In 2019, the number of freelancers in America totaled over 57 million, marking over 4 million new self-employed workers in the previous five years. Similar to most trends, there isn’t a single cause for the ever-growing interest in independent work.
For some, the opportunity to earn an hourly wage that is 70% higher than traditional work is more than enough to make the switch. Other freelancers might simply enjoy the flexibility that comes with choosing your own hours and workload week-to-week.
The ever-increasing demand for freelance work also signals an important change in the larger business landscape. Companies have raised their annual budget caps for freelance work, which has allowed for more opportunities for contracting out their projects to independent workers. Freelancers who may have been limited to a part-time capacity have, accordingly, found enough work to make the leap to full-time self-employment.
But the upsurge in freelance popularity doesn’t make this transition any easier to make, especially for those who aren’t financially prepared to abandon their stable employment, reliable salary, and employee benefits.
Before you email your two weeks’ notice, here are a few important strategies for managing your personal finances and making the most out of your full-time freelancing lifestyle.
Savings & Personal Debts
The first, and perhaps most important, step to quitting your day job has everything to do with your personal cash reserves. The average startup business takes two to three years to become profitable, and many freelancers follow a similar timeline. In order to reach the point where your revenue outpaces your expenses, you might need to prepare for months or years without a regular salary.
Surviving past the profitability benchmark means preparing your personal finances well in advance—primarily in the form of maximizing your savings and minimizing your outstanding debts. Savings give you a well to draw from during those critical months when all of your freelancing income goes to paying off expenses and keeping the business afloat.
If you’re not sure where to begin, a few creative solutions for savings today include:
- Refinancing your current debts. Although not always the case, refinancing your personal debts can lower your monthly repayments and the total amount you pay on your interest over time. There are a number of places to start your research, depending on the debts you carry. Refinancing your mortgage without closing costs, for example, can help you reduce your mortgage payments without having to front the cost to refinance. Learning how to refinance your student loans is another popular option, especially for freelancing hopefuls that still have a balance on their private loans.
- Automating your money management. Financial technology has come a long way over the past decade, and automating your personal bank accounts is one powerful innovation that deserves a spot in your toolbox. Account automation doesn’t take long to set up, but it will help you manage your money more regularly, all the while eliminating the possibility of human error. Automatic withdrawals on your checking account, for example, not only force you to allocate a consistent amount of your paycheck to your savings but also drastically reduce the risk of incurring late fees and overdraft charges on your bills.
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- Transitioning gradually to full-time freelancing. Before you fully migrate to working as your own boss, take advantage of your current salary and benefits to maximize your savings potential. By coupling your freelancing efforts with a part or full-time job, you’ll have the financial stability you need as you secure a consistent stream of work. And at the same time, that bi-weekly check will prove invaluable when it comes time to cover your own business expenses.
Productive & Professional Workspace
Which leads to our next point—unlike working for a company, you will be solely responsible for supplying all of your own equipment and designing your own workspace. Jumping headfirst into freelancing means that you’ll have to tackle all of your costs of business at once, which certainly adds up quickly for those just starting out.
By some estimates, you’ll need to plan for at least $1000 spent every month on supporting your full-time self-employment, and likely much more if you’re still paying off your workspace equipment.
The first expense category in cultivating a productive workspace is administrative costs, which includes anything you need for your auxiliary business functions. Invoicing software is a great example, as many freelancers need some form of cash flow management to ensure that they are receiving payments in a timely fashion. Administrative costs also include time-tracking software for accurate billing, messaging platform subscriptions for customer communications, and your monthly internet subscription.
Second, you’ll need to cover any tools and technology that are required for your field of work. Freelance graphic designers, for instance, will need to budget for an adobe creative cloud account, a high-quality camera, a digital stylus, and other essential tools in order to satisfy their customers. With so many software options available, this expense category can offer significant opportunities to save, as many platforms offer free or reduced pricing for single-user packages.
The final piece to completing your workspace is the hardware and equipment that you need to create a professional workspace. Depending on your line of work, your setup could be as simple as a laptop, chair, and desk. Other freelancers may need to anticipate filing cabinets, printers, fax machines, telephones, mailing supplies, and second monitors in their business-related expenses.
Diversified Client Portfolio
Would you be able to freelance in a full-time capacity if your biggest customer decided to stop working with you today? Chances are, if you’re not ready to answer this question then you’re not ready to quit your day job.
In fact, one study—which surveyed the experiences of SEO freelancers—found that respondents averaged working with 9 unique clients in a given year. Any less, and they ran the risk of running out of work or putting all of their eggs into one basket. Working with multiple clients over the course of a year also meant that these freelancers were able to hone their skills on a wide array of projects.
Diversified customer portfolios also play an important role in a much larger freelance philosophy–cash flow management. Defined as the process of tracking how much capital is “flowing” into and out of your business, cash flow management helps freelancers stabilize their income, mitigate month-over-month fluctuations in income, and budget for the future.
A large number of customers typically means that each project will be smaller (and therefore less profit), but it also means that you’ll have deposits in your PayPal account at a more regular rate.
All that being said, there is such a thing as too many customers, and freelancers with too much work on their hands will find their multiple streams of income outweighed by becoming spread too thin. Infeasible workloads often translate into cutting corners on your work or missing deadlines for your customers, which might jeopardize your existing relationships.
As you become more familiar with your own workflow, you’ll be able to find the balance between a stable source of income and a manageable workload.
Although it seems rather intuitive, freelancers need to charge enough (whether that takes the form of an hourly rate or by-project charge) to generate a profit. But calculating your fees isn’t as simple as transferring the equivalent of your salary into an hourly charge.
Freelancers are small businesses, and as such need to calibrate their cost to hire to cover the administrative costs that come with running a small business. Each hour you spend actually working on client deliverables needs to also cover the time you spend drafting invoices, communicating with points of contact, sourcing new leads, updating your personal website, and networking with other professionals in your industry.
One of the largest inhibitors to profitable wages for freelancers is caused by the myths that run rampant in this field of work. Freelancers looking for new opportunities often shortchange themselves for the sake of gaining new experience, with the hope that better pay will come after they’ve proven their worth. Inexperienced independent workers are also less likely to reject work proposals that fall below their profitability margins, due to the fear that they won’t find better-paying work or that rejecting too many projects could mar their reputation.
The solution is to calculate well in advance the minimum amount you can charge in order to keep the lights on, put money toward your savings, allocate vacation days off, and pay yourself for your work.
This infographic from CreativeLive on estimating your hourly charge does a great job of breaking down each of the factors that go into profiting from your freelance work. Some important points include:
- Finding your annual adjusted salary, which combines the total cost of each of your expenses with the projected amount you want to make
- Incorporating vacation time, sick days, and holidays into creating a livable and sustainable wage
- Researching your cost of living, which includes everything from healthcare coverage to a self-employment tax
Having this data on-hand will give you the confidence you need to accept projects that are the best fit for your needs or request a raise for those offering lower-than-expected payment.
If you are a current full-time freelancer, what financial roadblocks did you have to overcome? I’d love to hear about your personal experiences for prepping your finances and setting up a sustainable freelancing income!