The gig economy has been steadily growing for years, and if you’re currently under a ‘shelter in place’ order, but have skills you can market online, now may seem the perfect time to try freelancing. There are, however, a few financial tips you may want to consider first.
Set Your Rates Carefully
How much is your time worth? That’s a question most of us find hard to answer. But a freelance side hustle can take up a lot of hours, so it’s vital to consider what each one is worth. When setting an hourly rate you need to factor in just how many of your hours won’t be billable. Many freelancers find a per project rate is better than a per hour rate. This can allow them to look at each project, ascertain how complex it is, and price it accordingly.
Freelance writers need to be especially careful. It’s common to set a per word rate, but this isn’t always advisable. A lot depends on the type of writing you’re offering. Writing sales or ad copy is a skill that actually involves trying to create maximum impact in as few words as possible. Copywriters don’t generally find that charging per word is practical, whereas many blog content writers do. Pricing your services is the first step to actually making a significant income as a freelancer.
Decide Whether You’re A Freelancer Or A Business
This decision will impact your tax situation, and therefore your freelance finances. Every freelancer has to decide whether to operate as a sole proprietor or set up an LLC (or the equivalent in their country). Setting up an LLC is, of course, more complex. It does, however, come with various protections and tax benefits. You’ll want to carefully consider the pros and cons of each.
Either way, make sure you know what estimated tax rate is. You’ll want to set that money aside with every project you work on, on payday. The best place to stash that not-yet-due tax is a high-interest savings account, but make sure it’s accessible. If you’re in the US, you may be required to pay quarterly estimated taxes. In many other countries, you’ll include your freelance income when you file at the end of the tax year. Make sure you know what the law is where you live.
Keep Financial Records From Day One
Wherever you live, you will be required to file that tax return sooner or later. Make sure you’re keeping records of income and expenses carefully from day one. For the majority of freelancers, it will be worth using basic accounting software, such as Quickbooks or Xero. These systems do a lot of the work for you and generally cost a very low monthly fee. Even if you will be enlisting the help of a financial professional, the right systems and software can save him or her time, and you money, when it comes to tax season.
Adjust Your Budgeting
Budgeting as a freelancer is very different from budgeting on a fixed income. Many who freelance as a side hustle will find it useful to still budget for essentials entirely out of their fixed income. This allows you to use your freelance income for savings, luxuries, extra debt repayments, or something else that will improve your overall finances.
You can also have a primary budget that only includes your fixed income, and then draw up another month-by-month budget to allocate the funds coming in from freelancing. If you’re switching exclusively to freelancing, budgeting becomes a lot more challenging, as income is less predictable. In simple terms, you’ll want to be basing your budget on your lowest income scenario each month, not your income goal, no matter how confident you are. By all means, aim high, but budget low, just in case.
Diversification is always advisable when it comes to finances. Nobody wants all their financial eggs in one basket. Freelancing is no different. Having different clients, income streams and marketable skills can be invaluable and help you through tough times and market shifts.
There are a lot of things to think about when considering the freelance lifestyle. Make sure your freelance finances are set up right from the outset, to save yourself headaches later on.
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Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.
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