Freelancing is rewarding, but it is not for the faint of heart. Yes, you get to do work you love and you get to do it on (mostly) your own terms. You also have play roles you may not enjoy so much, like marketer, sales person, and bookkeeper, some of which we've talked about before. And one of the biggest challenges in freelancing is managing an irregular income.
Before I started working for Lifehacker, I spent over twenty years as a freelance computer consultant and writer. I loved working for myself, almost as much as I love with the people here, but managing the boom and bust cycle of work was something that never came easy. I did learn some good lessons along the way, though.
Create an Emergency Fund
Everybody should have an emergency fund that they only dip into when they need to cover basic expenses and have no other recourse. You've heard this advice from us on more than one occasion. The common wisdom is to keep enough money in your emergency fund to cover six to eight months of bills. If you're freelancing, you need more.
I recommend at least being able to cover expenses for a full year. Remember that it isn't just personal expenses you have to think about anymore. You also need to be able to cover business-related expenses and there are some other advantages, too:
- You'll find you aren't quite as desperate for clients. If a job comes along that, for whatever reason, you don't feel right about taking, you'll feel more comfortable saying no or at least taking the time to figure out how much you really need the job.
- If clients can't (or won't) pay their bills on time, you have more flexibility in dealing with them. If a good client is going through a rough patch and needs a little more time to pay, it's a lot easier to work something out with them if you have fallback funds.
- You can take advantage of more opportunities. If an event arises that lets you do some real networking or extend your training, you can think about whether it's worth putting off clients for that time so you can take advantage of it. A good emergency fund can make that decision easier, though you have to be careful not to make dipping into your fund like that a habit.
Open a Separate Business Account (and Use It)
If you're freelancing and you're a sole proprietor, it's perfectly legal to use the same account for personal and business expenses. It is not, however, a very good idea. Keeping a separate business account, even if you're just freelancing occasionally on the side, makes it much easier for you to create a viable budget. It also makes tax season a good bit less frustrating for you and your accountant.
Use that business account for business expenses, your salary, and paying into your retirement, tax, and business emergency fund. And that's it. If you have money left over, pat yourself on the back and leave it there. You never know what next month is going to be like.
Build Other Funds if You Need Them
As a freelancer, you don't get perks like insurance, 401K matching, or even automatic withholding for taxes. You have to take care of it all yourself. You can absolutely get by just using your regular business savings account and keeping track of how much you're saving away for different purposes. That's what spreadsheets and accounting programs are for, right?