Financial Planning for Freelancers
As a freelancer, you enjoy all of the freedoms that come with being your own boss. But one aspect of working for yourself always turns out to be trickier than you expected: finances. Not only are you responsible for HR matters like setting aside money for taxes, but you also have to deal with the struggles of a much less predictable income stream than the typical 9-to-5 employee. So before you pull your hair out or have a finance induced anxiety attack, take a deep breath and let our guide to financial planning for freelancers keep you on track.
Separate Your Bank Accounts
When you first started freelancing, you may have never dreamed that it would have taken off to the point that you actually need to treat it like a real business. In fact, for a lot of us, once the clients and orders really start rolling in, its hard enough to keep our heads above water. Slowing down to do something as simple as opening a business bank account never crosses our mind.
But really, this is the first step to successful financial planning for freelancers. For the simplest solution, make sure that you have at least two separate checking accounts.
One bank account is for your business. This is the account that you'll use to collect payments from your clients. It's also the account that you should use for business expenses, such as buying a new work laptop or outsourcing business related tasks (like hiring a virtual assistant).
The other account is for your personal finances. This is where you will pay yourself from the business account. Always make sure that you are using your personal account for personal expenses. You don't want, for example, to use your business funds to buy yourself tickets to a baseball game.
Schedule Your Payday
It might seem silly, but now that you are your own boss, you can't forget to pay yourself. There are two important aspects to consider when working out your payday plans:
Stick to a schedule. Whether you pay yourself every Friday, every other week, or once a month–the important thing is to create a predictable schedule for yourself just like someone who works a regular job would have. If your bank allows, you can set up automatic transfers from your business account into your personal account to force yourself to stay on track.
Keep your paycheck consistent. One of the biggest struggles when it comes to financial planning for freelancers is finding economic security. Once you have a clear idea of what your average quarterly or annual profits are, determine a paycheck that you can easily predict will be payable on a consistent basis. This will make budgeting so much easier and help you avoid the stress of financial insecurity.
Don't Neglect Your Savings
Everyone needs to save. That's finance 101.
But when it comes to financial planning for freelancers, savings are especially important. Because your revenue streams aren't always as secure as typical employees, you need to put away for a rainy day. You might get ill and be unable to work, or maybe an important source of new clients suddenly becomes unavailable.
For starters, you should work on building an emergency fund that equals at least 4 months of your income. Then, even if worse comes to worse, you'll have money to get you by until things get better.
If putting aside that much money seems daunting to you, consider giving the 50/30/20 method a shot. In this common recommendation from financial planners, you allocate your money as follows:
- 50% of your income goes to your needs, such as mortgage, insurance, utilities, groceries, and gas.
- 30% goes to wants like eating out, hobbies, and shopping.
- 20% goes directly into your savings.
Plan for Tax Season
Without an employer, no one is going to withhold those earnings for you. Come tax season the last thing that you want is Uncle Sam to come knocking for a bill that you can't afford to pay.
The safest way to plan for taxes is to set aside 25% of your revenue into a separate account. This will help you account for both your income tax and the self-employment tax (yes, that's a thing).
Odds are good that you will overpay and end up getting a refund, but it's better to be safe than sorry. If you really want your best shot at paying the most exact estimated tax, you're probably going to want to hire a professional tax accountant.
Another important aspect of financial planning for freelancers when it comes to taxes is to track your income and expenses throughout the year. The money you invest back into your business, such as in advertising or equipment, can likely be written off as a business expense. This will reduce your total taxable income, so you'll owe the government less.
Charge What You're Worth (and the Market Can Handle)
When they are just beginning, many freelancers make the mistake of competing on price. They charge the lowest amount possible just to acquire clients and make sales. This might be a viable strategy to earn some reviews and build your client base, but it isn't sustainable in the long run.
One of the most important aspects of financial planning for freelancers is to know how to charge what you are worth. You might fear that raising your prices is going to lose you clients. But really, losing clients is only a problem if it loses you profit.
Here's an example…
Imagine you start out charging $5 for a service that takes you about 30 minutes to complete. You're basically working for $10/hour. After working your butt off for months, you've landed 10 clients who love your work and come back to you month after month.
Now you decide to raise your prices to a number that represents the value you actually bring to the table: $25 per gig. Your wage has just jumped to $50/hour. If this price bump costs you half of your clients, you'll still be making 250% more than you were previously. Even if it costs you all but 2 of your 10 clients, you will still have broken even. And, you'll be making the same money for far less work.
Obviously, there is a tipping point. You can't charge more than the market will bear and still expect to get regular clients. But you may be very surprised at how much people are willing to pay for consistent high quality service.
Never Stop Prospecting
Even when you've got a loyal following of consistent freelancing clients, you always want to leave room for growth. If you are serious about financial planning for freelancers, never stop prospecting for new work so that you'll always have an income stream.
Offering your services on a platform like Legiit is a surefire way to get yourself out in front of potential clients. Buyers are always on the hunt for quality service providers. And if you can make a name for yourself in the community, you'll have a steady source of new work waiting for you whenever you need it.