Let’s face it: financial management is hard for freelancers. As a freelancer, you likely have an irregular income and are facing unique challenges. That makes it especially important to manage your money wisely.
You might be living from gig to gig, and, while you love that lifestyle, you also know it makes your finances less predictable. At the beginning of the month, you might not know how much money you will have made by the end of it. So, it might seem hard to manage your finances efficiently.
When you work a regular 9-5 job, you know exactly how much money you are earning. You know how many taxes you pay - it’s all feasible and allows you to plan ahead.
The situation is different for a freelancer. Working with clients means you negotiate the price, do the work, and get paid. So, your income depends on the kind of clients and gigs you get. You have to calculate your taxes and insurance fees yourself.
But being a freelancer is usually also much more lucrative than working 9-5. According to studies, freelance writers make about $63,000 a year. Either way, financial management for freelancers means to be on top of your game. It can be quite overwhelming, as you likely don’t have a finance degree.
In this article, we want to share with you some tips on how to manage your finances with an irregular income. Following these tips allows you to take some weight off your shoulders. With your finances taken care of, you can focus on what you are actually good at doing.
We’ll go over how to handle payments, savings, investments, and give you tips for managing your taxes. By the end of this article, you’ll have basic financial literacy that allows you to oversee your own finances.
When you are a freelancer with no prior education in finances, what you want to obtain is financial literacy.
Chances are that just looking at your financial papers right now makes your head spin. But financial literacy means you can read your financial papers and understand them. You know how to do your taxes, understand the difference between profit and revenue, and so on. You don’t have to become an accountant, but you do want to know the basics.
Even if you have professionals helping you, you still need financial literacy. Not having it is like not being able to read. It makes you dependent on others, and more prone to making mistakes.
Dan Lok himself spends 20-30 minutes each day going over his finances. As the CEO of multiple companies, he knows that he needs to understand where his business stands financially. That’s why he learned how to read financial statements - even though he isn’t an accountant.
It might be overwhelming at first, but don’t worry. As a freelancer, you probably run only one business - your freelancing. Your finances will be a lot easier to get under control than those of a serial entrepreneur; here are our top tips for doing so.
Financial management starts with the money you earn. As a freelancer, you are responsible for finding your clients, your pricing structure, and price negotiations.
Before you even begin working with clients, have your pricing set up. Know what you are worth, but keep your prices attainable. Base it on your skill level and how much value you bring to the marketplace.
If you are just starting out, you might have to go for low-hanging fruit. Do a few cheaper projects or do some work for free, in order to build up a portfolio and get testimonials.
When working with clients, there are different ways you can get paid. For example, you can get paid per gig or you could get a monthly fee for a certain amount of work.
Getting paid per gig means you find a client, deliver the work, get paid, and repeat this process with a new client. This is how most freelancers start out in their careers. A possible downside of this pricing model is that you have to look out for new clients all the time. No clients means you make no money.
Getting a client on a monthly retainer is advantageous in that you don’t need to look for new clients all the time. This makes your income a bit more predictable - you find one client and deliver your services monthly. This is what most full-time freelancers aim for, as it’s way more secure than getting paid per gig.
To successfully manage your money as a freelancer, start with thinking about how you want to get paid. Both ways are fine, just be aware which you personally prefer. Ideally, you’ll have a mix of both- a monthly retainer to ensure a fixed income, and additional gigs to earn more.
The most desired form of payment for freelancers is to get paid royalties. This means you get a small percentage of money for every time your service is used.
As a copywriter, for example, you could earn royalties for every sale your writing generates. For a photographer, royalties could come from each product sold with their photo on it.
However, royalties usually require that your work be outstanding. Most freelancers don’t start out getting royalties right away; it’s a great goal to work toward.
The reason royalties are so great is that they automate your income. You work on a project once, and then keep earning from it. While it’s not necessarily more predictable, it’s a great extra stream of income.
When it comes to financial management for freelancers, it’s a great idea to get some part of the money upfront. For example, if you agree to work on a $3K deal, you could ask for $1K before you start, $1K when a certain milestone is achieved, and the final $1K upon completion.
Receiving part of the money upfront allows you to structure your finances better. Instead of receiving the sum at once, you know how much money to expect within a certain timeframe and you can plan how to distribute it.
Getting some money upfront also protects you and the customer in case you have to cancel the project in-between. This usually isn’t likely to happen, but it’s always a good idea to be safe.
If the amount you charge is small, you could also ask for the full fee upfront.
Now, saving money is probably the trickiest part of financial management for freelancers. As your income is generally more irregular, you can’t agree to save a fixed amount each month. You don’t even know yet how much you’ll earn, so how can you set a goal for your savings?
Here’s what to do instead: save a certain percentage of everything you earn. Dan Lok calls thisthe bucket method, and it works as follows:
For everything you earn,10% goes into your savings account. What’s more, another 10% goes into your emergency fund.
