Freelancing is one of the fastest-growing areas in today’s economy, with enormous potential for development. But, while we may be experts in our field, many of us lack the time and knowledge to effectively handle our finances.
What if I told you that if you emphasized financial management today, you could expand your business and enhance your personal wealth? We’ll look at some strategies to make financial management easier for freelancers.
Self-employment provides you with the flexibility to work on your own terms, but it may also lead you to feel that you lack the anchor of certainty to work consistently toward your financial objectives and adhere to your plan. That is not correct. Your income pattern may be unpredictable, but your spending will be consistent, therefore your savings and investments must likewise be consistent.
If you freelance or run your own business, you most likely do not earn the same amount of money every time you receive a paycheck.
When you have a fixed set income — that is, you know exactly how much money you will bring in every two weeks — you tend to pie chart budget all the way up to the amount you make each month. When you receive a raise, bonus, or other sources of more income, you have many options —
Upgrade your living lifestyle.
Purchase something you fancy, such as a swimming pool, a more costly vehicle, or a motorbike.
Save that cash.
We know which bullet points the majority of individuals choose.
In any case, both variable and stable income circumstances do not have to be this way. It’s simply that, in my own experience and observations, I’ve seen them operate most often in the manner I describe.
Not only did I want to be comfortable during any transitions or potentially lean months, but I also wanted to make sure I had enough money to accomplish the things I truly wanted to do.
Nobody likes to pay rent or a mortgage, no matter how low the interest rate is. People like to claim that you’re wasting money on rent. However, this is only partially correct.
You’re wasting money on housing if you don’t have enough money left over at the end of the month to live the life you want to live now, whether you rent or buy your home.
The money you have leftover at the end of each month provides you alternatives.
It goes without saying (except that it doesn’t!) that the less money you put towards large costs like housing, the more money you’ll have to spend on other things while also saving.
What is the significance of financial management for freelancers?
Financial management may be complicated and time-consuming unless you have an accounting degree or years of hands-on experience. Additional tax considerations for distant employees and self-employed persons complicate the scenario.
As a freelance worker, you not only have to handle all of the fundamental business operations on your own, but you also lose the benefit of having an employer to assist with 401ks and other savings and financial management.
While some people are born with a business sense, none of us are born knowing how to do things like tax planning, budgeting, and bookkeeping.
These are intricate activities that experts devote their careers to studying and practicing. Even if you can afford to outsource such services, you need to have a basic understanding of risk management, income leveraging, and budgeting. These suggestions can assist you in prioritizing money management in your freelancing business.
First and importantly, pay yourself.
When I initially started freelancing, I regarded all of my earnings to be income. I’d use it straight to pay my expenses and buy the goods I needed. Anything I had leftover at the end of the week was considered “profit.”
That, as it turns out, is not a good strategy to go ahead with. I was struggling to keep my head above water. When I learned more about resource management, I began to treat myself as if I were a corporate employee. I set up a business account and paid myself a salary that was distinct from whatever profit I made. This is essential in formalizing what may appear to be an informal labor arrangement.
To accomplish this correctly, you should invest in invoicing software that includes essential features such as branded templates, automatic billing for recurring clients, and simple accounting administration. This will demonstrate to clients that your freelancing business is genuine, and it will make your life much easier when it comes to tax time. Quickbooks is a very good option.
You must concentrate on creating a solid savings plan to help you deal with the stress of sporadic income, fixed costs, and financial crises. Have a six-worth month’s of spending set up as a reserve.
Separate your business and personal spending.
This goes hand in hand with the first tip. If you want to start a genuine business that grows and makes a profit, you must approach it like one.
In most states, forming an LLC or a single commercial operation costs less than $100. You can also create a corporation or add partners to your LLC if your firm qualifies. It won’t cost you much extra, and you’ll be able to shield your company from personal financial liability, as well as vice versa.
A corporation, for example, cannot sue your company if you fail on a personal credit account or loan. If someone sues your company, they will not be allowed to seize your assets as part of the settlement. Keeping your business and personal money separate will also help you to have greater control over corporate earnings and offer a more accurate picture of where your company stands financially.
