Freelance Finance Methods for Beginners

Most independent workers are zealous people who would rather make their own rules than follow someone else’s. These freelancers care about more than just security. It could be the integrity of their work, or it could just be the freedom to set their hours.

Freelancing is proliferating in the US. This could be because people need to make extra money during a bad economy or because people want to start their businesses. In the U.S., three out of ten workers are now “free agents.” Additionally, even though many of these people are very good at what they do, they often do not fully understand the basics of their business.

To keep these rebels from being put through a trial by fire, we have made a list of things they need to do to make sure their money is in order.

• Set up a fund for emergencies

While it would be best to do this before you stop working for anyone else, this should still be your top goal after you have stopped working for anyone else. It depends on your position, but most financial planners say you should save enough for at least six months of both personal and business costs. This will prepare you for times when it is harder to find work and keep you from having to take a job you do not want just because you need the money.

• Set up a different account for your business

Every step of the way, you do not want to have to sort through work and personal expenses. Life is already messy enough. For your salary, taxes, retirement fund, and business expenses, use a different business account from the one you use for the business emergency fund.

Keep track of all the money your business spends and the receipts you get for it so you can “write off” all of your valid costs. Coming up with more tax ideas soon.

• Money is not the only thing at stake

When people first become independent workers, they often do not charge enough because they do not think about all the things their old boss used to pay for. Since you are now the owner, you need to set your rate high enough and get enough work to pay for the things you need to have.

When you set your rates, here are some costs to think about:

Health insurance

It is now the rule that everyone needs health insurance, so you need to include that in your budget. Not having disability insurance is also a bad idea, even if you are young. To make money as a free agent, you have to work. If something bad happens, like breaking your hand and making typing hard, you need to have that insurance.

Getting Old

No matter how long you want to work or how old you want to be when you retire, you need to plan for the day when you get paid less. Using the power of compounding, your savings will grow quickly in a tax-advantaged account. This will help you handle your money as you get older.

Savings: Finally, make sure that your budget allows you to save some money for future purchases.

Taxes: Different states and cities have very different tax systems. But as a general rule, set aside at least 25% of your first payment for taxes so you do not get a big bill from Uncle Sam during tax season.

Early on, find out what kind of independent worker the IRS says you are. This will help you figure out what your tax obligations are. A lot of the time, you will need to pay what is called “self-employment tax,” and you should do that every three months. This is where the way you keep records is very important.

• Take care of your finances

This is an important part of working that will kill your business if you do not do it, even if you use accounting software or a certified public accountant (CPA). Using a few well-known software programs will make paying and invoicing a lot easier, which will keep things neat for the taxman. If this is something that scares you, though, and you have the money, you might want to hire an expert.

• Always pay yourself

Even though your income can go up and down like a roller coaster when you are a contractor, give yourself the gift of a steady paycheck. This will make you feel less stressed and make making your monthly budget a lot easier.

To make sure there is consistency, split your average income over the last twelve months by twelve. This will give you a monthly amount. For those who are new to freelancing, figure out how much you have spent over the past year and divide that number by twelve. This will help you figure out what you need to make once you add up the costs in #3.

Do not give all of your money back to the business; you deserve a paycheck. Do not stop paying yourself like an employee. This will give you peace of mind and a true picture of how your business is doing.

• Make your projects more varied

Having steady work from the same client is good because it gives you security, but it can also make you too dependent on that one job. Change the kinds of clients you work with as you continue to build your name and client base. That way, if something happens to your “big fish,” you will not have to rush to make up the money you lost.

• Talk to a professional

Last but not least, just because you work for yourself does not mean you have to do everything by yourself. Hire a coach. Find a guide. Get a CPA. A Freelancers Union can help you use the power of a group. When you have help, the world seems a little less cold, and you never know what you might learn or who you might meet through the group you build.