The Financials of Freelance

Being a freelancer means you are your own boss. You can set your own schedule and work at your own pace. Even the amount of work that you take on is up to you. However, when it comes to setting up your finances around your new job, things aren’t as simple. Whether you are considering business loans or you want to use your savings to get started, you need to know just how money works for freelancers.

What is Your Cost of Living?

Business loans can make the transition to freelance work easier but you still need some idea of what it costs to live. Add up all of your monthly bills. This includes your mortgage, your car payment and even your utilities. These are things that you probably can’t live without.

Once you have a roof over your head and electricity, you still need money for food, clothing and gas. Entertainment expenses should also be included, but remember that this is a category of spending that may have to go if you aren’t making enough money.

Remember that medical insurance isn’t usually offered in freelance positions. Because you are an independent contractor, you are not a full time employee for any company. This means no medical benefits, no retirement fund and no special savings plans. These expenses and investments will need to come straight out of your pocket.

The total of all of these things added together is the amount of money that you will need to come up with each month to make sure that you are taken care of. Business loans make this transition easier as they make up for the lack of income as you get things started. At some point, you will need to be able to support yourself and make enough money to begin to pay the loan back.

How Do You Handle the Ups and Downs of Income?

Consistent income isn’t always a possibility in freelance work. You can end up having a sizable income one month and not being able to pay the bills the next. While your goal is to find work that is consistent, with steady pay, this isn’t always a possibility. You have to plan for the good and bad months.

When extra money comes in, move it straight to the savings account. You will be tempted to spend it and celebrate your success. Celebrate in moderation. The next month, things could take a turn for the worst. For the first few years, your savings account could end up being a lifesaver.

As slow months approach, you have the savings account to fall back on. You always need to have a safety net when it comes to freelance work. A solid savings account could be the difference between staying in business for yourself or going back into the traditional workforce. Even if you weren’t planning on looking into business loans, that type of back up money can be helpful in the beginning.

This post has been provided by a guest blogger.

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5 thoughts on “The Financials of Freelance

  1. > Even if you weren’t planning on looking into business loans,
    > that type of back up money can be helpful in the beginning.

    I used to think this way. If you have to pay interest, then that puts you back further because your money has to be allocated to this expense. Bank of America started requesting 1% from any line of credit (LOC) from small businesses. I ended my LOC in Dec 2011. It was a big decision. Even a few times in Jan 2012, I could have used it for cash flow and to move purchases along, I realize now with a little planning and reserve, you can avoid paying interest.

    I think you should try to freelance part time while you or your spouse as a full-time steady job. If the number you put in, work out to exceeding your full-time job including benefits, then go for it. Otherwise, you put your family and financial risk and you end up making less.

  2. Freelance income is tough to budget. That is why it’s always a good idea to have a large emergency fund and a buffer before venturing out into this. Also a good idea to leverage a full-time job before getting full-time into freelancing.

  3. Having a big emergency fund before you switch from employee to freelancer is also a huge plus. Someday I’d like to go full-time freelance but for now it’s providing some additional cash to pay off the car (done) and build up our emergency fund (also done).

  4. I think having a big emergency fund is key to freelancing, as well as setting a pay for yourself – dont just pay yourself whatever you earn that much, pay yourself something similar to what you were making at your old job – remember you’ve got pay taxes now.

  5. I have always feared being on “commission” or freelance. It’s so challenging to have an unpredictable income… I prefer to have some predictable income accented with some less traditional styles.

    Good for you for being so successful in what you are doing.

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