One of the biggest challenges that a freelancer has to deal with is irregular income. You make occasional earnings, sometimes at the start of a project and other times at the end of a project. Given the high uncertainty you’re likely to face, it’s essential to plan your finances carefully. In the beginning, you don’t have big contracts. You get a little bit of work done here and there. Not having any idea when you’re going to get paid makes it really tricky to budget. However, it’s necessary to eliminate some of that financial instability.
Freelancing, no matter what profession is concerned, has picked up in recent times, the market growing exponentially since the coronavirus outbreak. If you’ve decided to face your fear of striking out on your own and become a freelancer, learn how to live on an irregular income. Here are some solutions for managing personal finances when you’re self-employed.
Reconsider your decision of becoming a full-time freelancer
Like everyone else, you choose the option that you think will make you happiest overall. But is it the right one? The decision to become a full-time freelancer weighs more heavily than others because it can impact your life in so many ways. You learn how to run a business, you can work on your passion projects, and you have full control over your finances. Speaking of which, you don’t have the luxury of a stable paycheck. You should have some savings. Those funds provide a financial cushion in case you don’t get as many projects as you initially hoped.
It’s recommended to freelance on the side of your day job. This way, you can build up contracts, testimonials, and clients. Go ahead and start your business, but don’t give up your day job just yet. The “all or nothing” strategy involves high risks and should be avoided. If you want to freelance full-time successfully, be prepared to be broke. Make coffee at home, give up on shopping splurges, and don’t change your hairstyle every so often. When you’ve saved enough time (6 months of income living), you can make your dream come true.
Save at least 25% of your average monthly earnings
According to the experts, a self-employed individual ought to save at least 25% of their average monthly earnings. When pay-checks vary, it’s crucial to cover 9 to 12 months. This comes in handy if you’re in between projects or incur unexpected expenses. During the hard months of the year, paying your salary requires dipping into your savings. Therefore, save any excess income. Don’t forget to segregate and differentiate personal and business expenses. Your basic living expenses will most likely be rent/mortgage, food, healthcare, internet access, and utilities (water, heat, and electricity).
Budgeting is key in your professional life. It enables you to monitor all your expenses, so you’ll be more careful with spending. Create a second budget that includes want-to-haves such as weekend trips or dinners out. Wants represent expenses that help you live a comfortable life – the things you buy for fun or leisure. In the beginning, you’ll spend most of your budget on needs, meaning that you’ll have to cut down on your needs or downsize your lifestyle. It’s a necessary sacrifice as you don’t have the guarantee of a fixed income every month.
Protect yourself with insurance
When you’re freelancing, make sure that you’re adequately covered. Think about securing income protection insurance. It designates a range of insurance policies designed to help you meet your financial commitments if you’re forced to take a break from work. For example, if you were to fall ill or sustain an accident, income protection insurance provides regular payments. It’s possible to protect up to 70% of your income. When choosing a company, look for one that has a good track record of meeting claims as pricing.
Tap a line of credit to cover your expenses
In spite of your best efforts, you can end up in a situation where your income isn’t enough to make ends meet. In this case, you must do something to obtain money. You can rely on a credit card to deal with the cash flow crunches, but it would be better if you got a line of credit. It provides access to money on-demand and can help with unexpected expenses. You don’t have to fund the business out of your pocket. When bootstrapping is no longer a viable option, consider applying for a line of credit. Know that it’s not easy to obtain and you need a high credit score.
Many countries, including the UK and Canada, have credit scoring systems that aren’t completely different from the American credit scoring system. For instance, if you want to secure a line of credit in Canada, the main factors taken into consideration are your payment history, the length of your credit history, public records, the number of inquiries into your credit file. The terms for the paybacks are clarified when the line of credit is granted. Unlike a credit card, a line of credit has more reasonable fees, rates, and repayment terms. Needless to say, excessive borrowing against the credit line can get you into trouble.
To sum up, the life of a full-time freelancer isn’t always filled with rainbows and butterflies. You’re your own boss, yet you have to manage irregular income. Paying living expenses with fluctuating income can be at the same time overwhelming and frustrating. Expenses are recurring in nature but money isn’t. That’s a problem. Don’t give up hope because you can live in irregular income, even if it poses some serious challenges.
Your balance sheet will be mostly filled with question marks and you’ll make lots of mistakes in your first few years. But there’s nothing to worry about. You’re not going to get it right the first time. After a couple of years, you’ll have a better understanding of how much money you need to make ends meet and put something aside. You might want to accept credit card payments. People have the same money problems as you.