By 2027, experts predict that freelancers will comprise the majority of workers in the United States (well over 50%). This trend is also consistent with what’s happening in other countries, such as India and many nations in Europe. With dozens of new freelancers entering the workforce each day, there are unique challenges that many people will face for the first time. One of the more daunting issues is managing freelance finances when you’re just getting started.
From an inconsistent flow of cash to expensive health insurance, life in the world of freelancing presents unique fiscal obstacles. Thankfully, there are several strategies that you can use at any stage to help manage your freelance finances as well as possible. Here are some important things to think about:
Track your earnings closely
At the beginning of your freelancing career, your income is likely to be highly unpredictable. It will be nowhere near as easy to track as a steady paycheck (and probably never will be!).
It’s therefore crucial to track your earnings much more closely than before. Whether you use an app, a cloud finance system or a service from your bank, assess your earnings on a weekly basis – at least. That way, if you are pulling in less than you require to meet your needs, you can quickly identify the fact. Then you can look at reducing outgoings, seeking some finance or turning to some side gigs to make up the shortfall.
Frequent monitoring of your finances will also help ensure you set enough money aside to pay future tax bills.
Start out with savings (if possible)
If you are planning on taking the plunge into full-time freelancing, expect that income will be inconsistent for (at least) a few months. Even if you have a decent contract lined up, you may still struggle with cash flow while you wait for invoices to be paid.
As you get established in your field, it is incredibly helpful to start out with a financial safety net. Saving as much in the bank as possible prior to becoming a full-time freelancer is key to decreasing your worries and ensuring that you can cover all of your bills with no difficulties.
How much should you save? While there isn’t one magic number, having between three and six months of income set aside is a wise goal, and one that’s often recommended.
Take on part-time work until you reach your goal income
There’s nothing to say you have to jump in with both feet.
While working your way to full self-employment, you can always take on a part-time job to supplement your income. Doing this is a great compromise, and a way to create a steady source of income while building your client base.
Remember that freelance finances are about saving as well as earning
Spending $100 less is just as good as earning $100 more. In fact it’s better, because you typically have to earn considerably more than $100 to have that much in your pocket, once you’ve covered taxes and other expenses.
We’ve talked about this in detail here. When you first start freelancing, have a think about things you could cut back on – subscriptions, gourmet coffees, cable TV packages – the list goes on. If you spend a day working out how to save yourself $100 per month on your regular expenses, you’ve “earned” $1200 that day, which you’ll be “up” by over the course of the coming year.
Spend time on the right things
A crucial difference between working for yourself and working for a company is that you only get paid for some of the things you do. That can be quite an adjustment to those conditioned to still getting paid for days of meetings and “water cooler chat!”
In the early days of freelancing, there’s inevitably plenty of time to be spent on getting set up and marketing your services. However, it’s essential to use every moment wisely. You can easily spend a day playing around and creating a logo, but you could outsource that to a designer on Upwork for $20 and spend that day contacting old employers to introduce your new freelance services.
Equally, once you start getting work in, it’s wise to remember that being profitable is the aim, not merely being busy. Sometimes (but not always) it’s better to hold off for the $1000 job rather than fill your time with $10 jobs and have no time left for marketing!
Don’t let the fear of managing unpredictable freelance finances deter you from becoming a freelancer. With a bit of planning, monitoring, and saving, you can feel confident in navigating this new part of your professional life.