The freedom that comes from being a freelancer has a price: You have to pay close attention to your flow of money or risk being shackled by debt.
While there are many benefits to being your own boss, including flexibility in how and when you work, freelancers typically miss out on employer benefits and have to deal with an unpredictable income.
To help you get your financial house in order, here are some tips on how to manage your money as a freelancer.
Track your income
Getting a handle on your money starts with knowing how much you’re bringing in. Do you know how much you earned last week or last month? Was it more or less than what you earned in that same period last year?
“A lot of freelancers say they have no idea how much they make, and they throw their hands up in the air because they feel it’s so unpredictable and unmanageable,” says Kristen Euretig, a certified financial planner in New York City whose specialties include working with freelancers. “In reality, they have more predictable income streams than they realize.”
Having a historical view of your freelance income can help prepare you for busy and slow times during the year, she says, especially if you have repeat clients or seasonal projects. Those types of insights can bring some financial stability to the irregular freelancing world. Having a separate bank account can make it easier to track freelance-related money coming in and going out. A simple spreadsheet or free app can then help you devise and manage a budget.
Create a budget
Budgeting may seem daunting when you’re a freelancer, but it doesn’t have to be. The 50/30/20 method is a good place to start. It allocates 50% of your after-tax income for necessities, 30% for stuff you want but don’t need, and 20% for savings and paying down debt. (More on taxes later.)
The key to making this work is focusing on the savings and debt repayment part of the plan. Here’s the best way to handle that cash:
This amount can cover small, short-term emergencies, such as a car repair if you use your car for work.
Save for retirement
It may seem optional, but it’s essential. Select a retirement plan option, like an individual retirement account or Solo 401(k), and try to contribute 15% of your after-tax earnings. Use NerdWallet’s retirement calculator to make sure you’re on track.
Pay off bad debt
Debt that carries high or variable interest rates, including credit card debt, payday loans and medical debt, can be a major financial drain. Use this calculator to figure out your best option for wiping it out.
Continue saving for emergencies
In general, an emergency fund should cover three to six months of necessary expenses, such as housing, bills and debt payments. Freelancers should aim for the six-month end of the spectrum. But be patient: That money is meant to be used in times of financial difficulty, so don’t be discouraged if you have to tap this fund before it reaches that goal. Just remember to replenish it.
Pay off other debts
Put extra money toward other debts, such as student loans or a mortgage, prioritizing by interest rate to save the most money.
Set aside money for taxes
Taxes can be a major source of stress for anyone. It can be even more stressful for freelancers.
While an employer withholds taxes for its employees, freelancers are responsible for making payments themselves. Freelancers must make an educated guess of their annual earnings and make estimated quarterly payments to stay on track. If possible, use last year’s tax returns as a baseline.
You can deduct business-related expenses, like work-related use of your car and professional development. And if you meet certain requirements, you may also be able to deduct health insurance premiums.
Use this calculator to get a rough sense how much money to save during the year, making adjustments whenever your earnings outpace or dip below your original estimate.
To ensure your tax season goes smoothly, learn about the various tax rules for freelancers.
About 20% of full-time freelancers are uninsured, according to a 2016 report on freelancing by Upwork, a platform designed to connect freelancers with businesses. Going without coverage can lead to financial distress if you have a medical condition or an unexpected health emergency. Here are your options:
You can choose between federal programs — like Medicare, for people 65 and older, and Medicaid, for low-income people or those with children — and private insurance plans available through healthcare.gov. Compare those options here.
Freelancers under 26 will likely find that staying on a parent’s health plan is the best option. Those under 30, in excellent health and without dependents may choose a catastrophic plan to lower monthly costs.
Those who purchase plans through healthcare.gov may qualify for subsidies. To qualify, you’d have to send in an estimate of your earnings for the upcoming year. Underestimating your income means you’d have to pay some of that money back at tax time.
If you end up with a high-deductible health plan as defined by the government but are generally healthy and can afford your monthly premiums, a health savings account may be useful. Freelancers with compatible health plans can contribute money to an HSA throughout the year to cover those costs. It also reduces taxable income. After age 65, you can continue to use any leftover money tax-free for medical expenses; if you use it for non-eligible expenses, you’ll have to pay income tax on that amount.
Most states have minimum requirements for car insurance, but that may not cover the costs of an accident, so you may choose to get more coverage. Figure out how much insurance you need, then shop around for the best deal. If you use your car as part of a business, you might need commercial auto insurance instead.
Know when to raise your rates
It’s a good idea to re-evaluate whether you’re being compensated adequately or need to adjust the rates for your services. In Upwork’s report, almost half of freelancers said they’d raised their rates in the previous year, and more than half said they planned to raise rates the following year.
“Freelancers are in the unique position to be in control of how much they make. Most people don’t have that freedom,” Euretig says. “Really think about increasing your income so that your expenses can then follow.”
Earning more money can alleviate financial pressure and help you formulate a budget, she says. Start by reaching out to other freelance professionals to get a feel for average rates in your industry. You can also use the Bureau of Labor Statistics or a site like Glassdoor to find out the average annual salary for someone with your skills and experience. Then break that figure down to find the hourly rate.
Managing money as a freelancer can take more time and energy than it would for a salaried employee. But being organized and vigilant can be well worth the effort.
A previous version of this article incorrectly stated how money left over in a health spending account after retirement is taxed. This article has been corrected.