Freelancing offers an alluring promise of work-life balance since you can manage your own time. You don’t have to follow a strict 9-to-5 schedule. You also get to work from home or anywhere you want, instead of going to the office
This promise is especially tempting these past few months. The pandemic has driven more people to work on a freelance basis. In fact, in the past 12 months, two million Americans started going freelance.
If you want to pursue freelancing, there’s no better time to do it than now. In this article, we’ll explore some strategies you can implement to manage your finances wisely before and while running your freelance business.
Secure a Financial Safety Net
In 2017, it was reported that 41% of adults don’t have enough savings to cover an unexpected bill worth at least $500. Going freelance without savings is risky. Freelancing doesn’t guarantee a steady income, unlike an office job, especially at the beginning.
Thus, you need to have a safety net to keep yourself afloat while you’re still figuring things out. The popular rule of thumb is to save three months’ worth of living expenses. But given the unpredictability of freelancing, saving money that can cover you for at least six months up to a year is more ideal.
Separate Your Personal and Business Accounts
Separating your personal and business finances as a freelancer is difficult since you are your own business. In some cases, a personal expense may also be a business expense. This is why you need to sort out your personal and business finances and keep them separate.
One strategy that you can implement is setting up a separate bank account. You will use this to receive payments, pay bills, and buy necessary things for your business, such as office supplies and office equipment.
By setting a clear boundary between your personal and business finances, you’ll also be able to sort out your taxes easily.
Track Your Expenses
Once you’ve launched your new freelance business, you need to diligently track your spending. You can do this by writing your expenses down in a notebook. Or if you prefer going digital, you can encode them in an Excel file.
Expense tracking is very important during the first few months of your freelance journey. Your tracker will give you an overview of your business spending. This information will help you create an expense forecast so that you’ll know how much you need to earn each month to keep your freelance business running. The tracker will also help you determine areas where you could reduce spending.
While it’s nice to go to a cafe or a shared working space to get some work done, doing this can only result in higher monthly spending. Thus, as much as possible, you should stay home and do your work there.
If you’re concerned about staying productive at home, you might consider setting up a dedicated workspace. This way, you’ll have that one place inside your house where your brain knows that you need to focus on work.
Pay Your Taxes on Time
You must pay your taxes on time. Penalties for unpaid taxes can go from 5% of the amount of each unpaid month and can go up to 25%. To avoid missing payment deadlines, you might consider keeping a tax calendar. Check your annual tax deadlines and log them into your calendar.
You’ll also need to schedule when you will organize your finances and prepare your tax forms. This way, you’ll be sure to dedicate enough time to manage your taxes and avoid cramming.
Reduce Tax Liabilities
Speaking of taxes, you can decrease the total amount you need to pay by claiming business expenses. Many businesses evaluate capital allowances to minimize their tax liabilities yearly, and you can do the same as a freelancer.
Some business expenses that you can claim are the equipment you acquired for business purposes such as your computer, printer, or even a vehicle. Travel expenses count, too, such as fuel and parking fees.
You can also minimize your tax liabilities by claiming a home office tax deduction. You will qualify for the standard deduction if your home office is 300 square feet or less. If you meet this requirement, you can get a tax deduction of $5 per square foot.
Managing finances is important in any business, and that includes freelance business. You need to save money before you start. Once you’ve started, make sure that you monitor your expenses and file taxes on time. These simple steps will help you stay financially healthy as a freelancer.