Personal Finance for Freelancers 101: 6 Tips to Manage Your Freelance Income
* This post may contain affiliate links, which means I may receive a small commission, at no cost to you, if you make a purchase through a link! I only recommend things that I use and find helpful.
Buddies, we need to have a conversation about money. Specifically, what you’re going to do with all that juicy freelance income you’ll soon be receiving (if it’s not already coming your way). We’re talking freelance taxes! We’re talking bookkeeping! We’re talking debt! These tips on finance for freelancers will help you to make the most of this newfound income, and set you up for financial security (yes, you can achieve financial security as a freelance writer!).
So if you want to know my top tips on finance for freelancers, keep reading!
WHY I’M PASSIONATE ABOUT FINANCE FOR FREELANCERS
Raise your hand if no one ever showed you how to budget your money! You’re not the only one, buddy. It blows my mind that our schools spend so much time teaching us calculus and chemistry and so little time teaching us how to handle our finances.
When you don’t know how to manage your money, life can be difficult even when you’re making a regular salary at a 9-to-5. Whether I was making $28k per year or $78k per year, I was always living paycheck-to-paycheck when I had a 9-to-5.
Once you make the switch to freelance writing, things become even more complicated. Why? Well, when you’re a freelancer, your income can vary wildly from month to month. Seriously. My income has varied as much as $19,000 between two months. How do you cope without resorting to credit cards? How can you systemize your saving and spending so you not only survive but thrive?
So, that’s why I’m writing this post. This is a topic that’s very near and dear to me. As I’ve mentioned before, I’ve had some significant issues with credit card debt. Since beginning my freelance writing journey, I’ve paid off more than $10,000 in credit card debt…twice (I somehow didn’t learn my lesson the first time).
I spent the first three years of my freelancing journey with very little control over my money situation. All of that changed when I read Profit First by Michael Michalowicz. In the book, Michalowicz lays out a simple system that all small business owners (including freelance writers) can use to manage their money.
Thanks to this book, I was able to get my finances together enough to pay off all of my credit card debt and buy a house. I never believed that buying a house as a single, self-employed woman was in the cards for me, but here I am, typing this blog post from the comfort of my own home!
Today, I don’t use the complete system outlined in Profit First (though I still recommend that you read the book). I’ve modified the system to create a financial plan that works for me, and these are the tips I’m sharing with you today.
Disclaimer: I am not a CPA, a certified financial planner, or anything like that. I am just a freelancer with a history of money problems. These are the strategies that I use to manage my finances as a freelance writer. I highly recommend that you speak with a financial planner or accountant who specializes in freelance businesses.
Navigating your finances as a freelancer can be tricky. These 6 tips will help lead you to financial security!
6 FINANCE TIPS FOR FREELANCE WRITERS
1. Set Up a Business Account
First things first: if you’re just throwing all your freelance income into your personal checking account, you’re doing everything wrong. You need a separate business or personal banking account to hold all of your freelance earnings. From this bank account, you’ll make transfers to a couple of other bank accounts (more on those later).
2. Set Aside Money for Taxes
As soon as you get your first freelance paycheck, you need to open a separate savings account for taxes.
Ugh, I know. Taxes for freelancers? Yeah, buddy. You gotta pay them, and you gotta pay them quarterly. Well, somewhat quarterly. If you live in the United States, these are the days you need to pay your quarterly estimated taxes:
April 15
June 15
September 15
January 15 (the last payment for the previous year)
As anyone can see, these payments aren’t actually on a quarterly schedule. Why? I have no idea. I don’t make the rules here.
If you don’t pay your quarterly estimated taxes, you’ll be hit with a fee when you file your annual taxes. It’s not usually that much money, but nobody likes paying fees, so make sure you pay up to the taxman!
From what I’ve read, most tax experts recommend saving 20% to 30% of your income for taxes.
So, as soon as your freelance income hits your business bank account, make sure you slide at least 20% over to your tax account and set reminders in your calendar to pay your quarterly taxes.
