A freelancer’s life is certainly rewarding with being your own boss, flexible working hours and freedom to choose your work. But being a freelancer comes with its own set of challenges. As a freelancer, you are solely responsible for bringing in work and managing your time and resources, besides having to deal with unpredictable income. Freelancers also miss out on all the employee benefits and have to individually look after their financial hurdles like taxes, unforeseen expenses, and late-paying clients to name a few.
Do not let this hurdle of unsteady cashflow come into the way of living your dream of working as a freelancer. With smart planning, the perks of freelancing life can be extremely rewarding. If as a freelancer you are struggling to manage your finances, it’s time to take a sigh of relief. Empower yourself with these handy techniques to manage finances and take charge of your hard-earned money.
1. Track Your Income
The first step towards managing your finances as a freelancer begins with keeping a track of your income.
How much did you earn this month? Was the earning any better than the previous year?
Gaining an insight into these parameters will put you in a better position to prepare for the crests and troughs in your career graph.
Most of the time, freelancers are unable to keep track of their earnings and this ambiguity makes the resources seem unmanageable as well as unpredictable. To bail yourself out of this situation, maintain a spreadsheet of your freelancing income and use the data to prepare yourself in advance for those busy and slow times of the year. The following vision will bring financial stability in your fluctuating freelancing career.
2. Keep A Check On Your Expenses
Monitoring where you spend your money is equally important. Expenses here does not imply the fixed ones (rent, taxes, insurance) you cannot do without, but the flexible expenses that can be controlled, if needed. Keep a track of your past monthly expenses and look for things you can easily cut down if required. You will also be surprised to know how much you can save on these on-spur shopping extravaganzas. Compare the average expenses with your average income and set out the budget appropriately. A little self-discipline will help you make great savings that can later be used to fulfil your dreams.
While working from home you can save a lot of money, otherwise spent on coffee shops, lunches, after-work merriment and even in commuting. Freelancers also save a large chunk of money by opting for coworking spaces instead of personal offices. Look out for affordable and creative workspaces in your area, much like myHQ. You get access to all basic office utilities, a comfortable working zone across the city and quick munchies to satiate your hunger pangs. You get all these at nominal rental plans that are even redeemable. This one is definitely worth a try.
3. Always Create A Budget
Intelligent budgeting of your income will help you give financial stability in your erratic freelancing career. Budgeting also helps you to wisely manage your personal (grocery, fees, car etc.) as well as business expenses (software, insurance, taxes etc.). Financial advisors insist on starting with the 50/30/20 method. Under the aforesaid scheme, your after-tax income is then segregated as 50% for necessities, 30% for flexible expenses and 20% goes into savings.
Maintain separate personal and business accounts to help you compartmentalize your finances into tractable chunks. Keeping separate accounts will keep you at bay from anxieties of uncertain earnings and also avoid overspending.
Here’s how you can do it:
Business Account: Use this account to deposit payment from your clients. The figures here give an idea of your fair share of earnings. This is your actual paycheck account, and the money deposited here will be consumed for expenses.
Personal Account: The money in the personal account comes from the business account only, and should be a nominal figure that is generated at regular intervals. Transferring the entire amount from business to personal account will leave you strapped. Hence, be prudent enough in allotting figures for your personal account from the business account.
4. Manage Your Taxes Well
Dealing with taxes is one of the biggest anxieties for freelancers. Filing for your annual tax return turns out to be the most tedious job especially if you do it last minute. Missing out the deadline dates will only incur additional penalties and since you running short of time, the probability of missing out on a large chunk of receipts is quite high.
Therefore in order to prudently manage your finances, always file your tax returns as soon as the previous year filing gets over. Use your last year’s tax return as a guideline. This way you will have ample time to double-check your expenses and also make a fair share of savings to leverage your tax bills. As a smart taxpayer, keep aside 25% of your income as savings for taxes.
5. Make Provision for Short & Long-term Savings
Savings are extremely important, especially if you plan to work as a freelancer. Freelancing work can be immensely predictable. Therefore before you start your journey of ‘being your own boss’, it is advisable to save at least three months income in advance to stay sound while dealing with the “troughs” in your career. Once things get rolling, also start making provisions for your short and long-term savings.
Short-term savings or emergency savings are extremely important to meet unexpected expenses and manage your finances. According to financial planners, it amounts to a month’s income. Setting aside money for emergency savings enables you to deal with sudden expenses like health check-ups or car repairs, without having to draw money from your permanent savings.
Additionally, in a freelancing career, you also need to make provision for long-term savings that should be about three to four month’s income. These savings enable you to be financially sound as you deal with the inevitable ‘valleys’ in your freelancing career.
6. Plan For Your Retirement
Most of the freelancers overlook to plan for their retirement while they are the pear of their career, yet it is extremely essential. As a freelancer, you do not have employers to set up and make provisions for your retirement accounts. Experts suggest that it is wise to invest 20% of your current income in any retirement scheme.
7. Set Competitive Freelancing Rates
While it is important to be disciplined with your savings, it’s the least you can do if you are not earning enough. Re-evaluate your freelancing rates to ensure that you are being paid well, and if not consider increasing your rates. According to a survey, it was revealed that nearly 50% of the freelancers have increased their rates in the last year, and the other half plan to do so in the following year. Interact with other freelancers to get a fair idea of the average freelancing rates in the industry and increase your hourly charges proportionately. As you begin to generate more income, the financial pressure slumps.
Freelancing income can never be steady. Learning to strategically manage your finances is the key to enjoying the freedom of freelancing life.
Want more insights into living a life full of freedom? Check this out.