Close to 54 million Americans work as freelancers and they make 17% more an hour than full-time employees do. In other words, freelancers can make bank. Even so, it’s still hard for freelancers to stay afloat.
In some cases, it’s because they work fewer hours than their 9-to-5 counterparts. Fewer hours means less money, even if they make more per hour.
In other cases, it’s because they don’t know how to handle all of the money coming into their bank accounts. Whether you work a full 40 hours or you’re getting by with less, you need to know how to manage your money. Follow these tips so your freelance business can be a money making machine.
1. Set up milestone payments
It’s impossible to manage your money if you don’t have any. Unfortunately, the nature of the freelance world makes it hard to determine when money will come across your desk or hit your PayPal account.
You can get some of that control back with milestone payments. Whenever you take on a project, set up milestones. Your client will have to agree to pay each milestone payment before you move forward with the project.
Of course, you won’t need to set milestones up for small projects, but you will need to do so with large projects. That way, you can keep cash coming into your business.
This doesn’t just help you with your cash flow issue. It also helps you avoid non-payment and collections problems.
Collections issues are becoming a serious problem for freelancers. Some desperate freelancers have even started using social media to smear non-paying clients, but professionals warn against that. There might be legalities involved and you could end up in hot water.
Instead, set up milestones so you won’t have to spend as much time chasing down clients. Some people might skip out before they make that final milestone payment, but at least you’ll only be out $300 instead of $3,000.
That will help with your financial issues and your legal concerns as well.
2. Prepare for your taxes
Bloomberg recently reported on the rise of the 1099 economy. Due to the boom in the freelance economy, more people are getting 1099s. The relationship between W2s and 1099s is no longer cyclical, with freelancers gaining ground on waged employers.
As a freelancer, you likely have a lot of these forms. You might have them from Upwork or other freelancer sites, as well as various companies. This means you also have a tax obligation. Don’t make the mistake of paying all of your taxes during tax season. Instead, pay your taxes quarterly.
Use a self-employed tax calculator to determine how much you owe each quarter. Then, send the IRS a check. If you do this correctly, you’ll only owe for the last quarter during tax season.
3. Create a budget
It’s easy to feel out of control when you’re a freelancer. You might make $100 today and $1,000 tomorrow. With money coming in at different times, budgeting can seem impossible.
Still, you have bills to pay so you have to figure out a way to budget your money. This is actually simple. Let’s say that you’ve been freelancing for a year. During that time, you have made an average of $5,000 a month. That would be your projected cash flow. You would need to subtract your expenses from that amount and set your budget.
Not only will this help you avoid impulse buying, it will also help you get better at getting the biggest bang for your buck. You can prepare your own meals instead of eating out, get dental care abroad at a fraction of the cost in the U.S., travel off-peak, turn-off the TV or explore a dozen more ways to save money. And you can finally go after your bigger goals like putting “free” in freelancing, buying your first home or retiring early, which leads to my final point.
4. Get ready for retirement
Nearly 45% of working-age households don’t own any sort of retirement account assets, and you can bet that a large chunk of those households contains at least one freelancer.
Why? They don’t have employers who are willing to set up their retirement accounts for them and then match their earnings. This doesn’t mean you should ignore retirement.
First, pay off all of your debt so you can think about retirement. That doesn’t include your mortgage debt. It’s okay to carry a mortgage, even as you move toward retirement.
Then, invest 20% of your income into retirement. You can invest in a Simplified Solo Pension, Solo 401(k), or Savings Incentive Match Plan for Employees.
While the Savings Incentive Match Plan for Employees is typically for small business owners, it also works for freelancers, especially those who intend to scale up their businesses. For instance, if you intend to hire some freelancers to work under you, this might be the best option since it will be easy to grow your business. You can transition from a sole proprietor into a business owner without any problems.
Money management is an important part of any freelance business. There will be days when you’re flush with cash, and days when you don’t have anything coming into your accounts. If you manage your money properly, you won’t have to worry those ups and downs.
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Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa works with small business owners and entrepreneurs to assist them with financial management and creating organized systems and procedures. She specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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