Never combine business with pleasure. We’ve all heard that statement, haven’t we? That is also true for your financial accounts. Separate your company and personal accounts as soon as possible. This means you must open company-only bank accounts and credit cards and use them for all business transactions—no more buying ink for both the home and office printers on the same receipt.
Separating accounts gives a professional impression to your consumers that you are serious about your firm. Furthermore, it helps you to establish a commercial connection with your bank, which may make obtaining funding simpler in the future.
If improving your professional game isn’t enough to persuade you, consider how business-only credit cards and bank accounts may save you time. When you use business-only accounts, you may incorporate them into bookkeeping software, decreasing the amount of time you spend on basic accounting activities.
Make a retirement plan
Because freelancers do not receive a pension, retirement planning is much more crucial for them. Just because you don’t work for a corporation doesn’t mean you can’t save for retirement. Wasn’t the possibility of retiring early to an island someplace part of the allure of working for yourself? You should start thinking about retiring now so that you can have more peace of mind as your career progresses.
For people who do not have access to employer-provided retirement, the IRS offers Roth IRAs and other retirement programs. These are often sponsored by local banks and provide a number of benefits that make them a popular option to save for your senior years. The IRS website has further information regarding retirement plan types, regulations, and restrictions.
Don’t cut corners on critical expenses.
When money is tight, it’s easy to give up on items that aren’t immediately necessary to getting your freelancing job off the ground. You might begin by using a borrowed laptop or making deliveries in your personal vehicle.
Some cost-cutting techniques, on the other hand, may wind up costing you money.
Maybe you’re attempting to save money by building your company website on a “free” hosting provider. That free hosting platform, for example, is most likely earning money on the back end by selling your data to marketers or fraudsters and forcing you to post banner advertising on your site. For web hosting, never go with the cheapest option, You will definitely get what you pay for when it comes to web hosting. Scams abound in the web hosting sector, as organizations advertise inexpensive rates to attract clients who don’t know any better. These hosts frequently make millions despite employing low-quality servers, making them vulnerable to security breaches.
Choosing free hosting means you’ll have to include their name in your URL, which looks unprofessional (and may mean that they actually own your website). Free hosting comes with fewer security features, greater downtime, and unpredictable performance.
Another thing that may appear to be something you can put off until later is insurance. After all, what are the chances that your business would be disrupted because your car broke down, someone sues you, or a house fire damages your home office?
Protect Your Business Legally
Don’t allow a legal issue to be your financial downfall: speak with your legal counsel to verify your business is correctly formed. As a freelancer, you might begin as a sole proprietor or form a limited liability corporation (LLC). However, much like your pricing strategy, you should examine your legal framework on a regular basis to determine whether another kind of incorporation might be better for you.
And, with business insurance, you can plan for the unexpected. While no one likes to consider getting sued or being the victim of a cyberattack, these things do happen.
Examine the list of insurance plans that every small business should consider before consulting with your insurance expert for particular suggestions.
Keeping track of your company’s finances does not have to be a chore.
From someone who has experienced two of these possible things (I’ve never been sued) and had no full coverage to shield me from the financial repercussions, I say this with irony. Being appropriately insured is a vital component of risk management, and depending on your state and sector, it may be a legal necessity. Consider the cost of not safeguarding yourself and your organization against loss vs the comparatively modest cost of conducting business correctly before you try to save money or cut shortcuts.
Understand when to buy and when to borrow.
While a safe web host and company insurance are both required, there are certain places where you may save money by renting or sharing resources rather than purchasing your own.
For example, you may be able to use the family car for business purposes, but you may need to use it just for specific repairs or as a company tax-deductible. Leasing a car may be more cost-effective depending on how much driving you undertake for your business.
On the technical side, if you already have a good machine that can manage a professional workload, this may be fine. If the equipment will be heavily used, leasing it is typically less expensive in terms of out-of-pocket expenses, and the lease will include a service agreement. When it comes to business applications, SaaS and PaaS solutions are nearly always less expensive and more up-to-date than acquiring software and platforms yourself.
