Managing your money as a freelancer is one of the trickiest things to do. You need to worry about invoices, cash flow, taxes and more. If you’re not on top of everything, things can quickly get out of hand.
With a strategy in place, getting a hold of your finances can be easy, but it’s not that simple since you need to be on top of so many different things. Here are some tips on how to manage your finances as a freelancer.
Make a budget
It doesn’t matter if you freelance full-time or if it’s just a side hustle, you need to have a budget in place. While your income may fluctuate from month-to-month, the odds are your expenses will remain fixed. Create a spreadsheet and list all of your monthly expenses, this will quickly show you how much money is going out. If your income exceeds that amount every month, you’re doing okay.
That said, breaking even is likely not the goal for most freelancers. Hopefully, your income exceeds your expenses on a regular basis so you can build up your savings or expand your business. Having a budget will keep you on track.
Build an emergency fund
Since your income can change every month, it’s a good idea to build an emergency fund that you can fall back on in case you see a decline in your earnings. It’s recommended that you build up at least three months of expenses in your emergency fund. This way, you’ll be covered for a good amount of time so you can focus on getting back onto your feet.
Get on top of your invoices
Invoicing is a pain point for many freelancers, but if you don’t send your clients an invoice, then you’re not going to get paid. The easiest way to ensure you’re on top of things is to use invoicing software. By doing this, you can track who’s paid you and what’s outstanding.
Alternatively, you could track things manually by using a spreadsheet and an invoice template. Just be sure to log when you’ve sent your invoices and when you’ve been paid. It’s a good idea to find out what the typical payment schedule is with your clients so you can follow up if your payments appear to be delayed.
Make sure to claim your expenses
Generally speaking, anything related to your business can be claimed as a business expense. For example, if you work from home, you can claim any relevant expenses such as your mortgage, internet, and hydro based on what you use for work. That means if 30% of your internet usage is for work, you can claim 30% of your internet bill.
With any expenses, you need to have some kind of record for you to make a claim. That could be a paper receipt or any monthly statements you get. Make sure you keep these records on hand for at least 7 years as you’ll need them in the event that you’re audited.
Separate your personal and business expenses
This should be obvious, but you need to separate your personal expenses from your business expenses. There’s nothing wrong with using one of the best travel credit cards in Canada to make business purchases, you just can’t claim any personal expenses on your taxes.
To keep things simple, some people will get a business credit card so everything is separate from their personal expenses. This is also beneficial since business credit cards typically have detailed reports of your spending which can help you manage your business. If you’re frequently making purchases in a currency that’s not Canadian dollars, it would be beneficial to get a no foreign transaction fee credit card since it would save you the exchange fee each time.
Set aside money for taxes
Any income you make from freelancing is taxable. The amount of tax you pay depends on which tax bracket you fall in. Generally speaking, you want to set aside at least 25% of your income for taxes. If you’ve been making a good income, you’ll likely need to set aside even more as you may fall into a higher tax bracket.
To help ensure you don’t spend any of your money that’s meant for your taxes, open an account with a digital bank such as EQ Bank. As soon as you get paid, transfer out some money to your digital account. By doing this, the money you’ve set aside for taxes is always separate which will hopefully encourage you to not spend it for personal reasons.
Managing your money as a self-employed individual can be difficult regardless of how much you’re making. There’s more than one of handling things, so it’s up to you to figure out what methods work best for you. Once you get your finances under control, you’ll spend less time worrying which will allow you to focus on your business.