As a freelancer, managing your finances can be a lot more challenging than you might be used to as a traditional employee. Having to account for taxes, insurance and uncertain wages throughout the year makes for very difficult accounting. Here are some of our top tips for managing your finances as a freelancer.
Know what you earn
As we mentioned in the intro, when you’re working as freelancer you may not know exactly how much money you’re going to earn each month. Nevertheless, you still need to have a good idea of your income and outgoings.
To work out your average expected monthly income, note how much you get from regular and retainer clients and then add up all the money you’ve earned from non-regular clients for the past month. Take the total earned from non-regular clients and divide it in two, then add it to your regular client income – this is your projected monthly income.
Next you’ll need to add up any expenses including taxes and calculate your profit by taking your expenses away from your income.
Insurance can be a big obstacle for freelancers because you don’t have an employer making contributions or offering subsidised insurance plans. Even though it can be tempting to skip health insurance and spend the money you save elsewhere, we’d recommend having health insurance!
As well as health insurance, there are other types of insurance that freelancers also need to pay for:
- Life insurance – especially if you have children or other dependents
- Disability insurance – this provides you with an income if something happens to prevent you from being at work
- Car insurance – depending on if you have a vehicle, of course
- Businesses insurance – depending on your line of freelancing work.
Save for the future
Research shows that an estimated 40% of freelancers don’t have an active retirement plan. There are many start up business accounting options available to help to plan for things like this. As well as this, everyone should have an emergency fund they can dip into if needs be. As a rule, it’s best to have enough money in your emergency fund to cover your necessary living expenses for between three to six months.
How to calculate your emergency fund:
- Look through the past six month’s expenses, including all costs that aren’t luxuries.
- Work out the average monthly amount you’ll need to cover these expenses and multiply it by three to six, depending on how many months you want to cover.
This will be the basis for your emergency fund.
Unless you’re very lucky, it’s unlikely you’ll be able to create an emergency fund within a few days so it’s best to make a plan to save a little at a time by putting some money aside each month.
Once you’ve made all the necessary deductions, the rest can all go into a personal bank account (we recommend having two separate accounts). Once the money gets to your personal account you know it’s yours and you won’t have to worry about leaving some aside for whatever reason.