Take advantage of financial experts to assist you.
Many people are unaware that they are eligible for financial support such as tax credits and loans tailored to SMEs and freelancers.
You may be aware that you are eligible for benefits such as the earned income tax credit and deductions for business use of your home and vehicle. However, you may be eligible for low-interest loans from angel investors and crowdsourcing, as well as targeted grants from local organizations and the Small Business Administration.
This covers support for tech startups as well as minority and women-owned businesses. Grants do not have to be repaid, and they can assist relieve many financial pressures on freelancers who may not have a safety net when they first start out.
Prioritize budgeting and tax preparation.
Budgeting is the simplest and most fundamental method of understanding where all of your costs and income come from and how to effectively manage your money. It enables you to recognize patterns and spend your money more wisely. For example, if you know a significant, lump-sum payment, such as a renewal or license fee, set away a little each month so that it will not have to come out of pocket all at once.
Furthermore, taxes may be tedious, but understanding what you need to submit and when – in addition to learning what credits and deductions you can take advantage of – will save you money, time, and even legal ramifications down the road.
Make and stick to a budget to avoid extra expenses. The most effective method is to create a separate bank account for your business and personal spending. Adhere to a flexible financial plan that is tailored to your income and spending patterns. Get enough health insurance coverage. If you have dependents, you should also consider purchasing life insurance. Adhere to an asset allocation strategy that is appropriate for your specific employment. For example, if you are a doctor, your income will be more consistent than that of other occupations such as a musician, and will not swing with market swings, allowing you to take more risks and achieve better returns.
Don’t fall into the trap of buying an expensive house or car as a way to improve your lifestyle.
I’ll never understand those who badger their pals to buy a house or make fun of individuals who live in, for example, a below-market-rate apartment or a studio apartment. They nag as they know you have the financial resources to buy a home or rent a larger area, but you refuse.
But you’re not going to do it for no reason.
You refuse to do it since you can work fewer hours on your own terms.
You refuse to do it because you don’t want to feel bad about purchasing coffee and eating out frequently.
You refuse to do it because you enjoy taking days off, going on road trips, going away for the weekend, and taking longer vacations on a regular basis.
You refuse to do it because you want to be able to save money after doing everything else.
You can’t live the life I describe here if you’re middle or upper-middle class and make relatively little money unless you do one of two things: go into debt to support your lifestyle, or keep your major expenditures — mostly housing — as low as possible.
Your choice should be obvious between the two alternatives.
Going into debt eventually catches up with you. It almost never ends nicely.
Keeping your home payment as low as possible — whether you rent or buy — keeps you far ahead of the game. It gives you the ability to act from a position of personal financial power.
The most powerful thing you can do with your money is spent as little of it as possible on housing. You’ll never hear the typical personal finance hacks mention this, but it’s the most powerful thing you can do with your money.
This might imply sacrificing homeownership. It almost certainly entails paying rent that is far lower than your city’s median, especially if you reside in a high-priced real estate area.
Automate Your Billing Process
Establish a systematic invoicing procedure unless you are giving your time, which you should not be as a freelancer. You will not get compensated if you do not bill your clients. Just as you would balance your own checkbook each month, you should ensure that you were paid for what you invoiced. You may experience cash constraints if you do not have a good invoicing practice, which involves sending out timely invoices and not allowing unpaid invoices to linger. This might influence your capacity to pay your own bills.
Consider adopting invoicing software to decrease the amount of time you spend invoicing. If your company offers a recurrent service, such as a coffee membership club, you may be able to set up recurring bills using the software. Remember, the more you automate your invoice process, the more time you’ll have to spend on revenue-generating activities.
You do not need to be an experienced investor to benefit from excellent financial advice. In fact, the sooner you seek professional assistance to get your finances in order, the sooner you will have more profit to spend in your business and discretionary money to invest in yourself. Using these financial management strategies can help you improve your wealth and make the most of your income, from establishing your small business website to budgeting for retirement.