Improving Your Finances as a Freelancer
As a freelancer, navigating your finances can be a complex task. However, by gaining a comprehensive understanding of your financial obligations, you can empower yourself to effectively manage your income and expenditure. This knowledge will enable you to maintain a clear overview of your financial situation at all times.
But where do you start to get back on the straight and narrow?
Set Up Tracking
Establishing a method to track your work and income is crucial. Whether you opt for a simple or more intricate system, the key is to have a reliable way to monitor your earnings. This not only helps you prepare for leaner months but also instils a sense of control over your finances, preventing any unwelcome surprises.
Investing in accounting software can be a game-changer for freelancers. It not only helps you track your business expenses and income but also allows you to automate payments, send invoices, and more. This level of automation can significantly improve your tracking and accuracy, saving you time and reducing the risk of errors.
Understand Days Off
An important part of improving your finances as a freelancer is appreciating that if you don’t work, you don’t get paid. This means paid time off isn’t part of your lifestyle, and you need to accommodate those times when you need to not be working, be it for a day off, weeks off, or longer. Managing your finances allows you to put money aside to help you cover time off so you don’t go without or end up having to while having a holiday, for example.
Separate Personal and Business Finances
It’s not essential or legal for a freelancer to have separate personal and business accounts; however, it is advisable.
You need a bank account exclusively for your business transactions, and you must keep track of all of your income when you declare your taxes each year.
This can help you avoid making mistakes when tracking income and expenditure and ensure nothing is overlooked. A business account alongside your personal account can offer you many benefits. It is worth exploring what meets your needs to find the best deal for you.
Set Money Aside Regularly
Improving your finances means you need to be careful with how you pay for your expenses and taxes. Try to get into the habit of putting away a portion of your income to pay taxes into a separate account, and putting away some of your income to pay for vital expenses, such as website hosting, software, tools, etc. Creating a budget for these expenses and regularly setting money aside for them can help you stay on top of your finances.
Contingency Funds
As a freelancer, you cannot always predict lulls in your work or schedule. This is where a ‘contingency fund’ comes in. It’s essentially a safety net, a fund you set up to cover unexpected expenses or periods of low income. It might only be small sums from your work, or you might prefer to put away income from work above what you normally do, but find a way to create a contingency fund, set up regular payments into it automatically and give yourself a safety net when you need it.
Ideally, you will want around 3 months’ worth of income to help you ride through any slower periods and cover your basic operating and living expenses. Of course, this can take a while to build up, but small regular deposits into the fund over time will slowly accumulate until you reach your goal.
Learn How to Budget
One of the best ways for a freelancer to manage their income and improve their finances is to learn how to properly budget and live within their means. This means understanding how much you need to live on for basic essentials, the difference between wants and needs, and the impact frivolous pending can have, either in a personal or business capacity.
You want to use the 20-30-50 ratio for personal expenses, which is 50% of your income for initial expenses (e.g., rent, mortgage, food, etc.), 30% of your nice-to-haves (e.g., eating out or new clothes), and 20% for savings. While not everyone can hit this right off the bat, it’s a goal to work towards to help you budget more effectively; as a freelancer, it is essential.
You need to build many small habits into your attitude and approach to finances as a freelancer to help you improve your financial circumstances, and these steps can get you on the right path.