Advertising

How To Effectively Manage Your Freelance Income

Advertising
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.

Advertising

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.

Advertising

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.

Advertising

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.

Advertising

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.

Advertising

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

More by this author

When You Start to Pursue Your Dreams, These 13 Things Will Happen 10 Brilliant Features Of Google Now You’ll Regret Missing Henry David Thoreau Quote 11 Free Life-Changing Books and Essays in the Public Domain 17 Benefits of Having an Animal as Your Best Friend 7 Success Tips Musicians Can Teach Us

Trending in Money

1 How To Achieve Financial Freedom With the Right Mindset 2 Financial Freedom is Not a Fantasy: 9 Secrets to Get You There 3 40 Healthy And Really Delicious Meals You Can Make Under $5 4 Life Insurance: A Secure Way To Protect Your Future. 5 How To Save Money On Groceries: 13 Quick Tips

Read Next

Advertising
Advertising

Published on November 8, 2021

How To Achieve Financial Freedom With the Right Mindset

Advertising
How To Achieve Financial Freedom With the Right Mindset

What would being financially free mean to you? Have you made the mistake of thinking that financial freedom requires millions of dollars and decades of hard work? When it comes to our relationship to money, the answers really lie in our mindset. Change your mindset around money and your entire financial outlook will change with it.

And no: we’re not talking about putting a check for a million dollars under your pillow at night. This is about you becoming a financially free person, in whatever capacity you choose. And that’s really the key: it needs to be defined by you. So many people outsource this responsibility to society/celebrities/the government etc… and as a result never achieve it.

What if you could identify what financial freedom looks like for you, realize that it is possible to get there in a matter of a few months and then build a road map to do just that?

Read on, because that’s what we’re going to open you up to. This isn’t about giving you specific strategies “guaranteed to work in five minutes or your money back…blah blah.” This is about awakening you to just how powerful you are, where your blocks lie and how to smash through them effectively.

Financial Freedom – What is it?

Well like I said: I’m not going to define this for you. That misses the whole point of this article, but let’s lay out some ideas to get you started.

Typically, when we talk about financial freedom in the west, we really mean: freedom from needing to work, in order to meet financial obligations. We know that there has been a rise in depression amongst nine-to-fivers, 62% as a matter of fact between 2019 and 2020 in the USA.[1] It’s therefore no wonder that there has been correlative uptick in the search for alternative solutions to finances.

This depression is largely as a result of feeling trapped, unable to realize potential and being denied opportunity. It is also likely that, thanks to a more global world and social media: we see just how abundant life can be for some; like a carrot dangled tantalisingly close, but just out of reach. We yearn for more meaning in our lives, more excitement and to be able to live on our terms.

Advertising

Finances are (as we see it) the stumbling block and the preserve of the chosen few…not us.

So to start building an accurate picture of what financial freedom would be for you, begin with what your life would look like if you didn’t have to worry about money. How would you feel if you didn’t have to consider your monthly budget, when putting your hand in your pocket to pay for lunch?

The point is that a lot of the stress and resulting depression that comes from feeling like a ‘wage-slave’ is down to our lack of clarity on what we actually want. We get caught, focussing on what we lack and that perpetuates a mindset of lack that very quickly is reflected in our reality. We are allowing our subconscious, emotional mind to be bombarded with imagery every day that reenforces a sense that we aren’t good enough. That we do not have what it takes.

That wouldn’t happen though if we had done the work of pinning down exactly what we wanted in the first place.

Does Financial Freedom Come at Extreme Levels of Net Worth?

There is a tendency, thanks again largely to how we are conditioned through media, to think that financial freedom only comes at extreme levels of net worth. What if I told you that is completely ill-founded and untrue?

Using the standard/assumed definition of financial freedom for a moment; this means that you need enough capital to generate a return that is greater than, or equal to your monthly expenditure. That doesn’t necessarily tell the full picture, but nevertheless; it’s is a good place to start.

If your monthly outgoings (mortgage, bills etc…) come to $3,000 for argument’s sake, you can achieve that with as little as $108,000 invested over three years.[2]

Advertising

Hardly the millions you had probably envisioned is it?

Remember: we’re not talking about you living a lavish lifestyle necessarily. If that is what you want; fantastic, it’s certainly achievable, but what we’re getting at here is your ability to meet all of your financial obligations without having to work.

I’m sure you’re unlikely to find $108,000 down the back of your couch, but it is a figure that is well within reach of most working adults. A $36,000 salary opens you up to borrowing that kind of money, and even if you have to continue working in the short term in order to service the debt and keep up with your bills; you’ll have a clear end goal in sight.

