Finance Management For Freelancers

Publié le 17 October 2023 Par Jobillico

Proper finance management for freelancers is an important component to a successful and long-lasting career.

Managing finances of your freelancing business is about more than just basic budgeting.

As a self-employed business owner, some freelancers may have to act as their own accountant—that means you are solely responsible for every aspect of financial planning, from managing monthly income to filing self-employment tax.

The stakes are undoubtedly high. But for the millions of people choosing this career path each year, they will tell you that working for yourself is absolutely worth it.

According to a survey by McKinsey, 36% of American workers reported themselves to be independent contractors or freelancers in 2022—a sharp increase from 27% in 2016. On a global scale, that figure is even higher, with the ILO estimating that 46.6% of workers were self-employed in 2021.

So, whether you’re just starting out or have years of experience in the gig economy, managing your finances doesn’t have to be stressful.

Keen to learn about self-employed accounting? You’ve come to the right place. This article covers the main factors of finance management for freelancers, common mistakes to avoid, and tools that make the process easier.

Why finance management matters for freelancers

Working as a freelancer is distinct to the classification of ‘employee’. For starters, employees have more legal protections from their employers. Let’s explore some of the key differences:

Freelancers don’t receive a wage or salary, instead being paid on a per-project basis.

You can’t claim benefits such as paid leave for vacations, illnesses, or maternity/paternity leave.

You won’t receive employer contributions to a 401(k) or pension scheme.

That said, lacking these benefits is made up for in other ways. You may be able to make more money, pay less in taxes, and have the flexibility to work when and where you want. It just requires more accounting effort on your end.

No matter what sector you work in, finance management for freelancers is essential for peace of mind, since knowing how much is in the bank is a necessity for future planning—whether that’s scaling your business, retirement, or simply booking a well-earned vacation.

The moral of the story is that personal accounting isn’t something you can ignore. Everyone knows that managing your money can be stressful, but it becomes much easier the more you learn.

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8 Freelance Finance Management Tips

From preparing for retirement to seamlessly paying invoices, let’s explore some essential finance tips for freelancers.

Outline Income Sources and Expense Patterns

Your income sources represent money that comes in, while expense patterns represent money that goes out. You’re going to need to track both if you’re to balance the books.

As a freelancer, you’re probably familiar with what your cash flows are already. But let’s recap the main considerations for those who are just getting started. Common income sources might include:

Client payments: The primary source of income for freelancers comes from payments received from clients for services rendered.

Retainer agreements: Income may also be generated from ongoing retainer agreements with clients for consistent work over a specified period.

Royalties: For freelancers who create intellectual property such as books, courses, or music, royalties from sales or licensing agreements can be a significant income source.

Ad revenue: If your freelancing involves running a website, blog, or YouTube channel, you can earn income from ad placements such as Google AdSense.

Affiliate commission: Some marketing partnerships offer you a cut of each sale that comes from your promotion of a product or service.

Meanwhile, common business expenses might include:

Workspace costs: Add up the cost of rent and utilities for your home office or co-working space, as well as internet and phone bills.

Office equipment and software: Factor in the cost of PC maintenance, supplies, and subscription fees for essential online tools.

Personal training: Professional development is still crucial for freelancers, but you’ll likely have to cover the cost of upskilling yourself.

Taxes: Set aside funds for income tax payments, social security, medicare, and so on. Also factor in the cost of accounting advice, should you require those services.

Insurance: Health insurance, liability insurance, and professional indemnity insurance are all necessary protections for a self-employed worker.

Emergency fund: Set aside cash for unexpected expenses or periods of lower income to maintain financial stability.

Retirement savings: Contribute to retirement accounts, such as IRAs, RRSPS or SEPs, to plan for your financial future.

Debt repayment: If you have loans or credit card debt, budget for regular payments to reduce or eliminate them.

To calculate your take-home earnings, take your total income and subtract any expenses.

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Time is of the essence as a freelancer, so find ways of working out your income and expenses efficiently. Use a spreadsheet template or an accounting billing software that can handle more of the manual workload. As the software automatically prepares invoices and monthly finance tracking reports, you can free up time to take on more work.

