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Looking back, the early days of freelancing were a financial rollercoaster for me. Money flowed in, money flowed out, and I had no clue where it was headed. Plus, the tax surprise hit hard one year, catching me completely off guard. I was essentially winging it. Mind you – I kicked off my business at 19, I was still a baby. Fast forward to today, armed with over 15 years of freelancing know-how, I want to share with you some tips and ideas that could help you manage money like a pro.
Money management for freelancers
When that freelancing invoice get paid into your account, don’t do what I did in my early years and start spending it all at once. How to manage money? Get smart with it, allocate your paid invoice instead into different accounts for better financial control. Give each part a job to do.
Paid invoice
Let’s say you’ve just finished a job and your invoice of $/£/€ 1000 (pick any currency that fits your income) has been paid into your business account. You want to make sure you trickle down this paid invoice into different accounts.
Tax
First off, squirrel away 33% for those inevitable taxes. That way, you’re safe when the government comes knocking at your door.
Business Account
Next up, business expenses. This can be subscriptions for software, hosting, phone and internet bills, etc…But you also have a marketing budget to think about, equipment for your work and so on. So, another third of your paid invoice stays in your business account.
Financial Hub
Finally, the last 33% heads to your Financial Hub – your spending money. But wait, there are still some pit stops before you’re buying rounds for everyone!
Money Management
Necessities
Necessities are basically your monthly must-haves. These recurring expenses often constitute a significant portion of your income.
- Rent or Mortgage
- Car or other transportation
- Insurances
- Utility bills
- Loans and Debt
- Telephone and Internet
- Groceries
- Etc.
Emergency
Stashing money for emergencies is a smart move. Whether your fridge calls it quits or you need a new phone, having a financial cushion eliminates unnecessary stress.
I also strongly advise maintaining a reserve equivalent to at least 6 months’ worth of your “Necessities” total in this account. This ensures you’re covered for a substantial period in case of unforeseen events. If you can set aside more, it’s even better.
Investment
Investing comes in many flavors, like putting away money in a high-interest savings account or diving into real estate or the stock market. The key is to do some digging and figure out what suits you best based on your unique situation.
Learning
Keep the learning flame alive! Improving yourself requires setting aside time and resources. Consider investing in courses to acquire new skills or refine existing ones, both personally and professionally.
Fun
Finally, here’s your fun account—dedicated solely to you. It’s the space for all the enjoyable things on your wishlist.
Many freelancers might see a 1000 income as a green light to spend it all on fun. However, relying solely on this mindset can lead to significant challenges in the long run. And I get it, I really do. After all the hustle you’ve poured into your 1000 project, ending up with a modest 33 for your personal fun fund might not feel like a victory lap. It can be a bit underwhelming, especially considering the effort you’ve invested. But here’s the thing: as you develop control over your finances, it’s a real game-changer. It’s not just about the here and now; it’s about building a robust financial journey.
Create your financial goals
With a money management system, you can figure out in advance the amount needed to cover your necessities. This helps you set clear financial goals, avoiding guesswork and steering clear of stressful situations.
Financial Goal Example
Imagine your yearly necessities are around 30k. If one-third of your income goes to your Financial Hub and another third to your necessities, you’d need to earn approximately 150k a year to cover all your bills. Break this down into a monthly goal, and you’re looking at around 2,5k per month.
Adopting clear financial goals will:
- Keeps you motivated to earn more, giving you a specific target
- Enhances the likelihood of a comfortable future
- Aids in reducing or eliminating debt
- Facilitates saving for emergency situations
- Supports business growth
- Encourages investments for the future
- Creates better intentional choices about how you spend your money
- Reduces the chance of stressful financial situations
Additional wisdom on how to manage money
Ditch credit cards for debit cards
Let’s talk cold, hard numbers for a moment. The International Monetary Fund‘s stats are showing us that we’re drowning in debt. Just look at the U.S., where the credit card balance hit a jaw-dropping $1.079 trillion in Q3 2023, as per the Federal Reserve Bank of New York. It’s mind-boggling. We all know that those plastic cards fuel unnecessary extra spending, often on things we probably don’t need. Here’s a suggestion: live within your means. If you can’t afford it, don’t do it. If you lost track of life’s essentials, maybe minimalism can give you some answers. But trust me; letting debt take the wheel is a one-way ticket to a financial nightmare. My advice? Stick to debit cards if you’re serious about securing your financial future.
Live on less than you earn
Humans have another quirky habit of playing a game called “Let’s Spend It All” when they get their hands on some cash. It’s like, “Oh, we’ve got €2000? Challenge accepted, let’s spend every penny!” The more we earn, the more we feel we can afford, leading to increased spending. However, this doesn’t have to be the default behavior. Before parting with your hard-earned cash, it’s essential to consider the desired outcome and question whether the expenditure is truly necessary. Ask yourself, “Do I really need to make it rain cash right now?” Understanding how money can serve you and adopting a thoughtful approach can help redirect funds to more meaningful purposes. Instead of spending just for the sake of it, redirect those funds to your savings, investments, or a learning account. This way, your money works for you with purpose and intention.
Don’t follow any financial advise blindly
When you delve into online financial advice, you might stumble upon the 50/30/20 rule. It suggests allocating 50% to needs, 30% to wants, and 20% to savings. Another one is the 70/20/10 rule: which involves putting 70% of your earnings to living expenses, 20% to savings and 10% to debt or charity.
Never take financial advice on how to manage money as gospel. Take a moment to reflect on your professional and personal goals. Question how the advice aligns with what you want to achieve. Remember, there’s no one-size-fits-all rule when it comes to managing your money. It’s all about what works best for you.
This means, don’t follow my approach to a T either. Feel free to tweak the percentages and make it your own. The key is to maintain those allocation “buckets,” and if I were to throw in a tip, consider letting the Fun bucket be the last one you fill.
Conclusion
Learn how to manage money like a pro and create a sturdy and robust financial future by making intelligent choices about how to allocate your income wisely. Set crystal-clear financial goals that nudge you to earn more, ensuring your future is comfier, and waving goodbye to debt. It’s all about smart money moves.
