So you've done it, you've quit the 9-5, determined your path, and set out in the direction of your dreams, congratulations! You're now freelancing, or turning that side hustle or long held dream into a reality. You're proud, fired up and scared as hell! Now what?
Well, the other things you'll need to turn your dream into a success is all on you, but we can help you with one thing. That quiet nagging fear at the back of your mind, "How am I going to handle my bills?"
If it hasnt hit yet…just give it a little while, it will, but don't worry, you're more than equal to the task.
OK, so whats the plan?
Firstly, Budget, Budget, Budget! This is obvious, but what needs to be done is a detailed definition of your core needs. Follow the tips here (and pay special attention to points 1 and 4). Essentially you're going to be working out what your monthly core needs are, and exactly how much you need to cover them. Expect this to become business goal number one for your business each month. Making your payroll. Everything else afterwards is "gravy", and by "gravy" I mean, "money that goes right back into your business". Your core needs should be mapped out clearly, which then leads us to the next step.
Step 2. You're now out on your own, you'll DEFINITELY need a safety net, ideally, you'd have had a safety net set up from before you started, but in case you don't, or if you want to make it even stronger, get started on that Emergency Fund. Now we call it an emergency fund, but its going to be a little easier to access than usual. Personally I'm for investing over saving 9 times out of 10, but now that you're self-employed you will need to keep a certain amount of money liquid for easy access during those down periods that come with every freelancer's life. A true emergency fund would be saved for the big things, medical emergencies, car troubles, etc. but in your case you want a separate fund like this since it can very well easily becoming a "cost of living" fund when you're out on your own.
Now you'll be following the emergency fund rules given in the link and so counting your fund in terms of time periods. So for example, if your needs are mapped out for a month at $70,000 per month, then your fund is measured like this:
$280,000 (total money in fund) ÷ $70,000 (total amount needed to cover living expenses monthly) = 4 (How many consecutive months you can live comfortably and pay your bills without income.)
Keeping that number high will become key, my personal advice is to have at least 3 months available at any given time.
As a tip, your business finances will also need to be managed very well. You're going to NEED to ensure that you separate the 2 for 3 reasons;
1. It keeps things a lot clearer for you, and your accountant (when you get one) at tax time.
2. Legally, you cover your ass when you can show that clear line of separation, which will be invaluable when you incorporate your company (TRUST ME, you WANT to incorporate your company sooner rather than later).
3. It keeps your needs in check. The last thing you want is to have a celebratory binge one weekend, and have your business affected because you only have 1 credit card, and maxing it out in the club Saturday night, means supplies can't be bought Monday morning.
Keeping the finances separate literally means ideally, separate accounts (business vs. personal), or tight budgeting skills and paying yourself a paycheque each month (or fortnight or however you pay yourself). Now, as with all things involving money you've earned, discipline will be key. Remember to keep a tight rein on yourself.
So, in review;
- Freelance budgeting is very similar to regular budgeting but a special eye needs to be given to income and saving (or investing in a liquid manner).
- Your core needs must be mapped, and a fund to cover them in the slower period set up
- Separate your personal finances from your business, it's best in the long run.
Hope you find these tips useful as you continue out on your journey of self-employment! It's a long but ultimately fulfilling road, let's make it as smooth as possible!
See you soon for more financial info, tips and tricks.