If you’re tempted to ditch the office and pursue freelancing, you’re not the only one. It’s estimated that 57 million people currently work as freelancers, and Intuit predicts that more than 40% of the U.S. workforce will be freelance by 2020.
But while freelancing comes with a lot of freedom and flexibility, it also has unique financial challenges. If you’re considering going freelance, first check out these eight tips on managing your money as a freelancer:
1. Shore up your savings before you take the leap
2. Separate your personal and business accounts
3. Create a “zero-based budget” to track cash flow
4. Get clear on your rates
5. Set payment deadlines for your clients
6. Set aside 25%-30% of your income for taxes
7. Save for retirement in an IRA
8. Plan to pay for your own health insurance
While freelancing lets you be your own boss, it won’t likely come with a steady paycheck. So before quitting your day job, take some time to build your savings.
Estimate how much money you’ll need each month, and build a fund that will cover three to six months’ worth of expenses. With this cushion, you’ll have time to get your freelancing business up and running without worrying about going broke.
Even after you snag some clients, don’t stop funneling a portion of your income into an emergency fund. With freelancing, it’s common to go through dry spells every once in a while, and your emergency fund will get you through tough times.
Also, think ahead about dealing with any special financial obligations, such as student loans. There are some particular considerations to keep in mind if you freelance while carrying debt.
Once you’ve started working as a freelancer, it’s time to separate your personal and business accounts. Not only will this help you plan your budget, but it will also be useful when tax time rolls around.
Having a business bank account will help you report your income, as well as deduct your business expenses. With your separate account, you’ll be able to easily track everything you’ve made and spent on your freelancing business.
Managing your budget on a fluctuating income might seem difficult, but it’s important to do. Because your income will increase some months and decrease other months, you’ll need to be careful about tracking your cash flow.
To get started, estimate an average monthly income. Write down all your major expenses, and plan how much you’ll set aside for savings goals, such as your emergency fund or an Independent Retirement Account (IRA).
Try the “zero-based budget” strategy, in which every dollar on your monthly budget is allocated for a specific purpose, whether it’s daily spending, rent, bookkeeping services or your own savings.
Check in with your budget on a weekly basis, at least to start. That way, you can make adjustments as you go and ensure you’re staying on track toward your goals.
As a self-employed freelancer, it’s up to you to make money and turn a profit. It’s also your responsibility to determine how much to charge clients for your work and time.
If you’re not sure where to get started, do some research on average rates among freelancers in your field and with your level of experience. Clients might also try to negotiate prices, so you’ll need to get comfortable with this discussion.
Figure out what rates you’ll accept and which ones would make you walk away. While you don’t want to lose income, you also don’t want to devalue your services or accept a job that doesn’t sufficiently compensate you for your time and expertise.
Another challenge many freelancers face is getting clients to pay on time. Unfortunately, some freelancers have horror stories of clients disappearing without ever paying them for their work.
Others have to spend valuable time and energy chasing down clients to get them to make timely payments. To save yourself the headache, set clear due dates for payments on your invoices.
If applicable, consider setting up milestone payments for bigger projects, so you’ll receive some money along the way instead of only at the end. This organized system will help ensure you get paid on time, as well as make it easier for you to follow your budget.
You might find one of the biggest downsides to working as a freelancer is having to allocate money for your taxes.
When you’re an employee, taxes automatically get taken out of your paycheck, so you never have to worry about them. But as a freelancer, you’ll need to budget 25% to 30% of your income each month for tax obligations.
Set the money aside right away, before you get tempted to spend it. And remember to pay quarterly estimated taxes, which (as the name implies) are paid four times each year.
Although this process can be tough at first, it will get easier with practice. And remember, you can probably deduct some business expenses for your home office or other purchases you’ve made to keep your freelancing business chugging along.
When you’re a full-time employee, your company might provide a 401(k) for you to set aside money for retirement. But as a freelancer, it’s up to you to plan for your future.
To start saving, set up a traditional or Roth IRA. If you can afford it, automatically set aside a portion of your income into your account each month.
Our retirement savings calculator will help you set goals and estimate how much you must save to meet them. Although it might be tempting to forget about retirement savings, doing so will only hurt “future you.”
Plus, the earlier you start saving, the bigger your nest egg will grow. Try to put at least a small amount into your IRA each month, and increase that amount as your freelance business grows and you feel more secure in your finances.
A retirement account isn’t the only benefit you’ll have to kiss goodbye as a freelancer — you’ll also need to bid farewell to employer-sponsored health insurance.
When you work for yourself, you’ll need to find your own health insurance plan. If you’re under 26, your best bet might be to stay on your parents’ plan, if possible. But if you don’t have that option, head to Healthcare.gov to find your state’s marketplace.
Unfortunately, affordable health insurance options are hard to come by, but if you explore your options and prepare for this expense, you should be able to find something that works with your budget.
Although health insurance can be pricey, it doesn’t have to be a deal-breaker if you’re eager to ditch your 9 to 5 and pursue the freelancing life.
Managing your money as a full time freelancer
Before leaping into freelancing full time, make sure you understand the financial challenges that come with being self-employed. Not only will you need to track your expenses and manage a fluctuating income, but you’ll also become responsible for your own taxes, retirement savings and health insurance.
As with anything else, these challenges will get easier with time. And as long as you understand what you’re getting yourself into, you can prepare to meet them head-on.
So learn everything you can about freelancing, and connect with current freelancers for their guidance and advice. That way, you can enjoy all the freedom and flexibility that comes with being your own boss while managing your money like a pro.