So, you have decided to take that big step of quitting your job and doing what you have always wanted to – freelance. Congrats! The feeling can be liberating – you no longer have your boss breathing down your neck andyou don’t need to fight peak hour traffic or plead with your employer each time you want to take a few days off. Ultimately, you are the boss of your own time and place.
However, freelancing also comes with its own set of drawbacks, the biggest one being that you no longer have a monthly pay check to rely on. You also would be leaving behind paid vacations, insurances, reimbursements for expenses and future pensions schemes, along with your full-time paid job.
When you do start off, you most often end up taking low paying gigs to shore up your experience and to pay for your day-to-day expenses. This, however, means that you are really not saving up for the future, or even for any immediate emergency situation. And, even after you are steady, there may be months where your inflow peaks and others where it hits rock bottom.
Hence, to make things easier, and to help you get better control over your finances, take a look at these tips and ensure that you always have money stashed away for a rainy day:
Create an emergency fund:
Once you have decided that freelancing is what you want to do, ensure that you have an emergency account where you have saved up at least six months’ worth of funds for expenses and emergencies. You should be able to fall back on the cash at any point, in case you need to. However, this is an emergency account which has to be used prudently. In case you do need to tap into this fund, remember to replenish it the next time you earn money.
Clear major financial burden:
As much as possible, try to pay off all the major loans and debts you have before you quit your full time career and get into freelancing. Avoid using your credit cards unnecessarily as the last thing you would want is to be stuck with is a huge bill and no money to pay it off.
Budget your monthly expenses:
Even before you start your freelancing career, keep a track of how much you spend each month, and do that for around three-four months. Apart from your fixed expenses (house rent/mortgage, school/college fees, taxes, insurances, utilities) also keep an eye on your variable expenses (petrol, eating out, shopping, commuting, etc). Once you get an idea of how much you are spending, you would be able to figure out what income you need to cover those expenses.
Cut costs on fixed expenses:
As a salaried employee you know that you can afford a particular internet/telephone/cable plan since your monthly cash inflow is already fixed. But, with flexible income, there is no guarantee that you may be able to continue paying for the same plans. Hence, it is better to search around and opt for operators who provide you with more cost-effective plans. Save up on telephone bills by using Skype/WhatsApp calling features and on electricity bills by opting for energy saving equipment.
Reduce variable costs:
Now that you don’t have a guaranteed monthly income to fall back on, it’s time to cut down on all your other expenses as well, atleast until you have settled down a bit. This means cutting down on alcohol and tobacco if you are a drinker, opting for home cooked food instead of eating out regularly, finding out deals and coupons to save up on grocery shopping and subscribing to Netflix/Amazon, thereby reducing your theatre trips. You should also be more prudent when it comes to shopping – switch over to lesser known brands which may offer the same quality at much less rates.
Manage your taxes:
As a freelancer, you are liable to pay your taxes yourself, as opposed to salaried employees whose employers handle their tax payments. Hence, you need to be aware of how much your earnings are and where all you can claim tax benefits. Ensure that you claim for deductions on business related items such as travelling on business purposes, equipment and software that you may have purchased for business purposes. Self-employed tax calculators like this one can help you keep track of how much you owe in taxes. If you find it difficult to calculate your taxes on your own, using the services of a tax professional will help as they will figure out ways by which you can save, reduce your tax burden and claim for tax deductions.
Invest in insurance:
A major mistake that most freelancers do is avoid taking insurance. However, in the absence of employer-provided insurance plans, it is important that you buy atleast a good health insurance. Shop around for the best health plans – by choosing government health plans you can qualify for subsidies, but the coverage may be low, you can also opt for private ones which best suit you and your family’s needs.
Keep personal and business accounts separately:
As a freelancer you may invest your earnings into buying technology, domain names or diversifying into other businesses. Here a separate account for your personal and business needs help in keeping your expenses separate and is also useful when you file your taxes.
Keep track of your invoices:
Create an excel sheet where you list down all the clients you work for, the payment you have received from them and any pending invoices. This will help you understand how much you can expect to earn on a monthly basis, and also keep track of your invoices. You will also be able to figure out how much you can afford to spend, based in the cash inflow.
Ensure that you send your invoice across as soon as you have submitted your work. If the project requires more time, have payment milestone – the first 25 percent upfront, 50 percent on the first draft and 25 percent on completion.
Save up for retirement:
Even if retirement is years away, there is no better time than today to start saving up for it. There are a number of retirement option plans such as the IRAs or Individual Retirement Accounts, which is a type of savings account which helps you save for your retirement and offers tax benefits, Simplified Solo Pension and Solo 401(k) if you are in the US. Aim to contribute atleast 15-20 percent of your net income into this account. In case you have kids, you should also think about saving for their college and scout around for good college savings plans.
Know what you are worth:
Finally, as a freelancer, you should know what your time and work is worth. Way too many freelancers commit the mistake of undercharging as they don’t do know what they are worth or they believe that they will get more clients by charging less. That is not true. Clients have funds at their disposal and can match up to your demand – what most of them need is the surety that they will get back their money’s worth. Also, ensure that you factor in costs such as online payment fees, exchange rate fluctuations (if you have international clients) transfer fees apart from your actual cost for getting the project done, while figuring out your charges. Remember, some freelance sites and payment systems charge and you would really not want to end up paying them more than what you have earned. As you grow in experience and broaden your portfolio, you can also consider increasing your rates.
Here is to a happy and successful freelancing career!
Author Bio: I am Emily Connor, 26 year old psychology student, and a content contributor at Dissertation Help and assignment editor with Assignment Help company. My interests range from productivity, inspiration to reading anything motivational over the internet.