Small Business Advice

7 finance tips for freelancers

As a freelancer, you may be looking for ways to optimize your finances. Here's our 7 best finance tips for freelancers.

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According to an Upwork study, 59 million Americans are currently freelancing. This number is projected to keep growing all through 2027, when a whopping 86.5 individuals will be freelancers. While some Americans are full-time freelancers, others work gigs and side hustles to supplement their income.

Either way, most of these individuals are brilliant at what they do. Unfortunately, a great deal of them don’t often have a good grasp of the essentials of personal finance. If you can relate, then we’ve put together seven finance tips freelancers can benefit from when managing personal finances.

The key takeaways

  • Create a budget
  • Pay yourself a salary
  • Diversify your income
  • Separate business finances from personal finances
  • Don’t forget taxes
  • Build an emergency fund
  • Get expert advice whenever you need it

Work with a budget

Budgeting is among a handful of finance tips freelancers can implement immediately. Unfortunately, creating and sticking to a budget is easier said than done. But as a freelancer, if you properly understand your income and expenses, you’ll find it simpler to budget. It’s essentially a matter of ensuring that your expenses fit neatly within your income.

The challenge with freelancing is that you’ll frequently find yourself having to deal with unpredictable cash flow. You’re not going to get the same paycheck every month as is the case with employment. For that reason, you’ll have to figure out how to prioritize expenses and efficiently allocate finances. Some costs to keep in mind include:

  • Health insurance

From 2019, health insurance is no longer mandatory at federal level. However, California, District of Columbia (Washington D.C.), Massachusetts, New Jersey, Rhode Island, and Vermont still require residents to have health insurance coverage by law. Therefore, if you live in any of those states, you’re legally required to budget for health insurance premiums.

Even if your state doesn’t mandate coverage, you may still benefit from health insurance. It essentially offers protection against high medical costs. As a freelancer, it can come in handy if you or your loved one needs medical attention at a time when you’re struggling with cash flow. Therefore, it makes sense to find affordable health insurance cover and slot it in your monthly budget.

  • Retirement plan

68% of employees in the private sector and 92% in the public sector have access to retirement plans set up by their employers Well, if you’re a full-time freelancer, you don’t have that luxury. You have to build your own retirement plan. Options range from a solo 401(k) plan to an individual retirement account (Roth IRA) and even defined benefits plans. Whichever one you choose, you’ll have to make contributions to secure your future – which is part of effective financial planning.

  • Savings

When creating your freelancer budget, make sure to set aside some money for savings. The reality of self-employment is that it has unpredictable cash flows. Should you find yourself experiencing low cash inflows, you can turn to your savings until the paycheck grows bigger again. There are multiple types of savings accounts that freelancers can use.

Regular or traditional savings accounts are generally the easiest to open, but they also earn very low interest. The latter point makes a case for high-yield savings accounts, which typically earn higher interest rates. Other options include saving in money market accounts (MMAs), certificates of deposit (CDs), cash management accounts and specialty savings accounts.

  • Accounting

Budgeting for accounting is one of those finance tips freelancers ignore, usually at a high cost. Without accounting, you may find it very hard to properly bill clients, create invoices and plan for tax time. All these might affect your cash flow and overall financial health.

Freelancer accounting apps like QuickBooks and Xero offer solutions that may help you manage invoices and get paid faster. They also keep clear financial records that you can use to file for taxes and even apply for various types of loans, should you need to.

Pay yourself a salary

Only 51% of entrepreneurs pay themselves regularly5. This is understandable on some level because you want most of your freelance income to go right back into the business. However, paying yourself a salary is an added incentive, which can work to improve your productivity.

Plus, if you don’t allocate funds for your own salary, it essentially means that you’re ignoring one of the biggest costs – owner compensation. The consequence is that your books won’t reflect the true health of the business, since costs are not properly accounted for. One way to ensure that you pay yourself without hurting business income and capital is using the profit first method.

Diversify your streams of income

The stability that comes with working for one client can be beneficial for you as a freelancer. However, you may find yourself depending on that client more than you want to. They can single-handedly hurt your cash flow and finances if they delay paying your invoices.

Even worse, you’ll have to start looking for clients (and a source of income) from scratch should your working relationship fail. To avoid such scenarios, keep a diverse pool of clients. The more sources of income you have, the easier it is to avoid extreme fluctuations in cash flow.

There are several ways of getting new clients, including online freelance marketplaces. Freelancer, Upwork, Toptal, Fiverr, SimplyHired and LinkedIn are all great places to land clients, regardless of the type of freelance work you do.

Separate business and personal finances

There are many reasons why every freelancer needs to separate business and personal finances. For one, it can help protect your personal assets against liability in case legal action is brought against your freelance business.

Secondly, keeping your freelance accounts separate from personal finances makes it easy for you to track business cash flow. If you mix the two, you’ll be forced to sort through business and personal transactions to figure out which incomes and expenses relate to your business and which ones relate to you individually. This may be a big problem when tax time comes around.

As a matter of fact, a dedicated business account may be enough to prove to the IRS (in case of an audit) that your freelance business is not just a hobby. This will entitle you to small business tax deductions. But you’ll need to keep track of business-related costs and receipts in order to write off eligible expenses. You can easily do that if you have a dedicated bank account where all freelance transactions pass through. Nearside offers a free business bank account where you can keep your business expenses separate from your personal. 

Finally, separating business and personal finances creates a more professional image for you as a freelancer. This can help create a good impression with clients and even creditors. In fact, lenders typically require that you have a business account before they extend business loans and credit facilities.

Plan for taxes

Being a freelancer means you are your own boss and can choose your working hours – which is fun, until it’s time for tax. As a freelancer, the IRS treats you as a self-employed individual. Self-employed people, on average, pay more taxes than their employed counterparts.

One great way of ensuring that your tax liability doesn’t catch you off-guard is to plan all through the year, not just when tax time is around the corner. A good rule of thumb is to set aside 30% of all your income for the various types of taxes that you’re responsible for.

First, there’s regular income tax, which is charged on all the money you earn within the year. Additionally, you’re responsible for paying self-employment (SE) tax, which currently stands at 15.3%. SE tax consists of social security and Medicare taxes, both of which are usually deducted by employers in the case of people who are employed. But as a freelancer, you have to do it yourself and pay quarterly tax estimates. These are usually due on:

  • April 15
  • June 15
  • September 15
  • January 15

Consider marking your calendar with these important dates so that you don’t miss quarterly payments. And don’t forget to deduct all eligible small business expenses. That will lower your overall tax liability and keep more money in your pocket.

Build an emergency fund

Just like a savings account, an emergency account will offer a financial cushion when freelance work is hard to come by. Ideally, you want this fund to have enough money to equal 180 days’ worth of your living expenses. Of course, it’s hard to achieve this when you’re starting out as a freelancer. So, you can set your initial target to 30 days’ worth of expenses, then build it from there. If, for example, you lose your key clients, you can rely on this emergency fund as you look for other clients.

Get expert advice

Being a freelancer most likely means that you’re brilliant at what you do. But it doesn’t mean you have to be brilliant at everything else. If you find that another aspect of self-employment is proving hard to handle, you can always turn to professionals for advice and guidance.

For example, if you’re struggling to manage finances, you can hire the services of a professional accountant. In addition to helping with your budget, a good accountant will also help you prepare and file taxes.

Similarly, if the uncertainty that comes with freelancing is taking a toll on you, consider getting a mentor or coach to help you through the journey. This is up there with the best finance tips freelancers can benefit from because you can’t be truly productive until you’re in a good state mentally and emotionally.

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