Freelancing is freedom, right? Yes, in many ways, the freelancing life does provide more flexibility compared to working at a 9-5 job. The challenge is an ever-changing income. A fluctuating freelance income is natural and can cause some frustration – if not panic!
Following is a non-nonsense guide to managing that up-and-down income. It will help you take care of your business, yourself, and your bank account.
Flareapps.com small business tip #053Don’t Quit Your Day Job Too Soon
For would-be freelancers, it’s tempting to go “all in”if you’re growing tired of your day job and/or have had a taste of what life as a freelancer can be like. A mistake that some make is quitting their day job too early. Freelance careers often require a transition period where you may be working full-time (or part-time) at a day job and freelancing in what spare time you have.
Without this transition, you are taking a huge risk. You can’t expect that the world will beat a path to your door just because you’ve decided to jump with both feet.
Many successful freelancers use one of these two strategies:
Work your full-time day job and freelance in your spare time
Working full-time while freelancing has the benefit of having a wide safety net. You can do some freelancing at night on and weekends and begin to build up a clientele. It may take a couple of years of sacrificing spare time to get there. The benefits are obvious: you have a reliable income from your day job; you can slowly earn enough money freelancing to justify leaving your day job; and, you get to see if the freelancing life is really for you.
Once you have enough clients, you may be able to justify reducing your full-time hours to part time or find a different part-time job altogether if your current employer doesn’t accommodate your wish to reduce hours to part time.
Another advantage is that you have time to build a reserve of funds. When you freelance, income can fluctuate (that is after all what this article is about 😉 . If you can save a reserve of a few months’ worth of income, you’ll have a nice contingency you can draw from when your freelance income is low.
Work part-time and freelance the rest of the time
If you can afford to work part time and freelance, you’ll have more hours to dedicate to building your business and as a result you might make the transition faster. To do so, you may have to really live frugally, particularly in the beginning when you don’t have much freelance income.
Flareapps.com small business tip #054Know All Fixed Expenses and Estimate One-Time Expenses
When you are freelancing, know exactly how much you spend every month. Calculate your fixed expenses and estimate one-time costs. For fixed expenses, make a list of absolutely everything, down to the penny that you spend in a month. Know both your expenses related to income and all of your personal and household expenses. This is important because as a freelancer, reducing personal expenses (when possible) can make your freelancing life more feasible. For one-time expenses, you’ll have to take educated guesses. Always estimate expenses liberally (they are often more than your best guesses).
Flareapps.com small business tip #055Estimate Monthly Income
As a freelancer, you’ll need to estimate your monthly income conservatively because freelance income can be so variable. If you have been freelancing for a year, you can take an average of your income over the past 12 months. Averaging is better than no estimate at all though using your lowest month’s income in the past year provides a safer “worst-case”baseline to use when budgeting.
Flareapps.com small business tip #056Use Budgeting Software
After taking the time to estimate monthly freelance income and expenses, use a business budgeting application like Flare to help you create an interactive budget. Enter projected income and expenses and then compare what you projected with actual income and expenses. If you do this monthly, you’ll be able to spot trends over time. These metrics can be invaluable for planning. You’ll be able to spot cyclical ups and downs and make adjustments to accommodate. This data can help you better prepare for the future. A budget also ensures that you are doing what many freelancers fail to do: plan for profit. Profit doesn’t just happen. You make it happen!
Flareapps.com small business tip #057Don’t Put All of Your Eggs in One Basket
When you finally have made the switch to full-time freelancing, it may be wise to earn income from many clients instead of one or two. A diverse portfolio of client revenue means that if one client contract dries up, you are still safe. If you earn most of your income from few sources, you are risking financial disaster if a client cancels a contract. It may be tempting to take on work from one or two big contracts, but you need to understand the risks. If you have many clients, if one cancels, you won’t have to scramble madly to replace the lost income.
Flareapps.com small business tip #058Ensure Clients Pay You in Stages
When freelancing, ensure clients pay you in stages. Build milestone payments into the contract. Many freelancers bill for 50% upon commencement of work then 25% at about the half way point and 25% upon completion. This is much better than waiting until the work is complete. You have money in the bank from the start.
Flareapps.com small business tip #059Save What You Can
After meeting your expenses (both business and personal) put something aside, both for contingencies and retirement savings. For freelancers this can be difficult. It is, however, possible. Saving something, anything, monthly early on in your freelance career is wise. You can discuss options with your bank or credit union. Learn about Simplified Employee Pension (SEP) plans and Simple IRA at:
- IRS: “Retirement Plans for Small Business”(PDF).
- CNN Money: “Ultimate Guide to Retirement: I’m self-employed what are my savings options?”.
Freelancing is rewarding. Ease into it, be conservative, and always have a plan:
- Don’t ditch your day job too early.
Transition out of your full time job slowly, or work part-time and freelance.
- Liberally estimate expenses.
Don’t underestimate expenses. You’ll have a false sense of security if you do.
- Conservatively estimate income.
Use “worst-case”scenario income as a baseline. It’s safer to underestimate. Certainly you’ll want to plan for growth by projecting incoming, but, you also need to know whether you can realistically meet expenses and maintain cash flow in lean months.
- Use budgeting software.
Budgeting is a feature of Flare accounting. Budgeting will help you see trends. It also forces you to look closely at your business finances and plan for profit.
- Don’t put all your eggs in one basket.
It’s safer to have a handful of clients rather than one or two.
- Get paid by clients at milestones over the life of the project.
Don’t wait until project’s end to be paid. Get paid something up front and at stages during the project.
- Save what you can.
Put something away monthly. Start saving early.