Thinking About Going Freelance? Here’s How You Can Financially Prepare

A freelance career can be ideal for a variety of different reasons. Flexible hours, remote work, and greater control are all great perks.

One thing that doesn’t rank high on the list of positives, though, is the pay — at least not at first. Even if you can bring in a boatload of cash, it can be a bit jarring to adjust from the steady rhythm of a full-time paycheck to the ebb and flow of a pay-by-project lifestyle.

This shouldn’t be a deal-breaker, though. On the contrary, the financial benefits of freelance life can be extremely lucrative if you’re willing to work for them.

Here are some tips and suggestions to help you financially prep for as smooth of a transition as possible.

Laying the Groundwork

Before you actually jump into the full-time freelancing gig, it’s important to lay the financial groundwork to succeed. You can figure most of these things out as you go along, but if you want to have a financially smooth transition, it’s best to take the time to set the stage beforehand.

Open up a Separate Bank Account

One of the first things that you want to do is open up a separate bank account for your freelance income. This helps to separate work from personal finances. It can also make it easier to report specific work and personal financial activity come tax time.

Create Your Financial System

It’s also a good idea to pull together all of the financial apps, documents, and other paraphernalia that you’ll need. For instance, if you’re a blogger who wants to start freelance writing, you will probably need things like:

  • An invoice generator to bill clients;
  • A Paypal account to receive payments
  • Spreadsheets to track your income and expenses;
  • Bank apps to manage your finances;
  • Checks to pay yourself from your business account.

These are just a few suggested items. Each person’s system will be different. The important thing is that you do your best to set all of these up before you need them. That way you won’t be left scrambling or making split-second administrative decisions once you start to get some freelance momentum.

Set Up a Freelance Budget

Next up, consider making a freelance budget. You likely already have a budget for your full-time income. However, freelance pay is notoriously inconsistent. With that being the case, it’s wise to plan your budget — especially at the beginning — as if you were in a financially stressful situation. Especially since you probably are — you’re just starting a new career.

In other words, as you structure your budget, be conservative and try to live well below your projected freelance income. Make sure you know what you need for necessary expenses and look for any areas like entertainment or subscription services that you can temporarily cut. You can always introduce them again in a few months once you have a better idea of how much money you can bring in as a fledgling freelancer.

Save Up an Emergency Fund

Another way to head off the ebb and flow nature of contractor income is by saving up an emergency fund.

The last thing that you want to do is launch your freelancing business and then start missing payments and bills. Defaulting on a loan is a serious issue that can damage your finances, lower your credit score, and leave you financially hobbled for years.

Do your best to save up one, three, or even six months of income before you start freelancing. The more you have, the better, as it can help you cover any shortcomings that you may experience as you find your sea legs as a freelancer.

Establish Professional Lifelines

As a final step, make sure that you have the names of a good accountant and lawyer ready to go before you start. You may need professional help in either area as you begin setting up your finances, generating income, tracking expenses, and navigating self-employment laws.

Taking the Leap

Once you’ve got everything set up, it’s time to get into the freelancing itself. Here are a few financial tips to help you keep things as smooth as possible as you get things off the ground.

Decide to Start Full-Time or Part-Time

There are multiple ways that you can launch a freelance career. Again, you can dive in full-time and figure things out as you go.

However, if you want greater financial stability, try to gather at least some clients before you quit your full-time gig. This will help you get a feel for how to handle your finances and what kind of income you can initially expect to make.

Pay Yourself Regularly if You Can

Depending on your field, you may have steady work or it may be a feast or famine scenario. For instance, a writer may be able to find consistent work all year round. However, if someone gets into the growing accounting field as a freelancer, they may find that a huge part of their workload comes around tax time.

In either case, it’s important to stick to your budget as much as possible and pay yourself the same amount each month if you can. Whenever you have extra income, try to leave it in your business account to create a payroll buffer for when things are lean.

Track Write-Offs and Pay Your Quarterly Taxes

Finally, always look for write-offs as you go along. There will be certain things that you can write off simply as a freelancer. Other items will be more specific to your line of work.

Along with write-offs, research the state and federal methods to pay your quarterly taxes. Try to be accurate, but remember, these are estimates of how much you think you’ll need to pay. If you pay too much, you’ll get it back on your next tax return. If you pay too little, you’ll owe money at the end of the year.

Conquering Freelance Finances

At the end of the day, freelance finances aren’t too scary, especially if you prepare for them. If you can go in with both eyes open, you’ll be able to adjust to the rise and fall of gig-based income with minimal disruptions to your financial state.

On top of that, once you’re used to the adjustment, you’ll be able to tap into the unique financial security that comes from working with multiple clients. With your financial eggs spread out into so many different baskets, you never have to worry about losing all of your income at the same time again.