The biggest concern of those who want to go into full-time freelancing is the financial stability.
The amount of money we freelancers make depends on our rate and the number of clients or projects that we have at a given time. Unlike a corporate job, we can decide and work on earning a set amount of money in a month. But what about those days when we want to take a break from work or those overlaps when contracts end? How do you set aside money for lean periods?
These are concerns that might scare a newbie freelancer but like a regular corporate job, preparation is key. In order not to be frantic and panicking during lean periods, you have to build up your financial arsenal. Here are five things that you can do to start:
1. Make savings mandatory
Build up your savings. Before you even start full time freelancing, start building your emergency or buffer fund. This fund should be enough to support you and your family’s expenses if in case unforeseen circumstances occur, for example losing a key client or falling sick and not being able to work. If you’re not sure how much your emergency fund should be, check this emergency fund calculator from Fitz Villafuerte.
Develop a system that can work for you. Because freelancers normally do not get paid in bulk every 15th or 30th of the month, set aside savings for every payment you get. Get creative. For example, save 20% of every client payment that you receive. Or assign all short-term project earnings as savings.
If you think that you do make enough money for saving, see tip #3.
2. Get insured
Unplanned expenses such as car repairs or health checkup can eat up your budget or in the worst case, force you to dip into your savings. Start checking insurances available for you. Remember that insurance is an expense that you’ll appreciate the most when you need it.
Evaluate plans from HMOs such as Maxicare, Medicard, or PhilCare. Getting yourself a health insurance will give you peace of mind and will also enable you to take better care of yourself.
3. Manage your expenses
The best way to do this is to first write down your daily expenses. Do this for a month until you can identify areas that you think you are spending too much on. Ask questions such as, “Do you really need that cup of coffee or can you brew your coffee instead? Can you lessen dining out and replace with cooking lovely meals at home?”
You will be surprised at how much money you can save just by examining your expenses and identifying areas where you either are overspending or should not be spending at all. As with everything else that we want to improve on, it starts with awareness.
Next is to prepare for big expenses. If a major expense is coming up, such as school tuition fees, break it up into chunks and save for it a couple of months prior. This will allow you to manage a consistent workload instead of trying to get more projects and clients a month prior enrollment time.
4. Automate your finances
Remove the laziness and procrastination in the picture. Set up an automatic transfer for your savings and automatic payment for bills.
Check your bank for virtual accounts. For example, BPI offers BPI Save Up where you can define a fixed amount each month to be deducted from your main account and transferred to your Save Up Account. Automating your finances will save you both time and money. Once the money is transferred to your other account, it will be less tempting to spend it.
5. Find ways to earn passive income
Lastly, once you have set up a cushion emergency fund for you and your family, start looking for ways to invest and earn passive income. Continue on setting aside a portion of your earnings, but instead of keeping it in your savings account, put it in an investment vehicle such as bonds, stocks, and mutual funds.
Because investments are risky compared to savings, study the options first and evaluate the level of risk that you are willing to make.
Do you have more tips on how to be a financially stable freelancer? Share with us in the comments section!