Financial stability can be difficult to achieve for a freelancer. On one month you could earn more than you’ve ever earned in the past, and on another month you could be barely getting by.
Despite an often fluctuating income, it is possible for freelancers to achieve long-term financial stability. How? By following these six (6) simple steps:
Step 1: Determine Your Average Income
The most common problem with having a fluctuating income is that you tend to spend too much on those months when income is high, and then end up short on months when income is low. Another problem is having the mindset that the high-income months are the norm, and the low-income ones are just a fluke.
In order to achieve financial stability, it’s crucial to banish these bad habits and establish once and for all just how much you earn on average. You determine this by getting your total income from last year (or from the most recent twelve months) and dividing it by 12. This may not be the exact figure you’re earning every month this year, but it will at least give you an idea of how much you ought to have in your pocket every month.
Step 2: List All Your Monthly Expenses
Now that you have an approximation of how much you earn per month, the next thing you need to figure out is how much you spend every month. List down all of your fixed expenses including rent, food, transportation, bills, prescriptions, health insurance (yes, you need to have this), etc. As a freelancers (sole proprietor) make sure you record any and all personal and business related expenses. If you’re unsure exactly how much each of these cost, it is better to slightly overestimate rather than underestimate so you don’t come up short. Also set aside at least 20% of your income for taxes. Adjust the amount you save for taxes (up) if you begin moving into a higher tax bracket.
When listing down your expenses, try to arrange them from the most important to the least important. Once you’re done with the list, try and see which expenses of lower importance you can cut out or minimize during low-income months.
Step 3: Set up Different Accounts
It’s imperative that you set aside the necessary funds to pay for these expenses every month. To this end, make sure you set up different accounts:
- Daily expenses account – includes all living expenses and health insurance
- Tax account
- Retirement account
- Emergency account – to be used only in emergencies, i.e. a pipe bursts, your car breaks down
- Saving/Spending account – this is for your personal “rewards” or big ticket splurges like vacations, a new car or purchases that will help grow your business. When allocating funds, this account should come in last.
Make sure that the money in each account is spent only on what the account was created for.
Step 4: Get Accounting Assistance
Being a freelancer means that at times business and personal expenditures may get mixed up. And like any small business, you need to keep track of these expenses as well as possible tax write-offs and other areas where you could limit spending.
The best solution here would be to hire an accountant, but doing so could add significantly to your costs. The more economical solution would be to use accounting software. There are several available for freelancers and small businesses nowadays, such as Wave and Freshbooks, that are either free or come with a reasonable monthly fee.
Step 5: Live Below Your Means
To achieve long-term financial stability, it’s important not only to stick to your budget but also to live below your means. You need to constantly work to keep your expenses low. This can be done by limiting unnecessary purchases, reducing utility costs, eating out less, etc.
Also, as much as possible stay out of debt. Borrowing money to purchase things with no return on investment can lead to more debt and eventually, bankruptcy. Only borrow when necessary, and only if it is going to produce returns or add value in the long run.
Step 6: Set Financial Goals
Apart from establishing a monthly budget, try to set financial goals for yourself that will eventually increase your profit margin. Set these goals regularly, perhaps monthly or annually. When setting these goals however, be realistic. They should give you the results you want over time, but should also be achievable and sustainable, not burn you out.
For the successful freelancers out there, what contributed to your success? Please share your tips and advice with our readers below.
For those just starting out, feel free to ask questions below and receive tips/answers from our readership.