If you possess a valuable skill and a sense of independence, life as a freelancer could be just what you are looking for. When you work as a freelancer, you get to pave your own path, go your own way and work on your own terms. You can work from home if you wish, or establish a professional office where you greet your clients. You can keep to a set schedule, or you can create your own schedule built around the needs of your family.
This kind of freedom and flexibility is hard to beat, but it comes at a price. The transition from nine-to-five worker with a steady paycheck to freelancer with uncertain earnings is not always a smooth one, and things will be even worse if you are unprepared.
Preparing your financial life is a vital part of moving from traditional work to freelancing. Here are some of the things you need to know as you make the leap into full-time freelancing.
Maintain a Separate Business Bank Account
Keeping your personal and professional lives separate is important for a number of reasons, and it all starts with maintaining a separate bank account for your freelance business. If you do not yet have a separate account for your business, now is the time to start one.
Even if you work as a sole proprietorship and choose not to incorporate your business, keeping a separate bank account will simplify your taxes and help you avoid future problems. Maintaining a separate bank account for your business will also make budgeting easier and allow you to see at a glance how profitable (or not) your new enterprise really is.
Keep Your Emergency Reserves Full
When you work as a freelancer, one thing is certain. No matter how carefully you plan or how many clients you land, your income will still be unpredictable. This unpredictability of income is one of the hardest things for freelance workers to adapt to, especially if they are the main breadwinner in the family.
There is not a lot you can do to even out the bumps in your freelance income, but there is plenty you can do to adapt. One of the most critical things freelancers can do is set up an emergency reserve fund and keep it stocked with at least six months worth of living expenses.
When times are good and you earn more than you expected, take a good portion of that windfall and use it to beef up your emergency reserves. When you have a tough month (or a few slow-paying clients), you can dip into those reserves to tide you over.
Set Up a Separate Tax Fund
Another thing that many freelancers fail to account for is the impact of taxes. In fact, many new freelancers are totally shocked when they fill out their first post-freelance tax return and find a huge bill waiting for them.
The sad truth is that tax rates are higher for freelancers and the self-employed, and short of petitioning Congress, there is not a lot you can do to change that. What you can do is be prepared, and that means setting up a separate account just for taxes.
If you are working with a tax professional, ask that individual for an estimate of your total tax bill. If you are doing things on your own, you can use a commercial tax program to calculate what you owe. Either way, you will need to make quarterly payments to the government, so set that money aside in a safe place so it will be there when it is time to pay up.
Life as a freelancer can be great. The freedom and flexibility are hard to beat, and the ability to work from home and make your own hours is just icing on the cake. But before you jump in and make the switch, you need to make sure your finances are as well prepared as you are. Knowing what to expect and how to get ready could mean the difference between a smooth transition and a freelance career epitomized by fear and financial uncertainty.