How to Go Freelance Without Going Broke

by Sheryl Nance-Nash

2 freelancers sitting at a table outside

It’s easy to see the allure of the freelance life. You make money doing what you love, on your own time, in your own way – talk about flexibility and freedom!  But without careful planning, it can also mean financial failure.

You’re now not only responsible for running your business and doing your job, but also for makings sure that you’re setting enough money aside for taxes and providing those benefits you’d typically get from a company, such as health care and retirement planning.

It is possible to freelance without jeopardizing your financial security, but you’ll need to stay on top of your money. Here’s how to get started…

How to Go Freelance

Create a budget

Maybe you managed just fine without a budget when you were working full time. Well, it’s a new day. A budget is a necessity. No doubt, as a freelancer budgeting can be tricky. “What’s coming in may be inconsistent, but what’s going out typically won’t be,” says Leslie Tayne, a debt resolution attorney with the Tayne Law Group.

Make a list of all of your monthly expenses. Determine what’s absolutely necessary to cover each and every month. Examine whether you can cut back or downsize in any areas to minimize your expenses.

Related article: Financial Planning Advice Every Small Business Owner Should Know

“Essentially, your goal should be to cover the basics, even if you’re in a dry period in terms of income. Along those lines, planning for the worst is important when budgeting as a freelancer,” says Tayne.

Look at your lowest-earning month in the past year – or if you’re just starting out, calculate what you think the lowest possible amount you would make in a month would be. By calculating your budget using your lowest earnings, you’ll avoid coming up short and will have the added bonus of leftover funds on your higher-earning months.

Keep taxes top of mind

Employers automatically withhold taxes from their workers’ pay, but when you’re a freelancer it’s up to you to set that money aside yourself.

One of the biggest mistakes freelancers make is not accurately forecasting what they’ll owe on taxes,” says James Pollard, consultant and owner of The Advisor Coach. “I recently saw a case where a newly independent financial advisor had such a strong ‘reinvest in the business’ mentality that he took all of his cash and put it back in the business. This meant virtually nothing was left to pay taxes.” 

He recommends automating a certain percentage of your revenue (say, 20-25% or whatever effective tax rate you predict) to put into a separate savings account for taxes. 

Get a good accountant. “They will help prepare you for quarterly taxes, advise you on when your business has achieved new revenue levels that might push you to set up an S-corp or other business structure and generally keep your finances organized,” says Laura Briggs, author of How to Start Your Own Freelance Writing Business.

Resist under pricing your services

This is the biggest mistake new consultants make. “They feel that if they price low, they will acquire more contracts. But if you work long hours and don’t make the amount of money you deserve on the job you won’t have enough time to grow your business or develop yourself. A low price also suggests to clients that you are not as good as other consultants, or that you are not worthy of important projects,” says Elaine Biech, author of The New Business of Consulting: The Basics and Beyond.

Pricing your services on the higher end of the range means you’ll be able to focus on fewer contracts, points out Biech. “This lets you manage your time better, allowing flexibility to deal with all those unforeseeable things that crop up when starting a business. It also lets you spend more time with each of your clients, giving them better service rather than worrying about your next contract.”

In addition to making sure you’re properly charging for your services, you’ll need to stay on top of sending out invoices–and making sure that your clients promptly pay them. If you’re just starting out with a few clients, a spreadsheet and calendar may be all you need. As you build your business, you may consider subscribing to invoicing software services that can help you keep track of your accounts receivable.

Make savings a priority 

Don’t nix saving. As a freelancer, it’s wise to have two separate savings accounts – a general emergency savings account and one to use as a buffer for living expenses on slower months. “It’s easy to get excited about earning extra on higher-paying months and to spend that money, but you’ll regret not having savings if an emergency comes up,” says Tayne.

Your goal is to have at least six months’ worth of expenses set aside in a liquid emergency fund. Once you’ve established that, you’ll want to start setting aside money for your retirement. You don’t have access to a 401(k) or the company match that often comes with it, but there are other tax-advantaged options available for freelancers. Talk with your accountant about whether a SEP IRA, Solo IRA, or other savings vehicle makes the most sense for you. Aim to stash at least 10% to 15% of your income for retirement.

Keep detailed records 

You also don’t want to commingle business and personal bank accounts. Similarly, keep business expenses separate from personal ones, says Ira Gostin, a business start-up advisor with Gostin Strategic. That will make it easier for you when it comes to tax time. 

Be persnickety about money. Keep track of your income and expenses so you aren’t surprised by low cash flow or unexpected charges. Says Ben Watson, founder of Fiscal Fluency, a personal finance and business coaching company, “Once you have some data to work with, identify costs that can be trimmed or potential clients that may actually be hurting you with the amount of time they require compared to the pay received.”


Customized Financial Advice

Customized financial advice with an advisor who’s got your back.

Pay for only what you need, when you need it. Our network of Certified Financial Planners (CFP®) are here to help you with your next big step in life.