Freelancer Getting Started Guide to Finances

Riddle me this, freelancers – is a killer month when you earn $10,000 working on jobs or when you’re actually paid that $10,000?

Finance Abacus

If you’ve been working as a freelancer for any real amount of time, you know all too well that completing a job has very little to do with the timeframe in which you will get paid.

Some clients (who we love) pay immediately – for those who pay electronically, this is often literally true. Other clients (and we love you too – mostly) can take weeks, months or (gulp) even longer to get the money to you.

Because of this fact, it’s really hard to figure out things like what our weekly and monthly earnings are. You might complete that $10,000 job mentioned earlier, but the money that comes in that month is from a few dozen jobs the month before totaling around $4,000.

Knowing that this is probably going to be a fairly common occurrence, how do you plan for your budget, savings, and retirement accounts? What can you do to make sure that you always have money lying around that’s easily accessible?

Freelance Financing 101: Stay Liquid… Up to a Point

What it really boils down to is that living the freelance lifestyle means you’re going to have to keep more money in a form that can be accessed quickly. Translation: Use savings accounts.

No, they won’t net you big returns, but they are the easiest way to earn a tiny bit of income while keeping your cash close at hand. Normal 9-to-5 working stiffs are supposed to keep around three months of expenses in a savings account in case the worst happens. For freelancers, I recommend at least six months’ worth.

Budget carefully, making sure to include padding. Yes, you want to know how much you really, truly need to earn each month, but the padding is important because there’s a great chance those first several months will be tight as you build up a client base. If you’re aiming to make $5,000 a month to meet your budget but $500 of that is “miscellaneous expenses,” you’ll be a lot happier when you only make $4,450 and fall short.

Separate Work and Play

This is one of those things I wish I’d done right from the beginning, but instead it took a year and the advice of my tax preparer before I finally made the switch. What am I talking about? Creating separate checking and credit card accounts which are solely for the business.

When payments come in, deposit them into the business checking account. If you pay for anything related to the business, even those (ahem) business dinners, put them on the business credit card and pay it off from the business checking account. How do you keep enough money in this account?

Figure out your “salary.” Remember that budget you came up with? Well, multiply it by 12 to figure out your desired annual wages, then divide by the number of times you want to be paid – this is your salary. Just be sure you always leave enough money in the freelance checking account to cover things like paying…

Quarterly taxes and Health Savings Accounts

Yup, that’s right. Now that you aren’t working for an employer, no one is turning in regular tax payments for you, so you have to do it yourself – four times a year. Another reason why the big savings account is a good idea, just in case you’re running a bit low for one of those payments.

Get cheap insurance, then set up an HSA. Health Savings Accounts are godsends for freelancers because the money you put in them doesn’t count toward taxes and you can use it to pay off the ridiculously high deductible you get on your not ridiculously low-enough-priced health insurance plan. How much should you put in your HSA? I recommend the full deductible amount.

Looking Long Term

After you’ve done all this, you can finally start working on IRAs and other long term (and higher-yielding) investments. Hopefully you were smart enough to include them into your budget even if you didn’t have anything set up yet. If not, head back to the drawing board and see what you can move around. Remember, the most important things in a freelancer’s finances are availability and flexibility.

For those looking for more advice on freelancer financing, including in-depth and detailed advice on the topic, check out eBook Finance for Freelancers by Martha Retallick, which is available from Rockable Press.

Photo credit: Some rights reserved by gorielov.

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