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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 August 20, 2019

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. And that’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways on how to set financial goals and then actually meet them with ease.

5 Steps to Set Financial Goals

Though setting financial goals might seem to be a daunting task but if one has the will and clarity of thought, it is rather easy. Try using these steps:

1. Be Clear About the Objectives

Any goal (let alone financial) without a clear objective is nothing more than a pipe dream. And this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore if you are saving today, then you should be crystal clear about what it is for. It could be anything like kid’s education, retirement, marriage, that dream vacation, fancy car etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives, however small they may be, that you foresee in the future and put a value to it.

2. Keep Them Realistic

It’s good to be an optimistic person but being a pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going out of the line will definitely hurt your chances of achieving them.

It’s important that you keep your goals realistic in nature for it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said – “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”. And this quote sums up the best what inflation could do your financial goals.

Therefore account for inflation whenever you are putting a monetary value to a financial objective that is far away in the future.

For example, if one of your financial goal is your son’s college education, which is 15 years hence, then inflation would increase the monetary burden by more than 50% if inflation is mere 3%. So always account for inflation.

4. Short Term vs Long Term

Just like every calorie is not the same, the approach towards achieving every financial goal will not be the same. It is important to bifurcate goals in short term and long term.

As a rule of thumb, any financial goal, which is due in next 3 years should be termed as short term goal. Any longer duration goals are to be classified as long term goals. This bifurcation of goals into short term vs long term will help in choosing the right investment instrument to achieve them.

More on this later when we talk about how to achieve financial goals.

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5. To Each to His Own

The journey of setting financial goals is an individualistic affair i.e. your goals are your own goals and are determined by your want to achieve them. A lot of times we get on the bandwagon of goal setting only to realize later on that it was not meant for us.

It is important that your goals are actually your goals and not inspired by someone else. Take a hard look at this step at all the goals you’ve set for after this step, you will be on the way to achieve them.

By now, you would be ready with your financial goals, now it’s time to go all out and achieve them.

11 Ways to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a 2 step process –

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough; and invest those savings wisely so that they grow over a period of time to help you achieve goals. So let’s get down to ensuring healthy savings.

Ensuring Healthy Savings

Self realization is the best form of realisation and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your monthly expenses. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you would be surprised to see how small expenses add up to a sizeable amount.

Also categorize those expenses into different bucket so that you know which bucket is eating the most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pump up your savings rate.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classical mistake which almost everyone of us do. We pay ourselves last!

Ideally, this should be planned upside down. We should be paying ourselves first and then to the world i.e. we should be taking out the planned saving amount first and then manage all the expenses from the rest.

The best way to actually implement is to put the savings on automatic mode i.e. money flowing automatically into different financial instruments (for example – mutual funds, retirement corpus etc) every month.

Taking the automatic route will make us lose control of our money and hence will compel us to manage in what’s left with us thereby increasing the savings rate.

3. Make a Plan and Vow to Stick with It

Budgeting is the best to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be made.

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Nowadays, several money management apps and wallets can help you do this automatically. It’s easy and who knows, you may just end up doing what people fail to do.

At first, you may not be able to stick to your plans completely but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Rise Again Even If You Fall

Let’s be realistic. It’s not like the world will come to an end if you made one mistake. This isn’t called leniency but discipline.

If you fail to meet your budget for a month, don’t give up the entire effort just like that. Instead, start again.

Remember that flexible plans are the most realistic plans. So go forward and try to follow your financial goals as planned but if for some reason, the plan gets out of hand for you, do not give up on it just yet. This has a lot to do with your psychology rather than any material commitment.

All you have to do is to stay on the road and vow to stay on it, no matter how much you fall down.

5. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make Savings a habit rather than a goal. While it might seem to be counter intuitive to many but there are some deft ways of doing it. For example:

Always eat out (if at all) during weekdays rather than weekends. Usually weekends are expensive. Make it a habit and you would in turn be saving a great deal.

If you are travelling buff, try to travel during off season. Your outlay will be much less.

If you go out for shopping, always look out for coupons and see where can you get the best deal.

So the key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice which will be harder to sustain over a period of time.

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6. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission. And it would be rather easy to lose the grip over your discipline.

Therefore in order to stay the course, it is advisable that you keep yourself surrounded with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

7. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

So if you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

Use this journal to write down all essential points such as your short term, mid term and long term goals, your current sources of income, your regular expenses which you are aware of and any committed expenses which are of recurring nature.

When you have a written commitment on paper, you are going to feel more energised to follow the plan and stick to it. Moreover, it is going to be a lot more easier for you to follow you and track your progress.

At this point, you should be ready with your financial goals and would be doing brilliantly with savings; now it’s time to talk about the big daddy – Investments.

Making Smart Investments

Savings by themselves don’t take anyone too far. However savings when invested wisely can do wonders and we are at that stage where we will talk about making smart investments.

8. Consult a Financial Advisor

Investments doesn’t come naturally to most of us therefore rather than dabbling with it ourselves, it is wise to consult a financial advisor.

Talk to him/her about your financial goals and savings and then seek advice for the best investment instruments to achieve your goals.

9. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about them.

Just like “no one is born a criminal”, no investment instrument is bad or good. It is the application of that instrument that makes all the difference.

Do you remember we talked about bifurcating financial goals in short term and long term?

It is here where that classification will help.

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So as a general rule, for all your short term financial goals, choose an investment instrument that has debt nature for example fixed deposits, debt mutual funds etc. The reason for going for debt instruments is that chances of capital loss is less as compared to equity instruments.

10. Compounding Is the Eighth Wonder

Einstein once remarked about compounding,

Compound Interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.

So make friends with this wonder kid. And sooner you become friends with it, quicker you will reach closer to your financial goals.

Start investing early so that time is on your side to help you bear the fruits of compounding.

11. Measure, Measure, Measure

All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments; taking stock of how our investments are doing.

If there is one single step where everything (so far) can go wrong, it is at this step – Measuring the Progress.

If we don’t measure the progress timely, then we would be shooting in the dark. We wouldn’t know if our saving rate is appropriate or not; whether financial advisor is doing a decent job; whether we are moving closer to our target or not.

Do measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

The Bottom Line

This completes the list of tips for you to set financial goals and actually achieve them with not so great difficulty.

As you can see, all it requires is discipline. But guess that’s the most difficult part!

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Featured photo credit: rawpixel via unsplash.com

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