Running a freelance business is different in a lot of ways from running any other type of business. It tends to include more variables and less consistency from month to month, or even from week to week. It can be difficult to manage money as a freelancer in a way that gives you total peace of mind about the future. However, some strategies can help put you on a more secure financial footing if you're smart about the money you make.
Figure out a budget
The first thing to do, just like with any other money management situation, is to figure out a budget to work with. This should be flexible to take both fruitful periods and difficult times into consideration. The idea is to live and work within your means while leaving wiggle room not only for dry spells, but for enjoying the rewards of your labor and living a full life.
Add up all expenses and weigh them against your average monthly income. Look for costs that can be reduced and that you're willing to cut out. Just be sure to leave yourself with some padding for unexpected expenses.
Give yourself a salary
Once you've figured out a budget, figure out a salary to pay yourself, and do so regularly. This can be adjusted in a pinch, but regularity will help you stick to your budget. If you're paying yourself considerably more than what your budget requires, put the extra money in a business savings account. Having a reserve may keep you from taking more money out of the business during lean times.
Include an emergency fund
Include an emergency fund in your bank account. This money can reside in that same savings account or in a different one set up specifically for emergencies. This money, however, is not just to help you pay for something extra one week. This is for when hard times do hit you, which is always a possibility in the freelance world.
Keep personal and business finances separate
No matter how much you decide to pay yourself and how much of that money goes into savings, you should always keep your personal and business finances separate. Not doing so can lead to a shortage on either side. Blending personal and business money can also make it more difficult to keep track of business accounting, especially where taxes are concerned.
Make quarterly tax payments
A mistake many freelancers make is waiting until spring to pay taxes. By doing so, you're likely to incur tax bills from each level of government. Instead, make estimated quarterly payments to reduce what would otherwise be a major financial burden. If you're already made this mistake, however, that doesn't mean you have no hope. You can work out a payment plan with the IRS to pay what you owe, though if this isn't a short-term plan, interest can get costly.
Use an accountant or accounting software
Money management doesn't come easily to everyone, and ultimately, you have enough to worry about simply fulfilling the duties you have to your clients. If you can't find the time or the will to properly manage your money, you can hire the services of an accountant to take care of your needs. If this doesn't seem feasible to you, you can turn to accounting software, which will still require some time and effort on your part, but can make things a lot easier. There are plenty of options on the market and even some that are free.
Don't forget retirement planning
As you work out your budget, don't forget to keep your retirement in mind. Look into your options, which may include IRA, SEP IRA, SIMPLE IRA, or even a self-employed 401(k), in addition to a simple savings account.
Don't put all your eggs in one basket
Part of being a freelancer is taking on projects from a variety of clients. Having a substantial number of clients gives you a better chance of sustaining your career in the long-term. If you rely on only one or two clients – even if the work is sustaining you in the present – you risk falling on hard times if even just one of them stops giving you the workload you're used to. If you can spread your services among a broader range of clients while keeping your workload reasonable, your job security may increase. Doing so may also provide opportunities for increased work from one or more clients if work from others dries up.
The freelance life can be stressful if you're not managing your money correctly, but keeping organized and planning accordingly may help you turn it into the ideal lifestyle you always hoped it would be.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A. Member FDIC