Creating a Financial Foundation for your Freelance Career (A Step by Step Guide)

When it comes to setting up a freelance business, no matter the industry you work in, creating a financial strategy is vital to both your business’ survival and your own personal finance. This is because as a freelancer, you are both you and your business. For the same reason that personal branding is vital to your success, being able to properly manage your money will help your freelance career be long and incredibly successful.

Unfortunately, due to the complexity of financial planning, many freelancers who are already dedicating much of their time to running their business and completing their work, will find it slipping by the wayside. In order to avoid this, every freelancer needs a strong financial plan and foundation to guarantee future success in this aspect of their business.

Creating a Budget and Financial Strategy

Creating a budget is the groundwork for any successful business from a financial perspective. By knowing how much you’re earning on an average monthly basis, and how much you need to spend on both personal and business expenses, you can determine if you have enough money to cover both. 

To start your budgeting process, begin by creating a spreadsheet of your average monthly income earned from your freelance business. As a freelancer, your monthly income may fluctuate, but by getting an average, you’ll have a rough idea of what you’re working with. Then, write down all of your expenses, both in your personal life and for your business, on the same spreadsheet. If you find your income cannot cover both, you will either need to cut out certain expenses, or change how much you earn by increasing your rates, or boosting sales. 

The easiest option is to cut expenses. When cutting expenses, you should first look into cutting unnecessary expenses, or extra luxuries, before cutting down on your more important expenses. For example, if you’re constantly buying new equipment that you’re not using, or spending a lot of money on socialization and more “luxurious goods”, consider cutting out those things first. This is only going to be a temporary setback, because as you gain more clients and sign more deals, you’ll earn more, be able to set higher rates, and have the money to spend on less necessary expenses.

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When creating a financial strategy, you also will need to determine how you want to view things such as debt and savings. Many businesses operate with leverage, meaning they take on debt that earns income in return. Other businesses prefer a cash model to avoid debt. Both have merits and downfalls. 

With a leveraged business, you will be able to get higher-end equipment, spend more on marketing and advertising, and anything else to support your business by taking out a business loan. However, the risk is you will need to make consistent payments, and in slow months the loan may take a drain on your finances. For a cash-only business model, only buy what you can afford to pay upfront. While the downside is you will not be able to leverage your debt to earn more, you will take on significantly less risk.

Finally, you will need to consider saving money for your business, as a type of business emergency fund. This fund will protect your business in times of financial difficulty, and is especially useful for freelance businesses that have consistent monthly expenses. Your emergency fund should be composed of enough money to cover 3-6 months of expenses, in the case where you have fewer clients or cannot work.

Payment Processing and Setting Rates

As mentioned previously, setting rates is a vital component for freelancers when it comes to constructing their financial strategy. This involves determining, based on the industry your business is operating in and the rates your major competitors are setting, what your business should be charging per project. By closely aligning your rates with other successful freelancers, you’ll be able to get more clients by not overcharging, while simultaneously avoiding undercharging for your service. Keep in mind, however, that this business is your livelihood, so when setting rates, make sure you will reasonably be able to cover the major expenses you budgeted for previously. 

You should also know the type of rate you’ll be charging, whether it be hourly or a fixed rate per project. At the end of the day, this choice should depend on what you feel is best for your business strategy. Remember that none of these decisions are set in stone, and you will be able to make changes when necessary. However, by making a decision early on, you will have a better foundation to make changes when going forward.

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Payment processing also plays a major role at this end of your business’ financial strategy. Your business should be able to handle many different forms of payments, from invoices to cash payments. Your best option is to research the multitude of payment processing options for freelancers. 

These are numerous options these days, from invoice processing software to credit card readers and applications. Many of these will charge a recurring fee, so make sure you take that into account when signing up for them. Oftentimes, simply writing checks will save the most money, but if you feel this method is outdated, then you can look into other forms of payment processing.

As a freelancer, you can also consider options to get your payments as soon as possible by using a digital checking account with early payments. This is especially helpful as your income is not consistent like it would be with a full-time job, so getting the money early serves as a great buffer to help you pay your bills on time.

Understanding Taxes

Taxes can be one of the most important yet challenging parts of any freelancer’s financial strategy. To best prepare for any taxation, both personal and business expenses, you should know what your tax status is. As opposed to a full-time or part-time worker, you are considered self-employed and will be taxed as such. Therefore, it is also your responsibility to put money aside on a quarterly basis, the freelancer’s equivalent of your employer withdrawing a certain amount from each paycheck for taxes.

You should also know that many expenses for freelancers are counted as business expenses, and therefore are considered a tax write-off. For example, if you have a room in your house dedicated to a home office it can be written off as an expense. Make sure to look into the rules of what is considered tax-deductible and how to avoid an audit. By having a full understanding of this, you will be at a great advantage in terms of how much money you can save every year on your tax bill.

Create separate bank accounts for your personal and business finances

In order to better understand your finances and be better prepared before paying taxes, it’s recommended to create a separate bank account for your personal and business finances. This will help you avoid getting these accounts mixed up with one another and making tax filing more complicated than it needs to be. Business bank accounts are available for freelancers and can be a great way to manage only your income and expenses for your business, while a personal bank account will contain all your finances and records for your day-to-day expenses.

Finding Flaws and Improving Them

As with any business strategy, there are inevitably going to be flaws in your strategy that will have an impact, both short term and long term. Therefore, it’s important to always do a bit of “spring cleaning”, so to speak, and reassess your financial situation. This can occur every year, month, or even week depending on how your business is performing. If you feel that you aren’t able to earn enough with a cash-only business model, for example, you might consider looking into small business loans.

To best improve your financial health, you should treat it like you would your physical health. Speak to financial professionals such as accountants, financial lawyers, and financial planners, to make sure your strategy is sound and will help you earn the most long-term. Finally, remember to continue reading about financial topics from a variety of sources, to become fully money-savvy, and grow your business alongside a better understanding of the world of finance.

Last updated on June 23rd, 2020