As a freelancer, if you are reading this blog, give a pat on your back first. You have come a long way after riding through waves of uncertainty to generate a regular revenue stream for your self. A freelancer dons multiple hats, generating leads, pitching, closing them, executing the work, invoicing, chasing for payments, etc. Your hard work and persistence are praiseworthy and to many an inspiration.
However, it does not end here. They say money makes money. So while your hard work should continue, its time for you to manage your finances smartly. When we say smartly, we mean having a balanced lifestyle, establishing an emergency fund, and investing as per your risk appetite in financial instruments to generate good Return on Investments.
In this blog, we are sharing how freelancers can manage their personal finances:
Separate Business and Personal accounts
It is a wise step to keep your business and personal accounts to be two different bank accounts. As a freelancer, you will always have an irregular flow of income, some months it will be higher and some months it will be lower. However, as a bread earner for the family, you would want the personal income to remain steady so that you can plan your expenses, savings in a more structured way.
We recommend that every month, you should take a fixed amount of money from your freelancing income as a salary. You can be conservative in deciding this amount, but some amount should be decided. If you are left with a surplus amount, you can either use it to develop your freelancing business like a better website, promotional campaigns, etc. or just save some more that month.
This will also give you a target every month to earn and deliver. That sets the pace and tone for your freelancing business.
Figure out your expenses
The next step or rather a parallel step would be to get a fair idea about your expenses. The expenses must be analyzed in the order of importance. First, we should calculate the mandatory and essential expenses followed by lifestyle expenses and subsequently by good to have expenses. Mandatory/essential expenses include Rent, Food, Telephone, Internet, Mortgages, etc. Lifestyle expenses can include Fun, Leisure, entertainment expenses, etc.
Some other expenses which should be considered are Insurance, tax which is of regulatory or mandatory nature.
These expenses will also be a great source of input to how much minimum salary should you draw as a freelancer. It is important to curtail lifestyle expenses and good to have expenses, in the case in some months you are not able to make enough money.
Establishing an emergency fund
Emergency situations do not knock the door and come. They arrive un-called. The best way to prepare for them is to have some contingency funds. Developing a contingency fund is easier than done. You can either save a good amount of money in this fund in the beginning or you can monthly add a fixed amount of money as a contingency fund or you can have a Hybrid Approach (Save some initially, then keep adding monthly).
Another important aspect to consider is if we draw money from this fund, it should be replenished immediately whenever you have funds. An emergency fund should not be a deteriorating fund but should be an incremental fund.
Investing in Financial Instruments
After deducting all possible deductions like essential expenses, taxes, insurances, Emergency funds, etc. from “Fixed Salary”, it is now time to spend the remaining money (if at all) into return bearing financial instruments. As of now, there are hosts of financial instruments available with varying risks and return levels. There are instruments that are as safe as Government Treasury bonds, fixed deposits which have lower returns, and then there are financial instruments like Stocks which depend on the Stock exchange, are extremely volatile but give high returns on investment. This is the stage where you make more money from existing investments. Depending on your financial goals and risk appetite, you can choose any instrument available in your country.
As a freelancer, making money is not easy. You will neither want to lose the money earned through hard work nor would you want to lose a chance of capitalizing the money to generate higher returns considering the risks you want to take. Hope this blog was a good step by step guide to managing personal finances for you as a freelancer.
Ashutosh works as a Product Manager at Refrens.com – India’s most powerful platform for freelancer’s finances and growth. He has helped some renowned technology companies with their product. In this blog, Ashutosh shares his experience on how freelancers can manage personal finance. You can follow Refrens.com on Twitter, LinkedIn.
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