And you’ll have doubled your income in the meantime, for the same amount of work!

How To Achieve Financial Freedom With the Right Mindset

As we touched on earlier, coming at your life from a space of ‘lack’ simply perpetuates more of the same. As I always say: your environment doesn’t lie. Look around you, if you’re dissatisfied with any aspect of your life, you first need to accept responsibility for it. If you don’t, you’re abdicating your power to make new choices.

You may well have been the victim of circumstance in the past, but how you respond and what you do with that experience is up to you. If you choose to look for the positive, however minor it might be in any given situation – your experience of life will begin to change.

This is, in essence, what The Law of Attraction is all about. What lies behind it is your reticular activating system (RAS). The part of your brain designed to filter out the (as it sees it) unless information, highlight the important information and prioritize your safety. Thanks to it being part of your primeval/‘lizard’ brain however, it predates the conscious mind, intellect and reason.

Advertising

The issue for a lot of us is that we haven’t understood how to communicate in a way that our RAS understands. We can’t translate our conscious desires and are therefore caught in a loop between two incongruous forces.

Our subconscious wants us to be alive and it bases its criteria for this, largely on the principal of: same = safe. Meanwhile, your quality of life, passive income, work/life balance etc… are inconsequential. That part of your mind doesn’t give a hoot about the utility bill or being able to afford a holiday.

It is perfectly possible to show you subconscious/RAS the benefits of financial freedom though, or indeed any other outcome you’d like to see in your life. You just have to speak its language. Becoming debt free and financially free is actually one of the easiest things you can communicate to your subconscious, because you have so much ‘real-world’ experience with money.

Here’s how:

  1. Start by clearing your mind and being present – find a meditation, visualization or breathing exercise that calms your mind, allows you to focus on the present moment and become an observer of your surroundings. The point of this is to stop all of those thoughts buzzing around in your head that are pulling you back to the past, or projecting you into an imagined future.
  2. Then build a mental movie or slideshow of what your average day would look like, were you to achieve financial freedom. We’re not talking about big occasions, huge wins or events; just an average day.
  3. From your position of present observer – start to observe the feelings that arise as you go about this average day in your new life. Do you feel your shoulders relax and drop? Have you got excited ‘butterflies’ in your stomach? Are you smiling more?

Learn to recall these feelings at will – this will connect the dots for your RAS and you will soon start noticing a shift. Think of it as connecting with your desired future and pulling it into/towards your present.

Bonus Hack – Practice Gratitude

We’ve already discussed how you can start attracting/observing the opportunities that will enable you to achieve financial freedom. This involves a lot of work in order to finesse, but the principals are easy enough to understand. Something that we can all do, no matter what we’re trying to achieve, is practice gratitude.

Using the same principals that I’ve outlined above: something of a ‘catch-all’ that we can train our minds to produce more of, is gratitude. If we can shift our mindset so that the next time some negative, external and unforeseen event occurs, we are still able to be grateful for it; your entire experience will shift.

Advertising

Not only will you observe more to be grateful for all around you on a daily basis, but you will shift out of a mindset of ‘lack’. All of the barriers that stood in your way before (not enough capital, stuck in a job I hate etc…) they will shift to becoming things that support your desires and goals.

For example:

The job you hate, when reframed as the means to support a transitional stage of your life (i.e. enabling you to borrow money to invest) suddenly gives you a resource to be grateful for.

The added beauty of this is that your RAS doesn’t know the difference between a big win and a small win. You being truly, deeply grateful for your socks (for example) carries the same weight as being grateful for your health, or your spouse. This is why I say “practice” gratitude. You can start whenever you want!

Look around you right now and find something that you really are grateful for, no matter how small and seemingly inconsequential.

Practicing this will create a snowball effect. Much quicker than you might think: you’ll be overwhelmed with gratitude for your life and all that’s in it.

In Summary

Financial freedom is more within your reach than you probably think or feel. Understand that the limits you’re assuming to be there are largely a product of your subconscious mind, having been drip-fed evidence of that over the course of your lifetime. Changing that might take a lot of effort in the short-term, like cranking over an old car, but the effects will begin to build up quickly and self-perpetuate.

Advertising

Apply this mindset to your financial situation and you will find that it too will begin to ‘snowball’. Financial freedom is closer than you think, so start looking for it today!

Featured photo credit: Pepi Stojanovski via unsplash.com

Reference

Read Next