conclude with a well-earned retirement.”
Women freelancers are especially advised to save for retirement. That is because women statistically live longer than men, are paid less, and have greater expenses raising children. In fact, women are twice as likely to live in poverty during retirement than men, reports Amy Tennery at TIME. Small amounts saved and invested today add up.
10. Don’t Be Proud, Get a Job
If freelance work is getting sparse, consider taking on a regular job and freelance on the side until more work comes your way. If that seems counterproductive to what you set out to do as a freelancer, consider that it’s also counterproductive to have a negative balance in your checkbook and risk losing your housing. You can always quit the day job once the big freelance projects come in. There is no shame in working.
Share your own finance tips for freelancers in the comments section below.