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Finance best practices for freelancers
Surviving and thriving as a freelancer requires strong financial management skills, but getting there can feel overwhelming, especially when your income is variable.
But help is here! Our upcoming SPARK event on June 5th will focus on the ins and outs of finance, from why you should consider keeping separate business and personal accounts, and the basics of budgeting, to debt management, and savings.
SPARK meets on the first Wednesday of every month across the country. Click here to RSVP for your city. Join us to network, workshop your business, and network.
Here’s what’s coming up!
The first step for figuring out your finances is creating your budget. Be thorough, but also play around with it. Create a lean one and a prosperous one. If your monthly income fluctuates, you can use the leaner or more padded budget as needed.
It's important to split your budget into needs, wants, and savings, such as:
These are your can’t-live-withouts, such as mortgage/rent, groceries, utilities, transportation, insurance, and whatever your personal circumstances dictate.
Nobody works just to live, so budget also for dining out, exercise classes, your binge-watching channels, and any other treats like your daily latte.
Everyone needs a rainy day fund, and to plan for the future.
Calculating monthly income
Setting the appropriate rate is critical to being able to stick to your budget and thrive as a freelancer. Just follow these easy steps.
1. Set your ideal take home pay.
Consider doing this twice — once for your lean budget and once for your prosperous one.
2. Calculate any new expenses that you’ll incur through freelancing
These might be healthcare, self-employment tax, or co-working/office space.
3. Add 1 and 2 together.
This is your annual adjusted salary.
4. Calculate your potential billable hours per year
Ask yourself, how much time off do you need, or want, to take? How many hours per week do you want to work? Remember to build in any non-billable time that you’ll need to build your business.
5. Finally, divide your adjusted annual income by your billable hours.
Debt management and credit scores
Handling debt while saving at the same time is one of the biggest financial challenges freelancers face. While a degree of uncertainty doesn’t make attacking your debt any easier, there are things you can do — both in lean times and good times.
Prioritize — make sure that you are paying down the loan with the highest interest rate.
Always pay at least the minimum. Missing a payment will hit your credit score hard.
Negotiate — call to ask for better rates, payment plans, or a reduction for some immediate payment.
Keep track — don’t let unpaid invoices lead you to miss payments.
Stop adding to the debt. Get serious about your budget and sticking to it.
Consider making multiple debt payments a month - one at the beginning of the month that pays your minimums. And one later in the month if you end up exceeding your income stream.
Keep up with inflation. Raise your rates on an annual basis.
Consider consolidation. Find a reputable offer and do the math to make sure it works for you.
Try to have one month’s savings on hand at all times, and then pay the rest to debts.
Work on improving your credit score. It affects your ability to secure loans and insurance products at good rates.
Savings road map
Ideally, you want to have a rainy day fund that covers 3-6 months of everything in the “need” category of your budget, as well as a long-term savings plan for retirement, and an estimated 25-30% of your income set aside for taxes.
How do I get there?
Look for areas within your budget where you can save and/or redirect funds to the things you’d like to splurge on.
Start small, chip away consistently, and don’t get disheartened.
Save all windfalls such as tax returns, gifts, and inheritances. No exceptions.
Set up automatic debits so you keep your savings promises.
Consider consulting a financial services professional to help you get started.