Now may be the ideal time to ditch the corporate gig and become a freelancer. Working for yourself comes with many perks, such as setting your own hours, working remotely, and sometimes working from multiple locations. Knowing how to financially succeed as a freelancer can be challenging in the beginning.
Before taking the plunge into Freelanceville, there are several issues to think through and even a few drawbacks. Let’s dive in and see what some of the world’s experts on freelancing suggest.
Getting Started As a Freelancer
Besides the flexibility a freelance lifestyle can offer, practically every successful entrepreneur provides valuable suggestions on taking the freelance plunge. Not surprisingly, the most pertinent advice involves getting your financial house in order.
Rarely does a brand new business venture begin earning a profit on the first day. Although the word “freelancer” might suggest a bohemian lifestyle with hundred dollar bills falling from a money tree, it’s rarely the case.
Have a Minimum of Six Months of Living Expenses Tucked Away
Two reasons people desire a freelancer lifestyle are flexibility and pursuing their passion. However, one of the advantages of being an employee is receiving a regular paycheck. Depending on the work performed, freelancers usually don’t receive immediate payment for their completed work.
Let’s say it takes five to seven days to complete a project. The client may want revisions made, and that could take another few days. Freelancers rarely receive their payment immediately upon completion of their work. Sometimes it takes 30-45 days to receive compensation after you submit an invoice.
That’s why it’s imperative to build a financial cushion. While a client may be slow in paying, the utility company or the financial institution that holds obligations such as your car or house payment wants their money on the agreed-upon due date.
“Working in sales at an engineering company back in 2003, I realized that a ‘job’ wasn’t for me,” said Rick Orford, the founder of The Financially Independent Millennial. “Indeed, I always had dreams of becoming financially independent, and a 9-5 wasn’t going to cut it. So, I started a side hustle designing websites. After a short while, I realized there was more money hosting websites than designing them. In 2004, I switched gears and began offering web hosting by subscription while working my tedious day job.”
Although Rick had a few months of his allotted salary packed away, it still wasn’t enough of a safety net.
“As business improved, I started to wonder, ‘When is it a good time to quit my sales job?’” explained Rick. “In the end, I quit my day job when I had four months of replacement income. Why four months? It just felt right. Having gone through COVID-19, I would do things differently. I’d probably wait until I had six months of replacement salary before switching to my freelancing job full time.”
Establish a Method to Manage Your Expenses
In addition to becoming the CEO of your personal enterprise, there are a few other jobs you automatically inherit too. One of the most important is becoming your own financial officer. Besides not receiving a scheduled paycheck, you’ve also taken on the responsibility of tracking and managing your expenses.
For example, a particular freelance opportunity may require a larger printer than the $99 inkjet model handed down from a family member. Or, you may discover that the 8MB of RAM on your current laptop isn’t nearly enough to handle the extra software needed for your new gigs. On the upside, you can write off many of your expenses on your tax return. That’s why it’s a good idea to consult a tax professional before diving into the freelance pool.
Kelan Kline, the owner of The Savvy Couple, spends his time offering financial tips on managing your finances best. He knows all too well how not keeping track of your expenses can ruin even the best freelancing opportunity.
“As a new freelancer, it’s imperative to start tracking your finances from the start,” explains Kelan. “Any education, courses, computers, equipment needed to start making money as a freelancer is a tax write-off. Understanding your deductions will help reduce the burden and stress of tax season your first year as a freelancer.”
Unless your gig is freelance accounting, it’s a safe bet that the least attractive part of working for yourself is managing your balance sheet and expense statement. Just like having a nest egg of several months of expenses, staying vigilant about knowing where you spent every penny is critical. Kelan also feels strongly about this issue.
“It’s important to forecast your income each month and budget for what you expect to make. Implementing this habit for the first couple of months will be extremely difficult. But once you get your feet under you and start obtaining consistent work, budgeting and managing your money should become much easier. The nice thing about freelancing is you can always charge more or take on more clients, so earning extra money is always available.”
Be Diligent About Tracking Your Expenses
Managing your money is essential, and one of the best tools is to track your expenses. You could always trot back to the company supply room and pick up whatever is needed. If larger company projects involved using graphic artists or off-site printing companies, all you did was make a request to your boss or route your work to another internal department. As a freelancer, those days are gone.
Let’s say a client retained you to write a white paper for a new client. The job description called for a turn-key project to include graphic art design in four colors. The only problem is that you have absolutely no experience in graphic art design. Plus, the printer you still haven’t replaced isn’t capable of producing 100 bound copies.
Sure, you got excited when you agreed to complete the twenty-hour job for $1,500 yet failed to factor in the costs of outsourcing what you can’t produce. Understanding the cost structure of a freelance project (including your own time) and any expense you will incur is vital.
Andy Kolodgie runs a business that purchases houses. When he started The House Guys In Maryland, he learned some valuable lessons about tracking his expenses.
“Being a freelancer is just like being a business owner. You’ll need to take it seriously, and the first step is keeping records of all your spending from the start,” Andy emphasized.
“Any business expenses such as home office equipment, cars, or travel can be deducted and potentially depreciated as well. Although it’s not necessarily important to understand all this terminology initially, it is important to keep track of everything. When tax time comes around, you’ll want detailed receipts to pass off to your CPA or while filing the documentation yourself. Further, the risk of an audit is higher among those who are self-employed. Therefore your tax documentation needs to be kept safe for at least six years after filing (at which point an audit can no longer occur).”
Don’t Allow Getting Paid to Be An Extra Expense
It’s finally time to collect payment for the work you’ve put so much of your heart and soul into. Sure, you had a few extra expenses on this first project, but seeing the funds hit your account is about to happen. Nora Dunn of The Professional Hobo travels for a living and offers solid advice on how not to lose a few extra dollars when you receive payment making sure you know every tip on how to financially succeed as a freelancer.
“You may likely end up juggling multiple income sources and perhaps even different currencies of payments as a freelancer. So get ahead of the curve and set up your financial house accordingly. PayPal is generally an expensive way to get paid, especially if currency conversion is involved. I recently switched to Wise (formerly TransferWise) and realized I had spent $2k+ on banking fees unnecessarily!”
Tax-Time Comes Everyday, Not Annually
Gone are the days when all you had to do before April 15 was get your W-2’s and a few other items together to file your tax return.
Freelancers need to be mindful of their tax liability each day. For example, your employer paid half of your social security tax. As a freelancer or self-employed individual, you’re now responsible for the entire amount. Plus, Uncle Sam’s IRS unit wants you to pay your taxes quarterly instead of annually.
Nora found that implementing a system to track expenses and income as they occur makes filing freelance tax returns much more manageable.
“You can use software or just a trusty spreadsheet (that’s what I use) to track your business-related expenses and income sources. I do this as I incur income/expenses throughout the year. When tax time rolls around, it only takes me an hour or two to organize my info to send to my accountant.”
How to Financially Succeed As a Freelancer Conclusion
Congratulations on your decision to join the freelance community! Remember to adequately prepare by having your financial house in order before marketing your incredible talents. Good luck and stay the course.