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How To Effectively Manage Your Freelance Income

How To Effectively Manage Your Freelance Income

One of the toughest things about freelancing is figuring out how to manage your freelance income so that you’re not standing in line at the local food bank during the lean times (although that’s an option, and it’s certainly happened!). Here’s a how-to guide to help you smooth out the roller-coaster ride of your cash flow.

Open a Separate Business Account With Multiple Savings Accounts

Let’s talk about bank accounts for a minute. In addition to your personal checking account, it’s a good idea to set up a separate business account. This makes it easier for you — and your accountant, if you have one — to manage your freelance income. This will make your accountant very happy, come tax season.

In addition to your main business account, most banks will allow you to set up multiple savings accounts for free, so why not take advantage of this ability? Even though you can manage your freelance income using bookkeeping software or spreadsheets, squirreling your savings away in separate accounts isn’t a bad idea, if for no other reason that it might make you think twice before getting your hands on money that you’re setting aside for stuff other than splurges. Especially if, like me, you put the checkbooks and debit cards in one of those “perfect” places that you can never find afterwards.

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Here’s a suggested list of bank accounts to consider opening:

  • Main Business Account: Make this the highest-yield savings account your bank offers, so that any cash that’s in there is earning interest while it’s sitting there. When a client pays you, this is where you deposit the check. From this account, you:
    • Pay yourself
    • Pay your business expenses
    • Set aside money for taxes, retirement and emergencies
  • Savings Accounts to Open Under Your Business Account: Open the following savings accounts under your main business account, and then once a month, after you pay yourself, transfer a designated amount into each of them. Think of these transfers simply as additional bills to be paid. I believe that most banks will even allow you to automate these transfers, which makes it a pretty painless and darn convenient way to manage your freelance income.
    • Retirement Savings: This can be a traditional retirement account such as a 401K, or you could even start doing a little basic investing with this money, since  (hopefully) it’s going to be in there for awhile.
    • Tax Savings: This is the holding area for yearly taxes
    • Emergency Savings: This is your buffer for lean times.

Set Up an Emergency Fund

Your emergency fund should be the first thing you think of when you have any cash left over after your expenses are paid. Having a year’s worth of expenses in reserve is a worthwhile goal for effectively managing your freelance income. Your emergency fund will be there for you in case your income drops below what you need to keep your commitments. In addition, having an emergency fund means that you can turn away clients who don’t quite feel right, or if a good client runs into a financial tight spot and can’t pay you immediately, you’ll have a cushion to carry you through. And of course, there are those unforeseen things that just happen — called emergencies — such as a pet getting sick or an unexpected car repair.

Treat yourself like an employee

Decide how much you can afford to pay yourself, then on a regular basis, either write a check to yourself or set up an automatic transfer from your business account and deposit it in your personal checking account. It is from your personal checking account that you pay things like rent, food, and other living expenses that aren’t related to the business.

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When deciding how much to pay yourself, it’s a good idea to stay on the frugal side and only pay yourself enough to cover your living expenses plus a little extra, then sock anything that’s left over at the end of the month into your emergency fund.

Project Upcoming Monthly Income and Expenses

Part of effectively managing your freelance income is figuring out how much money you’re making and spending each month, and then using those numbers to estimate what the next year might look like. When you’re calculating your projections, it’s a good idea to base your budget on your lowest monthly business income and highest monthly business expenses from the previous year. This is like assuming the worst-possible scenario, and hopefully, if your income’s trend is generally upward, estimating conservatively in this way should give you a bit of a buffer, which, once again, you can sock away in your emergency fund. It’s impossible to have too much money in that emergency fund!

Break Up Client Payments for Big Projects

If you’re working on a big project that extends over multiple months, consider billing your client on a time-interval or a “milestone” basis. That way, if your client flakes out or can’t pay you immediately, you’re only out a partial payment instead of the whole thing at once. It also smooths out your income curve, making budgeting easier. Also, if you need to exert a little persuasive power on a particularly recalcitrant client, you can calmly explain that they’ll get no more work from you until you’re paid from the last billing cycle. Hopefully you’ll never need to use this tactic, but it’s there if you need it.

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Be creative in finding ways to generate additional income.

There’s a whole movement called the Share Economy that you can tap into for additional sources of cash at little or no cost to you. If you have an extra room in your house, consider renting it out to travelers, or rent your car when you’re not using it. Or consider investing some of your leftover money in things that appreciate in value, such as musical instruments, that you can sell later for a profit. The more different streams of income you have, the less of a hit you’ll take during a dry spell in freelancing.

If possible, live on only one income.

If you have a partner with a job or other regular stream of income, do your best to live on that income alone, and either save or invest everything that you earn from freelancing.

Establish a foundation of thrift.

You never know when you’re going to have a lean month, or even a lean year, so make a habit of living on the cheap. Sign up for Netflix instead of paying for cable TV. Buy clothes at a thrift store, or check out local garage sales for things like furniture, sports equipment and appliances. Avoid buying fancy tires and rims for your truck that are going to cost a fortune to replace later. Trade stuff that you don’t want for stuff that you do want on Listia.

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Resist “lifestyle inflation”.

