Freelance Finances – What to Do with All that Money

Being a successful freelancer means you have the ability to earn a lot more money than you ever could with a full-time job.

Therefore, it’s very important that you have a good financial head on your shoulders. Otherwise, you could end up broke, in debt, or even lose your business.

It’s quite easy to forget about sticking to a budget or about saving when you’re making lots of money, but are you prepared for an emergency? Are you really prepared?

What if you’re out of work for six months because of being ill? What if your work dries up?

Here’s my five-step plan for being smart with your money, making the most of it–and finally–enjoying it!

Step 1: Taxes

Before you can do anything with your money, you must put money away for taxes. You don’t want Uncle Sam (or whatever you call your tax man in your country) knocking on your door, giving you an audit and forcing you to pay thousands in fees.

While I’m certainly not a tax expert, I recommend putting away at least 30%, while you’ll probably end up getting some money back after all of your business write-ups, this ensures you don’t owe money at the end of the tax year. Of course, if you make more than $100,000 a year, I’d definitely put in more.

I prefer to stay hands on with my money and taxes, so I don’t use an accountant. If you go this route you have to make sure you send your quarterly payments on time (if you’re in the U.S) and pay your final bill by April 15th. I prefer to use the business version of TurboTax, as it checks for errors, helps find as many write-offs as possible, and assesses your potential for an audit.

Step 2: Savings

The second most important thing to do before you do anything else, is to save. This step can be broken down into several small steps, depending where you are in life.

The first thing I recommend that you save for is an emergency, or rainy day fund. Because you’re in business for yourself, it’s probably a smart thing to save a bit more than the average person, in case something really goes wrong. I personally have saved $10,000 for my fund, but after I’m completely out of debt, I’d feel better if we had $20,000 instead.

Having an emergency fund means you don’t stress when your computer blows up, if you have to be out of work for several months, or if your house blows up (let’s hope not!). It’s a nice cushion that you’re not allowed to touch unless something happens that you’re not able to fund with your normal cash.

Other things you should save for before you tackle any debt is retirement. Since you’re not working for the man, you’ll most likely not get any money from him either. Check out your banks Roth IRA and Traditional IRA options, and contribute the max amount possible each month (which is currently $416.66 I believe in the U.S if you’re single.)

Other things you might want to save for should come after debt payments. These include things like:

  • A wedding
  • Future babies
  • Potential toys (boats, etc, etc)
  • Desired home upgrades

Step 3: Paying Down Debt

The key to being wealthy is to be out of debt. After I read The Millionaire Next Door, I realized several things. The majority of millionaires are self-made and got there by starting a business. Almost all of them drive used cars and are out of debt. Only a small percentage of millionaires are celebrities or trust fund babies.

This shows how important it is to be debt free. Never use credit cards and pay the ones you have now off as soon as possible. List your debts in order from lowest to highest in terms of the amount owed, and pay the smallest ones off first. You’ll never really be wealthy if you’re strapped with a bunch of car payments and credit cards.

Step 4: Bills!

Of course, with all this money you’ll need to pay your bills! I like to make bill payment as effortless as only have to record it in my budget, so I’ve set everything to auto-pay. This way, you’ll never have to worry about making your payment on time or waste money on stamps, envelopes and checks. Plus online payments allow you to keep track of your records easier.

At this point, you should probably take a look at some of the bills that can be reduced. Here are some ideas you can consider to lower costs:

  • Can you refinance your house at a lower rate?
  • Do you need expanded cable AND Netflix?
  • Are you making your house energy efficient to lower electricity bills?
  • Is there a way to reduce car maintenance and gas expenses?

Step 5: Enjoy!

Finally, we’re to the fun part. There’s no point to working hard and owning your own business if you can’t enjoy the money you’ve made. Always make sure you have a “blow” fund in place that gives you a set amount of money a month to spend on whatever you want to, no matter how trivial or silly.

You’ve earned the right to enjoy yourself, so never feel guilty that all of your money doesn’t go to something important. Everything needs to remain in balance and has its limits, even scrimping and saving needs to come to an end.

More Money Resources

Here are some more of my favorite money resources:

  • Dave RamseyMy favorite financial expert, Dave has a couple of books and an awesome talk show.
  • Budget – Awesome software I use based on the envelope system of paying bills and saving.
  • Billings – Another essential piece of software for billing & estimating clients. (Mac Only)

Your Thoughts

How do you manage your money? What are some of your money pitfalls?

Image by alancleaver