I've never been good with money. Since becoming a fulltime freelance creative, however, it's a skill I've been forced to acquire because accountants are expensive and "getting creative" when balancing the books means something else entirely.
What sets financial management apart for freelancers is the unpredictability of the lifestyle. You could, for example, be bringing home 5 grand one month and 1 grand the next. With such uneven income streams to navigate, not to mention increasingly complex tax obligations (in the UK and US at least), there's a lot to take in for those new to the freelance game.
With that in mind, I've decided to take what I've learned over the last decade and bung it into a digestable guide for all freelance creatives. Below, you'll find tips on budgeting, tax planning, and saving for retirement, along with tools and resources to help you manage your finances effectively.
Creating a Flexible Budget
A solid budget is the cornerstone of financial health for any freelancer. Given the variability in income, it's essential to create a budget that adapts to earnings that can and will fluctuate wildly.
Track Your Income and Expenses: Start by tracking your income and expenses over a few months to understand your financial patterns. Use tools like QuickBooks Self-Employed or FreshBooks to keep detailed records.
Categorize Your Expenses: Break down your expenses into categories such as rent, utilities, groceries, and business expenses. This helps identify areas where you can cut costs and manage your cash flow better.
Set Aside for Lean Months: Saving for a rainy day might seem like a trite sentiment but there's logic behind it. Plan for months when income may be lower. Establish a financial buffer by saving a portion of your earnings during peak periods. Aim to have at least three to six months’ worth of living expenses set aside in an emergency fund.
Effective Tax Planning
Tax planning can be daunting for freelancers, but understanding your obligations and planning ahead can save you time, stress, and money.
Understand Your Tax Obligations: Freelancers must pay self-employment taxes, which cover Social Security and Medicare. Familiarize yourself with your country’s tax requirements and deadlines. Tools like TurboTax Self-Employed or Xero can help you calculate and file your taxes.
Track Deductible Expenses: Keep track of expenses that are deductible, such as office supplies, software, travel expenses, and a portion of your home office. This can significantly reduce your taxable income. Try not to "take the piss" though, as the last thing any of us need is the stress of an audit!
Set Aside Money for Taxes: Open a separate savings account to set aside money for taxes. Aim to save 25-30% of your income for tax payments. This ensures you won’t be caught off guard when tax season arrives and if you've put a little too much aside by the end of the year, consider that a bonus!
Consider Quarterly Payments: In some countries, freelancers are required to make quarterly tax payments. Check with your tax advisor to see if this applies to you and make timely payments to avoid penalties. In the UK, self-employed indiviuals must make two "payments on account" by the end of January and the end of July every year.
Saving for Retirement
Retirement may seem like a distant dream, but starting to save early can give you financial security in the future. As a freelancer, you don’t have the benefit of employer-sponsored pension plans, so it’s up to you to plan for your golden years.
Choose the Right Retirement Account: Explore retirement accounts designed for self-employed individuals. Each has its benefits and contribution limits, so choose the one that best suits your financial situation.
Automate Your Savings: Set up automatic transfers to your retirement account. This ensures consistent contributions and helps you stay on track with your retirement goals. Apps like Acorns or Betterment can assist in automating and managing your investments.
Diversify Your Investments: Diversify your retirement savings by investing in a mix of stocks, bonds, and other assets. This can help mitigate risks and increase the potential for growth over time.
Managing Irregular Income
Freelancers often face irregular income, indeed, it's the rule rather than the exception. This means a strategic approach to financial management is reuired to ensure stability.
Invoice Promptly: Send invoices immediately after completing a project and follow up on late payments. Platforms like Wave or Zoho Invoice can help you manage invoicing efficiently.
Negotiate Payment Terms: Try to negotiate payment terms that align with your cash flow needs. Consider requesting upfront payments or milestone-based payments to ensure a steady income stream.
Plan for Growth: As your freelance business grows, your financial needs will change. Regularly review and adjust your budget and savings plans to accommodate growth and new opportunities.
Tools and Resources
Numerous tools and resources can simplify financial management for freelancers, helping you stay organized and on top of your finances.
Accounting Software: Use accounting software like QuickBooks Self-Employed, FreshBooks, or Xero to manage invoicing, track expenses, and simplify tax preparation.
Budgeting Apps: Apps like Mint or YNAB (You Need A Budget) can help you create and stick to a budget, track spending, and plan for future expenses.
Tax Preparation Tools: Tools like TurboTax Self-Employed or H&R Block can assist with tax filing and offer guidance on deductions specific to freelancers.
Retirement Planning Resources: Use retirement calculators available on financial planning websites or apps like Fidelity or Vanguard to plan your retirement savings and investments.
Financial Advisors: Consider consulting a financial advisor who specializes in working with freelancers. They can provide personalized advice and help you create a comprehensive financial plan.