Hint: if you’re not sure what you owe in estimated quarterly taxes, try a calculator like this one.
3. Track Your Business Expenses & Earnings
You need a system in place to track all the money that you make from each client as well as any money you spend on your freelance writing business. Trust me, when April rolls around and your taxes are due, you’ll be so glad you kept track all year long.
I use Intuit Self-Employed to track all of my income and business expenses. It’s so easy. You just hook it up to your bank accounts, then classify all your transactions as personal or business. If your expenses are for your business, you then further separate them into categories like “home office” and “advertising”. If you use the app on your phone, it will track your mileage as well (in case you ever drive to visit your clients IRL).
When it’s time to file your taxes, Intuit Self-Employed uploads all your data to Turbotax. From there, it’s easy to do your taxes yourself (and way cheaper than hiring an accountant).
Hint: as a freelancer, you will need to buy your health insurance (at least if you’re an American…sucks to be us). Since you can write this off as a business expense, you should pay your premium through your business account rather than through your salary.
Keeping track of your finances will help when tax season rolls around!
4. Pay Yourself a Salary
If you are freelancing full-time, please start paying yourself a salary. This will completely transform your finances and make your life so much easier.
If freelance writing is your side hustle, this isn’t quite something that you need to worry about yet. However, paying yourself a salary could be good practice if you eventually plan on making the switch from side hustle to full-time hustle
There is something fun about having hugely successful months where you have an unusually large amount of money to spend. I know I’m guilty of making expensive travel plans and spending way too much on going out when the money is good.
The flip side of that, of course, is that you sometimes have months where you hardly make anything at all and you’re considering finding a sugar daddy to help you cover the rent.
It’s SO STRESSFUL as a freelancer when you don’t have enough money coming in to make ends meet. Unfortunately, that’s just the nature of the beast. This happens to EVERY FREELANCE WRITER. It does not matter how many years of experience you have. There are just some months are slow, period.
This is why it’s so important to set up a separate bank account for your freelance income, then pay yourself a bi-weekly salary.
So, how much should your salary be?
According to Mike Michalowicz, author of Profit First, you should average the income for your three least profitable months in the past year, subtract your percentage for taxes, then divide in two to find your bi-weekly salary. Why? Because you know that your income will most likely never dip below this, so you can safely rely on your salary and plan your budget accordingly.
5. Use the 50/30/20 Rule
For my personal finances, I use the 50/30/20 rule. It’s a simple way to break down spending:
50% goes to needs (mortgage/rent, utilities, minimum payments on debts, and groceries)
30% goes to wants (shopping, eating in restaurants, travel, etc.)
20% goes to savings and paying off debts
Depending on how much money you’re making as a freelance writer, you may need to adjust your percentages accordingly.
I use a spreadsheet to track my expenses in these three categories, and I reevaluate my budget quarterly.
Let’s talk a little bit more about that 20% towards savings and debt! Right now, I am following this simple plan for paying down my debt:
I saved up the equivalent of 3 months worth of living expenses.
Now I am paying off any debt with an interest rate higher than 7%.
Once I have finished paying off my debt with an interest rate higher than 7%, I’ll begin investing the rest of my savings.
Why 7%? The average rate of return on stock market investments is around 10%. If you subtract 3% for inflation, you get 7%. Thus, if I start investing before I pay off my debt with a higher interest rate, the interest on that debt will be growing faster than my investments.
I use the “Avalanche Method” of paying off debt, where I pay off the debt with the highest interest rate and then work my way to debts with lower interest rates. However, there are a lot of different ways to pay off debt. I recommend doing a little research and finding a method that works for you!
6. Get Help
If you feel overwhelmed, talk to a professional. As I said, I’m not an accountant or a financial advisor. This is what works for me, but it might not work for everyone.
However, once you do get help and get your systems in place, it’s really easy to manage your money as a freelancer. Please do not let taxes or money matters be the reason you give up on your freelance writing dreams! You got this, buddy.
Like this post? Subscribe to my YouTube channel for more freelancing tips and advice!