Transitioning from a corporate job to self-employment can feel overwhelming but exhilarating. You might be giving up steady paychecks (and all those break room snacks), but you’re gaining the thrill of being your own boss.
Get started right by creating a financial tracking system that will help you keep a budget in line, pay your taxes correctly, and manage expenses. Here are five financial tips for kicking off your freelance career.
1. Create an emergency fund. Often, freelancing is full of abundance and drought when it comes to workflow and client payments. The common wisdom with an emergency fund is to put three to six months’ worth of expenses aside, but for freelancers, it’s best to have an even more robust savings account, so you can manage payment cycles more easily. Incorporate monthly additions to your emergency fund in your budget.
2. Consider a line of credit. Businesses often rely on a line of credit so they can borrow money easily without having to fill out loan applications every time they need to move cash around. Also, a line of credit tends to have a lower interest rate than a credit card.
3. Open a separate business account. Although it’s possible to use a personal account for your business needs, it’s not recommended. It’s much easier to track your business income and expenses if they’re in a separate account that you can review at a glance.
4. Create a savings account for taxes. When you’re self-employed, you must pay both income taxes and self-employment taxes. Freelancers usually need to pay estimated taxes on a quarterly basis, and those deadlines can come up fast when you’re busy building your business. It’s best to put the money aside each month into an account designated for paying taxes. That way, you won’t need to scramble when it’s time to pay. (For more information on taxes, see the IRS Small Business and Self-Employed Tax Center.)
5. Pay yourself a salary. Figure out your monthly personal expenses and create a salary based on that number. That way, any money above that amount can be saved for the business, put toward taxes, or tucked away into a savings account. Most likely, your income will be variable, so having a specific salary amount – which can be drawn from emergency savings if necessary – helps to keep some consistency in your personal finances.
Whatever tactics you take, remember that the overall goal is to keep your finances as streamlined as possible, so you can enjoy freelancing instead of fretting over expenses.
Have you made the transition to self-employment? What financial tips do you have to add? Share them in the comments below.
Want more financial control as a freelancer? Download this handy expense sheet so you can streamline your monthly income and expenses.