Financial management as a freelancer or entrepreneur can be challenging, but there are steps you can take to stay on track and avoid missteps.
Saving for unexpected expenses like health insurance or car repairs is also crucial to successful freelancing; emergency savings will help get through dry spells more smoothly.
1. Separate Your Personal and Business Money
One of the best ways for freelancers and entrepreneurs to begin managing their finances effectively is to divide personal from business funds, as this will save time, money, and reduce any legal issues that may arise from mismanaging both.
Mixing personal and business finances can make it more challenging to gain funding for your venture and file tax forms correctly, while negatively affecting both of them as well as your credit score.
Maintaining separate business and personal finances is also crucial to protecting you against potential legal issues, such as lawsuits and bankruptcy filings.
First step to protecting both personal and business finances: obtain an Employer Identification Number (EIN). An EIN allows you to file tax returns, open business bank accounts and apply for credit cards without worry of tax consequences or rejections.
2. Create a Budget
Budgeting is one of the key components to successfully managing finances as a freelancer or entrepreneur. A budget helps you understand exactly how much income is necessary each month in order to meet expenses without incurring debts.
Start by compiling a list of all your regular expenses – this should include rent, utilities, groceries, debt payments (such as health, dental and car), savings accounts for retirement plans as well as taxes.
Once you have an idea of your costs, subtract them from your income to determine how much money remains – this will allow you to decide whether or not changes to your business model are needed to accommodate them.
Create and monitor a monthly budget using spreadsheet or software, in order to monitor spending and assess whether or not you are living within your means and where expenses could be cut down to save more for future goals.
3. Track Your Expenses
One of the key aspects of financial management as a freelancer or entrepreneur is keeping track of your expenses. This includes all expenses you incur for business as well as personal purposes, including rent/office space/utilities payments, travel, food/clothing costs and entertainment activities.
Receipts make it easier for you to identify legitimate expenses and help prevent penalties and fees when filing taxes. Furthermore, receipts provide evidence that expenses attributed solely to work or business haven’t been deducted as deductions.
Evernote and FreshBooks offer useful apps that can assist you with tracking expenses, such as scanning receipts to quickly dispose of or keep for later reference.
4. Set Savings Goals
Financial management as a freelancer or entrepreneur may seem daunting at first, but with the proper steps put in place you can save for emergencies, retirement and other goals.
Start by saving at least three months’ of income in an emergency fund – this will cover unexpected costs like illness, client losses or travel.
Setting short-term financial goals, like saving for a down payment on a house or clearing off student loans, can also be useful in building momentum and keeping your long-term plan on track.
5. Invest
Investing is a form of finance in which resources such as time and money are exchanged for an asset that promises future returns – hopefully outpacing what was initially invested.
Based on your risk tolerance and investment style, you have several investment options at your disposal that could benefit wealth creation in the long term. Equity investments on the stock market or debt securities such as bonds and CDs each offer their own set of advantages and disadvantages; both styles provide opportunities for long-term wealth accumulation.
Your retirement savings should include opening a traditional or Roth IRA, SEP IRA or solo 401(k). These tax-advantaged accounts provide a way to save for your future without being taxed for each contribution you make to these tax-sheltered accounts.