This is the temptation to increase your spending as your income increases. If you find yourself at the end of the month with money left over, stash it in your emergency fund or invest it back in your business by, say, paying for some online advertising or attending a seminar in your field of expertise.

Prioritize spending.

Many financial experts recommend sitting down and writing down your expenses. Prioritizie them according to importance and pay the most important ones first.

Pay down your debts.

Take a piece of paper and divide it into columns. List your largest monthly payment toward the left, then go smaller and smaller until your smallest monthly payment is at the far right. Double up on the smallest payments until that debt is gone. Then take the money that you’re no longer spending on that debt and start doubling up on payments on the next debt. Keep going until all of your debts are paid off.

Featured photo credit: Twister/Beyond Neon via flickr.com

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Last Updated on January 21, 2020

How to Develop a Millionaire Mindset in 6 Simple Steps

How to Develop a Millionaire Mindset in 6 Simple Steps

We all like to dream about being financially wealthy. For most people though, it remains a dream and nothing more. Why is that?

It’s because most people don’t set their mind to achieving that goal. They might not be happy in their current situation but they’re comfortable – and comfort is one of the biggest enemies of growth.

How do you go about developing that millionaire mindset? By following these simple steps:

1. Focus On What You Want – And Take It!

So many people are too timid to admit they want something and go for it. When there is something that you want to accomplish don’t think “I could never actually do that”, think “I could do that and I WILL do that”.

Millionaires play to win, not to avoid defeat.

This doesn’t mean to have to become a selfish jerk. What it means is becoming more assertive and honest with yourself. You don’t have to grab off other people. There is a big pot of unclaimed gold in the middle of the table — why shouldn’t you be the one to claim it? You deserve it!

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2. Become Goal-Orientated

It’s almost impossible to achieve anything if you don’t set firm goals. Only lottery winners become millionaires overnight. By setting yourself attainable goals, you will get there eventually. Don’t try to get rich quickly — get rich slowly.

Let’s take the idea of making your first million dollars and expand on what kind of goals you might set to get there. Let’s also say you’re starting at a break-even position – you’re making enough to get by with a few luxuries, but nothing more.

Your goal for the first year can be having $10,000 in the bank within a year. It won’t be easy but it is doable. Next, you need to figure out the steps you need to take to achieve that goal.

Always look at ways to make growth before cutbacks. With that in mind, you might want to see if you can negotiate a pay rise with your boss, or if there’s another job out there that will pay better. You might be comfortable in your old job but remember, comfort stunts growth.

You may also have other skills outside of your workplace that you can monetize to boost your bank balance. Maybe you can design websites for people, at a fee of course, or make alterations to clothes.

If this is still not enough to make the money you need to save $10,000 in a year, then it’s time to look at cutbacks. Do you have a bunch of old junk that someone else might love? Sell it! Do you really need to spend $10 on your lunch everyday when you could make your own for a fraction of the cost?

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If you are to become a millionaire, you need to start accumulating money.

Here’re some tips to help you: How to Become Goal Oriented and Achieve More in Life

3. Don’t Spend Your Money – Invest It

The reason you need to accumulate money is for step three. Millionaires tend to be frugal people, and that’s because they know the true value of money is in investing. Being your own boss goes hand-in-hand with becoming a millionaire. You’ll want to quit your regular job at some point.

Stop working for your money and make your money work for you.

Rather than buying yourself a new iPad, that $500 could be used to invest in the stock market. Find the right shares (more on that later), and that money could easily double within a year.

There’s not just the stock market — there’s also property, and your own education.

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4. Never Stop Learning

The best thing you can invest in is yourself.

Once most people leave the education system, they think their learning days are over. Well theirs might be, but yours shouldn’t be. Successful people continually learn and adapt.

Billionaire Warren Buffet estimates that he read at least 100 books on investing before he turned twenty. Most people never read another book after they’ve left school. Who would you rather be?

Learn everything you can about how economics works, how the stocks markets work, how they trend.

Learn new skills. If you have an interest in it, learn everything you can about it. You’d be surprised at how often, seemingly useless skills, can become extremely useful in the right situation.

Start developing the habit of learning continuously: How to Create a Habit of Continuous Learning for a Better You

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5. Think Big

While I advise to start off with small goals, you absolutely should have a big goal in mind. If you have a business idea, then that is your ultimate goal – to start that business and make a success of it. If you want to invest your way to millions of dollars and do little work other than research, then that is your big goal.

There is no shame in not achieving a big goal. If you run a business and aim to make $1 million profit in a year and “only” make $200,000, then you’re still significantly ahead of most people.

Aim for the stars, if you fail you’ll still be over the moon.

6. Enjoy the Attention

To be successful, you have to be willing to promote yourself and enjoy the attention to a certain extent. Now the attention doesn’t need to be on yourself, it could be on your brand, but attention definitely attracts money.

Never be embarrassed to get your name out there. That means finding a spotlight and being brave enough to step right up underneath it.

If you run a business, try contacting the local papers. You’d be surprised at how amenable they often are to running a story about you and your business, and it’s all free publicity.

Above all, remember: You control your own destiny. Push hard enough for anything and you’ll get it.

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Featured photo credit: Austin Distel via unsplash.com

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