While working for yourself means having lots of freedom to set your schedule or choosing your clients you would like to work with, it also means you are solely responsible for delivering your work and managing your finances.
From having to track your income for taxes, to finding your own health insurance, you will face a unique set of challenges financially when you go freelance. To help overcome these challenges, we put together 5 tips on financial management for freelancers.
#1 Open A Separate Bank Account For Business Transactions
When you are freelancing, you are basically running your own business.
This means you are required to keep full and accurate records and accounts of your business transactions from the start, and such records must be supported with invoices, receipts and other relevant documents. You will also need to prepare a statement of accounts consisting of profit and loss, as well as a balance sheet.
With this in mind, you should open a separate bank account to track your income and business expenses apart from your personal expenses.
A separate bank account will help avoid getting your business expenses tangled up with your personal expenses. In this way, you can effectively track your business expenses to see if you are investing enough or spending too much, and using these expenses to use it for claims as deductions when you file your annual tax returns.
Plus, you will have a much easier time to monitor closely your income and see if you are hitting your goals.
#2 Setting Aside A Portion Of Earnings Income For Taxes
When you are earning your keeps as an employee, your employer will usually automatically prepare and declare for you your income for you to file your taxes. But as a freelancer, you are now running your own business, and this means the burden of tracking and managing taxes falls on your responsibility.
Just as like running any businesses, a healthy cash flow is important, and so is paying taxes on time. It is your duty to ensure you have sufficient cash for taxes, and if you are to overspend your money and leaving insufficient funds to pay your tax obligations, you are likely to run afoul with tax laws.
That is why it is a good habit to prepare ahead of time by setting aside 20% to 30% of income for taxes. This enables you to prepare adequately when the time comes for you to pay your taxes.
#3 Consider Getting Adequate Insurance
Life is never a bed of roses; there are times where the unexpected happens.
Unlike working as an employee, freelancers do not get typical benefits such as paid medical leave and medical insurance. This is why having adequate insurance coverage is important, as it will come in to protect yourself from any unforeseen financial burden should any misfortune happens.
One insurance you may want to consider getting is the income replacement insurance. This insurance can protect you in times of major sickness, which can potentially cause a loss in income due to adverse impact on your work output. Currently, there are two insurance products that specifically caters to freelancers for such coverage – Freelancer Income Protection (FLIP) (Gigacover), and Prolonged Medical Insurance (PML) (NTUC Income).
Other insurance you can consider getting are disability insurance and professional indemnity insurance. The former provides a monthly income if you are to suffer a disability that prevents you from working, while the latter provides coverage for incidents such as negligent acts or omissions, loss of documents and infringement of intellectual property rights.
Before committing to buying insurance, it is good to know your budget as well as your needs first. You may also wish to speak to your trusted financial advisor, who would be able to advise you on the policies that will suit you, based on your needs and budget.
#4 Devise A Budget That You Will Actually Stick To
As a freelancer, you are likely to manage a fluctuating income. Hence, it is important to devise a budget and track your cash flow. This will help you in managing your personal budget, as well as your business expenditure and design goals for major spending.
There are different ways and strategies in monitoring and managing budget, and you can try different methods to find out which one works for you.
For those who are new to freelancing, you can try using the popular 50/30/20 budgeting approach, which involves spending 50% of your income on necessary expenses, 30% on discretionary expenses, and allocating the final 20% on savings or taxes. Another approach is zero-based budgeting, which means allocating every dollar you make to a certain purpose until your balance is zero.
In addition, you should also make a point to check in with your budget regularly to make sure you are staying on top of your goals.
#5 Be Clear About Price, Deliverables, And Payment Terms
As a freelancer, it is best to have a clear sense of what your services are worth. One way is to do some research on the market rates based on your skills and experience. For new entrants to the freelancing world, you may want to start with providing a lower rate for your services to build your portfolio, and start charging more (or walk away from lowball rates) with more time and experience.
Also, delayed or non-payment of a job done is every freelancer’s nightmare. As a freelancer, you can prevent this occurrence by stating clear payment deadlines and conditions on your invoices and contracts. Get any correspondence in writing to ensure that you and your client are on the same page, and set a reminder if the deadline is approaching and you have not been compensated for your work.
No matter how demanding these financial challenges can be, you can be well equipped to handle them. Take time to design a system to track your budget and expenses, and be sure to sign up for adequate insurance coverage.
As long as you are proactive in managing your finances, you can be certain of finding success and enjoy the freedom and perks that comes with being a freelancer.
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