Being your own boss can be both a blessing and curse. While you have the power to do all the decision-making, you are also solely responsible for cash flow and finances. Often, if something is not right with the accounting, you are far behind by the time you realize you need to shift gears and change your spending, saving, bill-paying or income habits.
There are measures you can take, however, to stay ahead of any curve balls. No one is so infallible that he will miss everything related to money that tries to take him down, but being prepared for financial challenges is half the battle. Here are six personal finance tips for freelancers to help you stay prepared make most small fiscal fires die down quickly.
1. Always Know Your Income
Many freelancers simply have no idea at any given time how much money they make. This is not to say they do not know what their average income is within a given year. This does mean that they have no clue which invoices are outstanding and which have been paid. This also requires some projecting for the coming months based on current contracts or negotiations.
The typical bad money habit for freelancers is to overestimate income because they believe what clients have promised about work and payment. Best practice, however, demands that you count only what has been signed off on by clients – and make that a modest estimate.
2. Practice the 60-40 Split
The Freelancers Union, an international organization that offers assistance to and advocates for independent contractors, recommends that every dollar of income be divided this way: 60 percent of that is yours to spend and 40 percent should be stashed in a savings account for taxes. Other experts have suggested that your income be divided into different categories: 20 percent for recurring bills; 20 percent to a savings account; 10 percent for an emergency fund; and 20 percent for your own discretionary spending.
Over time, you will find a personal money algorithm that works for you. It will involve some trial and error, a few mistakes and whole lot of well-learned lessons. The key is to ensure you build cushions for the money events that tend to cripple those with limited income. If you cannot manage this task on your own because you tend to spend first and think later, hire an accountant. Hiring someone else leaves you to focus on your work.
3. Pay Estimated Taxes
You should be paying taxes each quarter rather than trying to come up with a lump sum during tax season. Even if you discover at filing time that you owe a little more than you expected, it is far better than scrambling to pay a large tax bill by April of each year.
4. Find Ways to Minimize Recurring Bills
There may be ways to decrease the amount of your current bills and save money. Some consumers receive a recurring charge for things that they really do not use. For example, sometimes, there is GPS navigation and Internet service tacked on to a cell phone bill each month. Some who pay extra money for these features actually use them on their personal computers at home. The cell charge is an unnecessary cost. It may also be possible to scale back your current mobile plan, if you use your phone only for business during the day.
5. Keep All Receipts
Being a receipt hoarder helps you to track your spending down to the penny. You should also have them organized in an easily accessible place to help you keep up with expenses. For some freelancers, this is a file cabinet with manila folders. For others it is a flash drive that holds scanned receipts; on-the-go entrepreneurs prefer digital files.
6. Keep a Separate Business Bank Account
It becomes so confusing to mix personal and business finances. It is always best to keep them separate. This means keeping a dedicated business checking account so that you are not buying food for your home at the market with your business check. It is a simple but smart practice to keep expenses divided. If you are ever called on to account for expenses or have to undergo a tax audit, you will be very happy that you did.