The purpose of your savings account is to build up money. If you don’t get any clients or gigs for some time, you will still have your savings to rely upon. Your emergency fund, on the other hand, is for unforeseen emergencies such as your car breaking down or an accident.
It’s very important to have both. Don’t think of these two as the same thing because they are not. If you keep a savings accountand an emergency fund, you will be protected.
Many people struggle with saving money. Some get so excited about their paycheck that they blow all the money right away; others might think they need to invest all the money back, and invest it in crazy things.
What you want to do is be smart about your money. If you buy something, focus on acquiring assets that generate more money. If you invest money, invest in what you understand.
But, most importantly, start saving from day one. Expect the best, but also prepare for the worst. If an emergency happens, what will you do? What if you have a period with no clients - how do you survive? Savings are every freelancer’s backup plan.
Financial management for freelancers also includes investments. According to the bucket method, 10% of everything you earn goes into your investment bucket.
But what should you invest in? If you currently earn below half a million a year, the best decisions you can make are investments in yourself. Invest in books, courses, and other tools that make your work easier.
I know half a million sounds like a lot, and you might want to look for other investment methods sooner. However, investments take a lot of money, knowledge, and patience. You use these methods to accumulate money, but not to finance your basic needs.
That’s why, in the beginning, you only invest in yourself. The skills you improve by doing so are yours forever and are likely to start making you more money faster than you’d expect.
For example, investing in a new book might give you ideas for a better offer that provides more value to the marketplace and allows you to charge more. Besides, nobody can take your newly acquired knowledge away from you.
Only if you earn more than half a million should you think about other forms of investments.
To sum up, your financial management for now is :
For everything you earn...
10% goes into your savings,
10% goes into your emergency fund,
10% goes into investments.
But that’s not all. You also want to use 1-10% as “fun money”: the money you can spend however you want. This method allows you to enjoy your money without blowing all of it.
The remaining money is for covering bills and buying daily goods like groceries.
If you follow this method, you have a basic financial management system in place. You definitely want to open several bank accounts so you can divide your buckets. So, when $100 comes in, you actually transfer $10 to your savings, another $10 to your emergency fund, and so on.
Now, this covers the basics - but we all know financial management for freelancers also includes taxes, which is the most overwhelming bit. So, here are our tips for handling taxes.
Now, a huge question many freelancers have is how to take care of their taxes. The thing is, if you don’t look these things up right away, you might receive shocking invoices later.
When, how, and how much you have to pay in taxes will greatly depend on the country you are in. Every country, or even a state, has different regulations and guidelines.
So what can you do? Do your research online, or book coaching with an expert who can explain it to you. Investing some of your money to learn from an expert is a great investment in yourself. Do what you need to understand your taxes to the dot.
When you do online research, here are some pointers to look for:
In the US, for example, freelancers pay quarterly income taxes to the IRS. But, depending on where you are located, there might be different things to which you have to pay attention.
In some countries, you have to send in estimates by the beginning of the year. Some countries want you to pay the income tax yearly, some quarterly. You can usually find this information online.
There’s no way around it: dig in and gain an insight into what you have to pay.
Financial management for freelancers is all about keeping your deadlines in mind. If you pay taxes too late, you might have to pay a fine - which means you lose money for nothing.
Look up the dates ahead of time and put them in your calendar. Hand in your tax statements before the deadline, and always pay on time.
This method saves you money, stress, and builds your reputation as a responsible person.
Many freelancers might want to get an estimate of how much they will have to pay. Our advice is to calculate your taxes as accurately as you can and set the money aside as soon as you can.
Stay on top of your game by planning everything accurately.
If you pay taxes, you might also be allowed to deduct some costs from them. Tools and books you buy for your freelancing business might be tax-deductible. The trick is to keep track of your deductibles early on; collect them in one place so you don’t forget about them later.
If you still feel overwhelmed by financial management for freelancers, many great apps allow you to track income, expenses and so much more.
Apps are a great tool because they show you where you are at, visually. If you don’t want to use an app, you can also track your finances with pen and paper. What’s important is that you track them somewhere.
We see so many freelancers who don’t do any tracking. Nearing the time their taxes are due, they stress over finding all their papers, deductibles, and income statements. Proper tracking saves you from lots of stress and anxiety.
Financial management for freelancers starts from the first dollar you earn. Many people try to make some money first, and set up their financial systems later. But that’s a bad idea. If you don’t start right away, won’t it be much harder to start later?
Commit to managing your finances the right way from the beginning. Your habits shape you: if you take your finances seriously from the beginning, you’ll get better at managing your money instantly.
The wealthiest people in the world are wealthy because they have great money habits. They know how to save, invest, and multiply their earnings. Financial literacy is your start to healthy money habits.
If you want to dig deeper into this topic, Dan Lok has an online training called Millionaire Money Habits. This two-hour training will help you discover how rich people think about their money. Dan also goes over common money myths, which probably hold you back from earning more. Discover The Millionaire Money Habits Today.