We’re going to talk about something today that’s a little uncomfortable. But it’s vital to your success. Ready? Let’s talk about freelance money management.
Yes, money. You need to be making it. But most people don’t like to talk about it. Which means we can be making bad decisions without realizing it, hindering our own success.
We’re going to explore some of the challenges related to money, some steps to stable freelance money management, and then some practical tips to manage your money.
“Don’t Talk About Money”
There’s an age-old perception that you’re not supposed to talk about money. It’s rude to ask people how much money they make. Budgets make us squirm. We’re insecure about our money management, so we avoid talking about it.
The end result is a lot of bad habits and practices that can hamper your success and even kill your business.
We need to overcome these challenges and be smart about money. Let’s be honest: Being smart with your money is just as important as doing great work for your clients.
One of the biggest challenges freelancers face is imposter syndrome. We don’t really believe our work is worth what we’re charging. But it is. You deliver value, and it’s worth money to your client. You earn it. So embrace it.
Another challenge is that financial pressure can be poison. It makes you take on bad clients and do work you shouldn’t be doing. It causes stress and worry, which can impact the quality of your work. Suddenly you’re working long hours to make up for shortfalls and you’re missing out on all the benefits of freelancing.
While talking about money is hard, having money gives you freedom and choices. Proper freelance money management gives you the freedom to make the choices you want to:
- It allows you to take a vacation or work fewer hours.
- Having money in the bank gives you the freedom to say no when a client isn’t a good fit.
- It means you can be picky and wait for the best jobs.
- It gives you the freedom to support your causes with pro bono work or donations.
It’s All About Behavior
Freelance money management is actually really simple. You don’t need to know a lot, you just need to do it.
Money management is 5% knowledge, 95% behavior.
Here’s the complicated financial knowledge you need to get your head around: Spend less than you make.
That’s obvious. There’s no secret knowledge here. You just have to make the simple, smart decisions and follow through. That’s the hard part.
So get your expenses under control and stabilize your income. Recognize those two sides to freelance money management and you’ll be in good shape:
- Recurring income strengthens your business.
- Recurring expenses weaken your business.
4 Steps for Stable Freelance Money Management
Let’s cover four basic steps to manage your money. Remember: It’s all about behavior. We’re not dropping earth-shattering knowledge here.
Step 1: What Are Your Business Finances?
The first step to any progress in freelance money management is to know your situation. What’s your income? What are your expenses? Get a handle on where things are at. (See? It’s not rocket science.)
Step 2: Create a Budget
Next, you need a budget. A lot of people groan at the idea of a budget, but it’s simply a plan for your money. Figure out how you’re going to spend every dollar. Reduce expenses wherever you can. This is crucial to creating financial stability.
You should also give yourself a steady paycheck. Actually, pay yourself the same amount each month. This is important for stability in your personal finances and in your business. This can help you avoid either of the two extremes: vastly under-paying yourself or spending all your business profit on personal expenses.
Step 3: Build a Buffer
Save two to three months salary in your business account as a buffer. This creates stability in lean months. If you have that much saved, work toward five to six months.
You never know what’s going to happen—when a client may fall through or a project gets dropped. You need some margin to weather those storms, so build a buffer to keep your business safe.
Step 4: Get Out of Debt
The best way to keep your freelance money management on track is to avoid debt. Some debt is necessary, such as a home mortgage, but try to minimize or completely avoid consumer debt like credit cards.
If you do have debt, work to pay it off quickly. Reduce your expenses to free up money to pay down your debt faster. Use the debt snowball approach where you pay off your small loans first and then snowball those payments to the larger loans so you gain momentum.
If you have a business credit card, always pay it off each month. If you can’t pay it off, trade it in for a debit card. And don’t fall for the “free rewards” trick.
10 Best Practices for Freelance Money Management
We’ve covered some of the big picture ideas about freelance money management. Let’s get down to the nitty-gritty:
- Keep your business and personal funds separate. Yeah, it’s basic. But you absolutely need to do it.
- Familiarize yourself with tax laws and take every legal deduction. Don’t pay more tax than you have to.
- Even if you do your own taxes, plan an annual consultation with a good accountant. DIY is fine, but check with a professional to make sure you’re on track.
- Use a smartphone app to save your receipts. Don’t waste time organizing, just have a way to save them in case you ever need them.
- Use a mileage app to track business mileage. The current mileage deduction is more than 50 cents a mile, so it adds up quick.
- Pay your quarterly taxes or you’ll regret it in April. Getting hit with a massive tax bill in April can be crippling. Pay early and save some extra.
- Have a completed W-9 ready to send to clients. (And if you have contractors, don’t pay them until you have their W-9.)
- Enter deposit transactions as they happen. This is your best record of income. Make sure you keep track of it and don’t put it off so long that you can’t remember what’s what.
- Set a reminder each month to reconcile your accounts. Again: Don’t put off your accounting. Do it and get it over with.
- Minimize collection problems with a solid project process. Don’t waste time trying to collect payments. Put a good process in place that will ensure you get paid in a timely manner.
The way to be successful in freelance money management is to do it. There’s no secret formula. Start putting the behaviors in place that will keep you on track. Make good money management a habit, and you’ll be in good shape—free and happy.
Resources for Freelance Money Management
For more help with budgeting, watch our webinar How Freelancers Can Stop Sucking at Budgeting with Phylecia Jones. Or read our blog post on freelance finances exploring the math that makes freelancing work.
If you want to dive deep, check out our Freelance Summit. Join veteran freelancer Nathan Ingram for 11 hours of webinar training. The multi-day series cover process, profit, and productivity.