Money Management Tips for Freelancers

As a freelancer, I know that one of the biggest challenges to success is proper money management and maintaining the flow of income so that daily expenses can be met, while also saving in case of a down-period, and also trying to save for retirement.  In fact, money management issues are the leading reason that freelancers fail and are forced to return to full time work for a larger company.

The benefits of being a freelancer are numerous, but in order to succeed, you will need to follow some simple money management tips:

  1. Track your finances!  Tracking is the most important part of running a business.  I can’t tell you the number of people I interact with who don’t know how much they made last month, can’t tell you what their hourly rate should be, and can’t give estimates for financial situations that they might encounter.  Whether you’re using accounting software such as Quickbooks, a financial system like Mint, or just tracking invoices via PayPal, staying on top of your income is very important, and tracking will make or break your business regardless of what else you’re doing.
  2. Don’t underestimate taxes. Taxes are a hassle, and pretty much everyone hates them, but you do have to pay them. To make the situation even better, you usually have to pay to have your taxes done as well, since very few firms offer free tax prep to their clients. Before spending your money on luxuries such as a new TV or a new car, make sure you have enough money set aside to pay your taxes. In general, it can help a lot to sit down with an accountant before the year is over, that way you can not only understand your financial situation, but can also take steps to reduce your tax burden by making investment purchases, etc. Depending on your country, your business setup, and other factors, this may be more of an issue for you, or less, depending on the regulations and tax rates.
  3. Pay yourself first.  Many people find that if they set aside a certain amount of money for savings or retirement automatically, they will automatically adjust to live within their new means.  However, if you ask someone to cut an amount from their budget, they will always resist that change.  Therefore, having a system in place to automatically set aside a given amount of money for contingency savings or retirement can make all the difference.
  4. Careful with investments.  Investments are a key way to grow your wealth for retirement or for the future, but they also carry risk with them.  If you’re investing, avoid complex financial vehicles or products that you don’t understand.  If you can’t explain what it is you’re investing in, then you should not be investing in it.  Index funds and mutual funds can provide more than enough return while still being simple enough that you can understand them.  Also, if you can’t sleep at night because you’re worried about your investments, you are carrying too much risk.
  5. Expect delays.  One of the prime mistakes that freelancers make is expecting to get paid immediately (or even before) work starts.  Clients will stall, delay, disappear, get sick, lose checks in the mail, and pretty much everything else imaginable.  You have to manage your finances with the expectation that it may take up to 30 days to get paid for your work.  Ideally, you can cut this delay down using some of the following tips, but still plan that the money may not arrive instantly.
  6. Charge a downpayment.  There’s several reasons for this.  First, by charging a downpayment (25%, 50%), you get some money up front which helps with cash flow.  Second, it also lowers the chances of last-second payment surprises, where a client can’t or won’t pay, and third, it ensures that both parties have a stake in the game.  The client has a stake in the game, because you already have some of their money, and you have a stake in the game, because you’re already doing work and haven’t been fully paid.
  7. Create a savings account to store money for contingency plans.  What would you do right now, if your computer died?  What would you do if you got evicted, or if your spouse lost their job, or you suddenly are expecting a child?  By setting aside money into savings, you can deal with any unexpected life events with much less stress.  However, keep these savings separate from your retirement savings (you don’t want to have to take your retirement money and spend it).
  8. Use time tracking and invoicing apps.  Many freelancers underestimate how much time they spend on a project, and don’t know how to charge appropriately.  FreelanceFolder has a great tool you can use to determine your hourly rate:
  9. Don’t charge clients hourly unless the project is truly an hour-by-hour situation.  When you tell a client that your rate is $100 an hour, they will expect you to work super fast and be done within 3 hours.  In reality, it may take you more like 10 hours.  But, when you send that client a $1000 bill, they will fight against it.  Charging a flat rate (with downpayment) tends to be a safer course of action in most situations.  If you do decide to charge hourly, make sure you give the client a realistic expectation of the hours that the project will require.
  10. Relax!  Being a freelancer can be very stressful at times, but it’s important to relax, take a deep breath, organize your thoughts and your business.  By simply following the tips outlined above, you can reduce the stress of financial management and drastically increase your chances of success.
Hope you find these tips helpful!  If you’re a freelancer, please share your financial management tips with us in the comments!

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