Do you find it difficult to cope with the financial ups and downs of freelancing?
Do you often wonder if you’ll be able to manage until you’re next paid by a client (whenever that will be)?
Have you been putting off the decision to freelance because you fear the insecurity of life without a regular paycheck?
Freelancing can be a rocky road. Living on an income that fluctuates every month isn’t easy. It’s possible to have a great month when you earn thousands of dollars followed by a “lean” month with little or no income.
That’s why it’s so important to build a secure financial foundation so that you’re not at the mercy of fluctuations in your income. If you don’t manage your money, your money (or lack of money) will manage you!
The good news is that it’s possible to survive the financial ups and downs of freelancing and thrive as a freelancer by managing your money successfully. Here are some tips for doing so.
Build Up a Cash Surplus
One of the realities of freelancing is that there are no guarantees that you’ll have consistent work throughout the months and years to come.
In addition, you may be unable to work for an unforeseen reason, such as a health problem or a family emergency.
Therefore, it’s extremely important to begin building a cash surplus right now, so that you can survive the lean times.
Save a percentage of each payment
To build a cash surplus, transfer a percentage of each payment you receive into a separate savings account and commit yourself to withdrawing nothing from this account.
Once you’re in the habit of doing this, you’ll find that you don’t miss the money you transfer into this account.
Start off with a small percentage of your income, such as 2.5 or 5 per cent, and gradually increase it over time to 10 to 20 per cent or more.
As the balance in your cash surplus account gradually increases, you’ll be encouraged to continue saving.
Set savings goals
Set yourself an initial goal of saving enough money to cover one month of your living expenses. Once you’ve achieved this, extend it to three months and then six months, and so on.
Each time you set a new goal, see if you can increase the percentage of your income allocated to your cash surplus. That way, you’ll reach your targets faster.
However, even if you can still only afford to save 1 per cent of your income, it’s still important to continue doing so. Don’t give up because you feel you’re making little progress. It’s better to have a small cash surplus than nothing at all.
Increase Your Income Whilst Reducing Your Expenses
There are more opportunities than ever for freelancers. Successful freelancers find and take advantage of as many of these opportunities as possible.
Start by brainstorming all the possible ways you could increase your income from freelancing. Choose a few ways that seem relatively straightforward and set goals.
For example, if you’re a freelance writer, you could decide to sell reprint rights to articles that were published some time ago. Then, you would make a list of the publications and websites that may be interested in your articles before contacting them to offer your articles for sale.
At the same time, brainstorm all the ways you could reduce your business and personal expenses. Having lower expenses will mean that you’re able to invest more money in your cash surplus and save for other purposes, such as a well-deserved vacation or your future retirement in the sun.
Plan for Your Tax Bill
As a freelancer, you’re responsible for filing your own tax return and paying all the taxes you owe.
To plan for this, calculate the percentage of your estimated annual income that you’re likely to have to pay in taxes.
Then, each time you receive a payment from a client, transfer a slightly higher percentage of the amount received into a separate savings account.
For example, if you estimate that you’ll have to pay about 20 per cent of your income in taxes, transfer 22 per cent of each payment to your tax savings account.
That way, there shouldn’t be a shortfall if your annual income is higher than you expected or if you’re still waiting for a payment from a client when your tax bill arrives.
Minimize Use of Your Credit Card
Although credit cards can be useful when funds are low, it’s not a good idea to rely on them too much. Challenge yourself to stretch your income (minus your savings) for as long as possible so that you don’t have to use your credit card for business or personal expenses.
Chase unpaid invoices on the date they become overdue so that you receive the money you’re owed as quickly as possible.
If you have had to resort to using your credit card to tide you over, minimize interest payments by paying off the outstanding balance as soon as you receive the next payment from a client.
Resist the Temptation to Spend, Spend, Spend after a Period of “Famine”
If you’ve been working hard on a long-term project and have had little or no money to spend on enjoying yourself, it can be very tempting to spend, spend, spend, as soon as you receive the large payment for all your hard work.
Treat yourself after you receive your eagerly awaited earnings but set a limit on your “celebration spending”.
I’ve been using this method of money management for a few years now. At first it was hard to build up a cash surplus because I found that I had to withdraw most or all of it to cover expenses while waiting to receive payments from clients.
But at least I was able to rely on my cash surplus rather than slide into debt.
Over time, I’ve built up a larger cash surplus. I now find that I can take some money from it to cover lean periods without withdrawing all of it.
Once I get paid, I try to replace the money I’ve taken out as I know I’ll need it in future. However, if I can’t do this, I don’t worry too much about it but just continue to save a percentage of each payment.
Psychologically, as well as financially, this system has helped me to deal with the uncertainties of freelancing.
As a freelancer, managing your finances is often a juggling act. If you manage your money wisely and plan for the future, you’ll find that you experience fewer periods of feast and famine because you have built a firm financial foundation.