Managing your finances requires diligence even when you have a steady paycheck. Add in what comes along with being a freelancer — inconsistent income, the ups and downs of running your own business, and wearing many hats at once — and you’ve got even more of a challenge!
While dealing with your personal and business finances might be the last thing on your list (especially if your tendency is to avoid the numbers and hope for the best), you can find tremendous freedom and clarity by choosing to manage your finances in a powerful, proactive way. You’ll be able to make business investments that make sense for you, identify your ideal clients, accomplish short-term and long-term goals, and wake up each and every morning with a plan for the day.
Sounds pretty fabulous, right? The best part is, the process of gathering information about your money and managing it all can actually be easy and fun. I’ll show you how, step by step.
Start by thinking about why you do what you do. Considering the “why” will help you define your financial goals for both your business and personal life. What do you want to achieve in the next 12 months? What income can you reasonably expect to earn each month? What do you plan to spend? Of course, there’s no way to perfectly predict income or expenses, but estimating to the best of your ability will give you a benchmark to keep in mind as you work towards your goals. Having a plan in place means you have something to measure against as you spend and earn, and you’ll be able to have a more accurate picture of your financial wellness as the months go on.
Avoid dealing with our money entirely is actually more stressful to us in the long run. It’s perfectly normal that with all you have on your plate as a freelancer, dealing with personal and business finances might get pushed to the back burner. That’s why I recommend creating some time in your calendar every two weeks to show your money some love. This block of time (what I call a “money party”) is your time to handle any money-related tasks or to-dos. Make it fun by enjoying your favorite food or beverage or creating a fun or relaxing atmosphere. You can even get together with other friends or freelancers and have your party together. This can open up great conversations around money while also establishing a great support system that helps keep you on track.
While it’s always important to be aware of what’s going on with your money, there’s no reason to make it any more difficult than it needs to be. Simplify things by combining or streamlining accounts, separating business and personal expenses, and automating whenever possible. You can use your “money party” to check on automated bills or transfers, so you’re never ignoring your money and payments are made on time and you spend less time doing more.
Not putting aside money for taxes is one of the most common pitfalls for new freelancers and entrepreneurs. It’s an easy mistake to make if you’re used to a W-2 job that does most of the tax withholding work for you! But as a freelancer, it’s important to remember that you’ll be footing the bill come tax season if you treat all your money as available income.
Your can make tax season easier and avoid the pain of a large tax payment by putting money aside into a separate tax fund on a monthly or biweekly basis. That way, when you pay your quarterly or annual taxes, the money is there waiting for you. A quick tip about paying quarterly: according to Lisa Greene-Lewis of TurboTax, generally, if you expect to owe $1,000 or more in 2016, the IRS will expect you to pay quarterly taxes in 2017. That means on the April 18th deadline, you will not only be filing your taxes for 2016, you’ll also be filing your taxes for the first quarter of 2017.
Luckily, Lisa shared there are many ways to reduce your tax bill as a self-employed filer — like home office expenses and travel — and it’s important to keep track of your deductions year round. So set yourself up for a success and a stress-free experience by planning accordingly!
Another common pitfall when it comes to our money is not paying ourselves first. We prioritize paying our bills and spending on our lifestyle and then we contribute anything that’s leftover to savings. Only one problem: there’s never really any money left to save! You might think that if you earn more, you’ll be able to save more, but if you don’t change the equation, you’ll find that your savings still aren’t adding up. When you’re running your own business, it’s even more important to prioritize paying yourself first. If you don’t think you can save, start small. Set up a monthly automatic transfer from your checking account to your savings account. If you hardly notice it, gradually inch up the amount! The best part is that paying yourself will soon become routine: by automating it, you’ve turned it into expense.