Maintain A Safety Net to Cover Unexpected Expenses

It’s clear that freelancers face an extensive list of expenses, some of which can pop up unexpectedly. If your work computer suddenly breaks down, and won’t be able to complete anything until it’s replaced. If you didn’t have an emergency fund, it could be a nightmare finding the cashflow to simply get back to work.

On top of this, some months can be worse than others financially—a client can’t give you as much work due to factors outside your control or you suddenly become ill, for example.

Freelancers need to be aware that their income is variable and, at times, unstable. Yes, you will have good months, but you must be prepared for the bad months too. As a general rule of thumb, you should keep 3 to 6 months’ worth of living expenses in a safety net, just in case.

Prioritize Paying Debts and Set Aside Tax Funds

Taking on debt is risky for numerous reasons. Obviously, it accrues interest, which can be financially draining over time. But more to the point—if you don’t pay your debts off in time, you could be hit with additional penalties and a negative hit to your credit score.

As such, most people tend to have a debt-averse approach to finance, seeking to pay off their credit cards and debts before buying anything unnecessary.

Many people also think of tax as being in the same category as debt, since it’s money that you owe to the government and will be paid by the end of the financial calendar. But you should always calculate how much tax you owe in advance. This allows you to plan accordingly, keeping the money in a spare account where you won’t accidentally spend it.

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Set Up Retirement Accounts

It may be a long way away for some, but planning for retirement is something all of us should be doing.

As we’ve already covered, freelancers don’t enjoy the usual employee benefits, so you won’t receive payments into a 401(k) or retirement account. That means you’ll be taking on more responsibility to save this money yourself.

Obviously, the amount you need to save will come down to the lifestyle that you want to live after you retire. That said, you should plan to spend no more than 4% of your retirement fund each year, to make your savings last for 30 years. So, work out how much you’ll spend per year of retirement, minus the state pension, and multiply that by 30—that is your savings target.

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Explore Opportunities to Diversify Your Income Sources

To be a successful freelancer, you have to keep your eyes open to opportunities wherever you see them. You might have found a niche that suits you. But don’t let this mentality close the door to other income streams that you can run on the side.

We mentioned ad revenue and affiliate commissions earlier—these can be reliable sources of passive income if you have a website with decent traffic. Or if you’ve been working with the same client for an extended period of time, you could ask to negotiate a retainer agreement, especially if you’re crucial to running their operations.

Establish Clear Invoicing and Payment Processes

One area that will save you significant time in the long run is your system for creating invoices using invoice software and making outgoing payments.

Many freelancers prefer automated systems such as accounts payable solutions to keep on track of their outgoing expenses. These platforms not only streamline your workload, producing automated invoices and receipts, they also provide a birds-eye view of your finances, helping you calculate how much you can afford to spend.

Maintain Separate Business and Personal Bank Accounts

The key distinction between business expenses and personal expenses is that you can write the former off on your taxes. Understanding this difference is a key part of understanding finance management for freelancers.

The IRS estimates that the average American spends 13 hours filing their tax return. So, to save time, it’s easier to keep business and personal spending in separate accounts—this simplifies the process of working out your taxable income.

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Define Short-Term and Long-Term Financial Goals

As with everything in life, going in with a plan makes the journey stress free.

While meticulously planning your financial goals isn’t always realistic, it’s good to have some sense of your annual target. From here, you can calculate the amount of work that you’ll need to take per week to realize those dreams.

Managing Your Freelance Financial Journey

To wrap up, finance management for freelancers isn’t going to be as easy of a journey as it will be for company employees. Freelancers have increased responsibilities—from filing tax returns to invoice processing, and ultimately, saving for retirement.

Accounting tasks can eat up a lot of your time if you don’t have the right processes in place. So, when starting your freelance business, invest in the necessary tools to save you time, energy, and money. Alternatively, you can think about hiring an external accountant. Either way, it’s crucial to do it right. Good luck!