Money Management 101 for Freelancers

I’ll admit it, shameful as it may be: When I was in a full-time job, I put very little thought into money management. As long as I had enough money to make it through the month (or could make clear cuts if it looked like I wouldn’t), I deemed myself okay. I was saving, but not strategically. I had eyes on retirement, but not seriously. Simply put, I naively trusted that it would be fine and just kept moving.

But since I made the switch to a freelance-based income, my money management strategies have had to change. Less predictable cash flow, fewer automated or HR-assisted tasks, and increasing responsibility on my shoulders forced me to wise up quickly. I’ve learned a lot, and it has transformed my relationship with something I otherwise hid from learning more about. If you’re thinking about making freelancing or independent work a bigger part of your life, but are nervous about the money management side, don’t worry. I get it. The tips below will give you some basic guidance on how to set you up for success.

Sock 40% of every paycheck into savings. Just do it.

When you get a regular paycheck from an employer, money is withheld for things like Social Security, Medicare, and other public funds of that nature. But when you work independently, you’re responsible for these funds. Between that and your standard rate of taxes, you can expect your tax bill (before deductions) to hit about 40 percent of your annual income.
That number shocked me when I first heard it. In truth, it shocks me every time I put that amount away. But doing so routinely is imperative. Why? Because when it comes time to pay taxes, even with the quarterly method that the IRS allows for independent workers, the price tag is easier to conceive of when you know the money’s there. Spread out over four payments (typically April, June, September, and January), the payment becomes even more manageable. So, be diligent about putting this money away. Even when it’s tough in the moment, it makes some big obligations a breeze down the line.

Automate your finances

As you make purchases for your business, tracking these expenses can benefit you in a few ways. The first instinct is to do so out of caution, given the fraught relationship that independent workers have with audits. But expense tracking can also work in your favor; several categories of expenditure can be written off, lowering the amount you owe to the IRS. So, making tracking automatic (using a system like the one bundled inside AND.CO), versus a manual system like Excel or Quickbooks, can save you both time and money!

A word of caution: Automating these processes doesn’t mean you put them out of your mind. Most apps, Fiverr Workspace included, allow you to approve the categories purchases are put into. Which means you’ll see all of them again as you categorize them. I like this process, because it helps me be reflective about what I buy or purchase, what’s really needed, and what potential cuts may need to be made if funds get tight one quarter. Interestingly enough, a money management technique designed to save me time, sometimes actually pushes me to slow down and think deeply about the business I’m building. Particularly in the early phases of your freelance career, it can be a good exercise to inspect the direction in which its headed.

Create a safety net

I know it might sound excessive to sock more money away after the first step, but as someone who faltered in this before and paid (literally and figuratively) for it, I want to drive this point home. Even with meticulous planning and systems to track income and expenses, you may still run into moments where you don’t have as much money as you might need. Things happen—unexpected repairs/replacements, runaway expenses, late-paying clients (ugh!)—and your financial outlook can change as a result. But with a strong safety net in place, you can weather these prospective storms with greater ease.

Unlike the set percentage for taxes, the amount needed for this net to develop is fairly nonspecific. Most experts recommend three to six months of your targeted monthly income as your cushion, depending on your lifestyle. You can go about “constructing” your net in a few ways:

• You can earmark an additional percentage of each paycheck,
• You can earmark any income that exceeds your monthly target, or
• You can earmark money from specific projects (I do this one, pledging to “not touch” the money from one recurring writing assignment).

Again, it might seem overly cautious to stow away so much money. But in those moments when emergency calls, you’ll be glad you have somewhere to land that’s so richly padded.

Follow your money

So, about those client “stiffs” I mentioned earlier: yes, they happen. And they can make life quite difficult for people whose income isn’t always steady. As such, while it may not seem like a money management strategy, getting good at following up on missing checks or deposits should be an essential part of your skill set.
For slight delays, it can be helpful to have email templates set up. This serves two purposes. One, it standardizes the language for a tough conversation. Two, it reduces the fear or anxiety that can come with broaching these topics. I get anxious every time I have to hit “Send” on a message like this, but it’s often made easier when I have strong language already crafted. Bonus tip: Write your templates before they’re needed, so your sense of nervousness doesn’t leak into the wording.
If you suspect you’re being “stiffed,” there are additional options you can consider. New York recently passed the “Freelance isn’t Free” Act, providing legal recourse for those affected by nonpayment. For those freelancing outside states with such protection, Fiverr Workspace has developed a service designed to advocate on your behalf. This letter writing service will demand payment from a delinquent client, citing their legal obligation to do so per the terms of your contract. The best part? It costs less than that latte you’re sipping at the moment.

To that end, ensure that the work you’re doing as a freelancer is always under contract, and that the contract in question has payment terms (including the number of days a client has to pay, and the penalty assessed if that time is exceeded).

Know yourself, know your worth

One final money management tip for you: Charge more. No, seriously. As your career grows and develops, you’ll reach moments where you can command more money for your work. Seize those opportunities to do so. Have you been syndicating writing pieces with more frequency lately? Has something you’ve worked on been covered in a national publication? Are you unveiling a new service, thus making your time in another area more precious? All of these reasons, as well as several others, can serve as ample cause for a rate increase.

This is a process that should be conducted thoughtfully, with plenty of notice for your existing customers about when and how the rate change will impact them. Contrary to what many fear, rate increases don’t drive away customers; in fact, when the work and reputation align, they’re likely to respect the changes you present to them. They’re paying for top quality work, done in the context of a strong and effective contractor-client relationship. As long as you’re providing that on a consistent basis, you’ll be doing work that justifies the cost.

Money management is, for many, a skill that will need to be learned anew as a freelancer. But by being mindful of savings, monitoring and thinking about expenditures, building a safety net, and monitoring how clients contribute to your financial wellness, you’ll be well on your way to mastering the essential money management skills of this way of work.
What other money management tips do you have to share for new or developing freelancers?