Freelancing can be extremely rewarding, yet can present its own set of financial challenges. By tracking expenses, creating a budget, and opening separate savings accounts you can better manage your freelance income.
Taxes are another key component of freelance money management, and keeping an eye on earnings and paying quarterly taxes is necessary to prevent an astronomically expensive tax bill in the future.
1. Track Your Income and Expenses
One of the key aspects of freelance money management is tracking income and expenses. Doing this allows you to plan your finances, understand what’s coming in and out of your business, and make decisions that could save money and expand it further.
Tracking business expenses is crucial for taking advantage of tax deductions. Eligible expenses that you can deduct from your taxes reduce how much of your earnings are taxed; having a dedicated business bank account and credit card can assist in this regard; it helps establish credit histories while offering rewards programs as well.
Lunafi’s expense tracker automates transactions from banks and credit cards so you don’t have to manually input them – saving both time and preventing errors in entering them yourself. This allows Lunafi users to save both time and reduce errors with our expense tracking feature.
2. Create a Budget
Money management is an indispensable skill for freelancers or self-employed individuals, just as meeting deadlines is. Being financially sound can often prove crucial.
Budgeting can be challenging for anyone, especially when income fluctuates. An app like Elorus will make keeping track of your net income easier while creating a spending plan. When creating your budget it is wise to estimate average monthly earnings over an extended period and use that number as the basis.
Save surplus income from high-earning months into an emergency fund or dedicated account dedicated to surplus income; this will help make it through any slower times at work. Also consider investing in yourself through retirement plans like SEP IRA.
3. Set Up a Separate Personal and Business Bank Account
As a self-employed individual, it’s vital that you pay yourself first. While this might sound obvious, freelancers with fluctuating income should especially follow this rule.
Setting up separate accounts allows you to keep personal expenses and business income completely separated, helping reduce confusion and money lost through miscalculation or mismanagement. Plus, this makes filing quarterly taxes and saving for retirement much simpler!
As part of your business planning strategy, it’s also advisable to set aside 30-35% of earnings as tax savings account savings. This will make filing taxes simpler while helping avoid unnecessary taxes or penalties that might crop up when tax time rolls around.
4. Create a Separate Savings Account
As more people work as freelancers or engage in side hustles, it’s critical that they stay on top of finances – especially since independent workers typically take on aspects traditionally handled by employers, like invoicing and paying taxes.
Separating money earmarked for business expenses from that set aside for personal spending can help keep savings on track and minimize temptation to dip into emergency savings funds for other purposes.
Freelance work can be rewarding, yet requires a unique approach to money management. Take charge of your finances by creating two bank accounts – personal and professional – separate personal bank accounts from business bank accounts, tracking income and expenses separately, creating a budget, setting goals-specific savings buckets. Learn more about managing money as a freelancer using Rocket Money!
5. Create an Emergency Fund
As a freelancer, it can be hard to predict your monthly income; much depends on winning new projects, clients paying on time, and how much work is on the pipeline. An emergency fund can come in handy.
Start small when setting savings goals — something manageable can serve as motivation to continue saving! Setting this initial goal may create momentum that inspires further savings efforts.
Try and set aside a portion of your income on a regular basis – perhaps using the 6 Money Jars Method. Or consider investing in an SEP IRA which offers some tax benefits similar to full-time jobs – in order to establish a cushion of three-six months of expenses as soon as possible.