As much as freelancing is a preferred means of earning a living for many, it is not for the faint-hearted. Although you get the opportunity to do the job you love under your own terms, you also have to bear in mind that you will also have to play the role of a financial manager. Income obtained from freelancing is irregular and very inconsistent meaning that as a freelancer, you should be very professional, keen and strict when planning your finances.
Here are some tips that will assist you in smoothening the rollercoaster ride of your finances.
1. Creating an emergency fund
It is sensible for every individual, including freelancers, to have an emergency fund. This account should only be used to cover the basic expenses in cases where there are no other resources available. As a freelancer, you are advised to store enough money in your emergency fund account to cater for more than a year’s bills. You should also keep in mind that the expenses to be covered are not only personal but also business related expenses.
Having an emergency fund will ensure that you have peace of mind even when you don’t have clients for a while. This account will also make you flexible when dealing with customers who are not able to offset their bills in time. In so doing, your business will continue uninterrupted.
2. Opening a separate bank account for your business
Though it is legal for a freelancer who is a sole proprietor to have a single account both for personal and business use, it is advisable for you to have a separate business account. Having a separate business account will ensure that you can monitor your business input more closely thus enabling you to create a viable budget. This separate account will also make the tax season less frustrating for both you and your accountant.
This account should be utilized for paying your salary, business expenses, taxes, and funding the emergency fund account. In case you have excess money, leave it in the account since you are never certain of what the future holds.
3. Project your monthly expenses and income
As a freelancer, you are bound to have times when you will be overwhelmed by work and there will also come times when work will be scarce. This therefore means that your income will vary a lot, especially when you are still becoming established.
To budget appropriately, you will have to project your monthly expenses and revenues. Here are some of the ways that you can approach this;
Deal with averages – You can divide your annual revenues and expenditures by twelve and use the outcome as the amount to be used when planning your monthly budget. If you have been working for less than a year, utilize the available data. This method is very effective when the monthly income doesn’t vary wildly.
Prepare for the worst – By expecting the worst, you are advised to use the month you earn the least as the maximum monthly income and the month that you spend the most as the minimum monthly expense when budgeting. This method makes an excellent and easy way of creating an emergency fund since you are more likely to spend less and earn more annually.
4. Arrange milestone payments for your clients
This approach is mainly applicable to freelancers who handle massive projects that can take weeks or months to finish. Therefore, a freelancer managing such projects should set up milestones in his or her contracts that should include partial payments from the client. This approach will help ensure that there is a consistent flow of cash on a regular basis as opposed to one waiting for the final pay day. Below are some of the ways that you can set your milestones;
- Bill the client for every hour that you spent on the project on a monthly basis
- In cases where the project has distinct milestones, place your billing around them
- Lastly, you can break the project into 25% blocks and charge each of them accordingly.
5. Use invoicing tools and applications
There are numerous tools and applications that you can use as a freelancer in managing your finances. Since most freelancers are tied up in their finances, especially when starting up, these tools and apps can come in handy since they are user-friendly and will enable one to reduce the cost of hiring a professional.
These tools are available online at very affordable prices. Tools like Freshbooks can help you to invoice regularly thus ensuring that all your payments are made on time. There’s also free invoicing apps like Invoice Generator if your budget is limited.
The better you manage your finances as a freelancer, the more peaceful you will be and the better you will become in your freelancing niche. Happy freelancing.