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As a freelancer, your day starts with leaving the house, giving your roommates a heads-up that it’s time to focus, and figuring out when to finally step away from your work. Now’s the time to tackle your freelance finances.
Order your lunch, open Slack, and maybe plan that afternoon shower. It’s Work From Home Week! Whether you’re working from the couch or a local café, Mytour is here to guide you in maintaining your productivity, balance, and sanity, whether it’s for a day or your whole career.
The fundamentals of budgeting apply to both full-time employees and freelancers: Understand where your money goes, reduce unnecessary costs, live within your means, set aside at least 10% of your income for savings, and start investing early.
However, freelancing presents unique challenges that you’ll face along the way. Here’s what to keep in mind as you navigate your journey.
Understand Your Clients' Payment Habits
Get familiar with your clients' payment schedules so you're not caught off guard by overdue bills when someone doesn't pay as promptly as expected.
“You can’t control your customers but you will likely find many of them behave similarly in the future to the way they’ve behaved in the past,” writes Due.com, an online payment platform. “This means you’ll be able to take on new expenses or juggle bills based on when you know additional funds will be coming in.”
Track when clients pay and how often they miss payments or pay late. If it becomes a regular issue, it might be time to consider dropping them. For different methods of charging clients, check out this article.
Separate Your Personal and Business Finances
One of the most crucial steps as a freelancer is keeping your personal and business finances separate. Open a dedicated business bank account (ideally a high-yield one) and a business credit card. It’s also a good idea to track your business expenses in a different app from your personal ones.
“Separating your business accounts from your personal accounts makes it easier to clearly track all income and expenses related to your business without any added guesswork,” writes Upwork. “Using a business bank account and credit card can cut down on the hassle of trying to parse out which expense goes with what when you’re balancing your books.”
Keep a separate record of all your financial accounts, including the name and login URL, so you never lose track of them.
Set Yourself a Salary
Once you’ve established separate accounts for your business and personal finances, you can more easily pay yourself a salary while reinvesting the rest into your business (or into a “backbone account,” which we’ll discuss next). Your salary could be based on:
A portion of your profits: This is especially effective for new freelancers or those still growing their business.
A fixed salary: Once you’ve established a steady income, you can assign yourself a specific salary amount.
In the beginning, it’s wise to keep as much money as possible in your business accounts (particularly if you’re new to freelancing and taxes, which can be tricky and may result in owing a significant amount). Take only what’s necessary for living, saving a little, and investing. As your income grows, you can adjust your salary accordingly.
Once you’ve determined your salary, ensure it covers all your essential expenses: rent, food, insurance (including prescriptions), utilities, internet/phone, and transportation. Allocate an additional amount (around 20 percent) for taxes.
Establish a “Backbone” Account
This is a crucial tip for nearly everyone, but for freelancers, it’s even more important to create a financial cushion for slow periods. You can’t always predict when clients will pay, if you’ll lose them, or if they’ll reduce their workload. It’s also essential for covering quarterly taxes or dealing with any unexpected emergencies that arise.
This article from Upwork calls it a “backbone” fund, but at its core, it’s an emergency fund. No matter the name, it’s all about creating options—whether you lose work or simply want the freedom to turn down stressful or unfulfilling tasks.
As mentioned earlier, it’s wise to keep your “backbone” fund separate from your personal finances, much like using a bucket approach to saving. This reduces the temptation to dip into the fund on impulse.
This may feel like a daunting task—it’s a significant amount of money to set aside. But as other freelancers have shared, having a solid cash cushion is crucial when you’re working for yourself, especially in the first year when things are still settling into place.
Start Saving for Retirement
Freelancers aren’t automatically included in company 401(k) plans, so saving for retirement requires more effort. It’s easy to put off, but it’s just as important to start saving now. Aim for at least 10 percent (or more), but if that’s not feasible, save whatever you can. The key is to develop the habit, even if it’s just $50 a month.
This could involve investing in an IRA or Roth IRA, focusing on low-cost exchange-traded funds, index funds, or target date funds. Alternatively, you might consider Simplified Employee Pension plans, or SEP IRAs, which we’ll delve into more later this week.
Keep Track of Everything Throughout the Year
Whether you’re a freelance writer or a contract developer, treat your work like a small business, which means tracking everything. For tax purposes, be sure to keep all 1099s (the IRS recommends keeping three years' worth in case of an audit, though they can go back further if they suspect underpayment or fraud), and if you have an IRA, you’ll need to document all contributions.
Your records should include the date of your contributions, the amounts invested, the date you opened your IRA, and the source of any money you rolled into the account, as noted in Beth Koblinger’s How to Get a Financial Life.
Additionally, save receipts for business-related credit card transactions (this is easier if you open a dedicated business account), union dues, and other expenses. If you plan to deduct the cost of your laptop or smartphone, keep track of when each was used for work purposes.
Equally important, keep an eye on your cash flow. Set up a spreadsheet, a Google Doc, or use an app to monitor invoices, billable hours, payments, and where all your money is going. Remember: You’ll never regret tracking too many details, but you will regret not knowing where your money is.
Consider Hiring an Accountant
Bringing a certified public accountant on board, especially around tax season, can be worth the investment. They’ll ensure everything is in order and that you're not overlooking anything when it comes to taxes, which tend to be more complex for freelancers than for full-time employees.
But don’t just consult them at tax time. “Speak with your CPA early in the year to understand what to watch for as you manage your taxes,” suggests Upwork.
An accountant can also help you craft a practical retirement plan and offer guidance on how to achieve your other financial goals, though this will probably require a second meeting.
Automate Your Financial Strategy
Unless you’re a freelance accountant, you probably don’t want to spend too much of your time on financial management. That’s where automation can be a game-changer.
Think about automating the following:
A percentage of your personal income into your savings account
A percentage of your personal income into your Backbone fund
A percentage of your personal (or business) income into an IRA, Roth IRA, or SEP IRA
A percentage of your business income into a tax estimate account
Bill payments like rent, loans, insurance, internet/cable, cell phone, etc.
Expenses, income, invoices, etc. (Nerdwallet has recommendations for apps/software that help with this, including QuickBooks, FreshBooks, and Wave)
Reminders to check your budgeting apps regularly
Additionally, as recommended here, set up your bank (or an app like Digit) to send you daily updates on your account balances (or as often as you prefer) so you always know where you stand and avoid unexpected overdraft fees.
Increase Your Rates
Freelancing can be challenging, but it also gives you the opportunity to adjust your rates when you feel the time is right. However, it’s a decision that should be carefully considered—you need to be clear about your value and the clients who warrant higher fees.
As stated by the Freelancers Union, much like a full-time employee requesting a raise, you can increase your rates when the value you provide to your clients has grown:
You’ve gained more experience that you’re applying to your clients’ projects
You’ve acquired new skills
You’re introducing new, complementary services
You’re delivering the same services with enhanced quality
You’re dedicating more attention to your clients
Above all, recognize your value and avoid undervaluing yourself. Now go out there and earn what you deserve.
