Disclaimer: I’m not an accountant or an attorney; these are just some tips from my own experience and what works for me in my freelance business. Managing your freelance finances is a) time-consuming and b) absolutely critical to your survival as a freelancer. So, it’s worth taking some time to consider whether you’re optimally managing your money. And those of you who are more financially oriented than I am, please chime in in the comments.
- Before you do anything else, separate your business and personal finances. Even if you do business as a sole proprietor (meaning that you are not incorporated), open a separate checking account that you use only for business purposes.
- People use various accounting tools and processes, but at the very least, track your total freelance income for the year. Every time a client pays you, enter that amount into something (a spreadsheet, QuickBooks, Translation Office 3000, etc) so that you have a running total of how much you have earned.
- Always, always have a savings cushion, especially if you are your (or your family’s) only income. Freelancing has its highs and lows; some months go like gangbusters and other months drip along. Big clients may unexpectedly change their plans or hire an in-house translator. And if you (or a family member) are too sick to work for an extended period, you’re left without income unless you have disability insurance. So don’t let yourself live paycheck to paycheck. Keep at least 3-6 months’ living expenses on hand in cash at all times.
- Track your total outstanding invoices. For me, this is a big one. Of course you’re going to record your outstanding invoices so that you know whether clients have paid you or not, but you also want to know how much money you should be receiving in the next 30-60 days. This statistic will tell you how aggressive you need to be about looking for or accepting new projects. For example, let’s say that your income goal is $7,000 per month. Every time you issue an invoice, you enter it into an Excel file with a column that totals your outstanding invoices, so that you know how much money clients owe you. So for example if your outstanding invoices only total $5,000, you know that the next month is going to be lean unless you take on a lot more work. But if your outstanding invoices total $9,000, you know that you can afford (at least from the financial point of view) to be choosier about the work that you take on, to work on some non-paying tasks such as updating your website or marketing to higher-paying clients.
- Track your business expenses. The easiest way to do this is by using a debit or credit card associated with your business bank account. That way, you don’t have to comb through your records at the end of the year, wondering whether that trip to the office supply store was for home or for work.
- Establish a business savings account. Another big one: at the very least, you need to set money aside for taxes. Depending on your situation and your tax bracket, this could be anywhere from 25-50% of what you earn. Every time a client pays me, I deposit the check in my business checking account and then immediately transfer 40% to my business savings account so that I am never in a bind when tax time rolls around. And also…
- Use your business savings account as a paid vacation fund. Freelancing doesn’t have many downsides, but one of them is no paid vacation. So, provide yourself with a good quality of life by having a paid vacation fund. For example, if you want to take off 4 weeks per year and work 48 weeks, start by putting $100 a week into your paid vacation fund. Then you’ll have $4,800 to “pay” yourself during your month off.
- Have some sort of retirement plan. My accountant likes to say that “Everyone has a retirement plan. Either you’re saving for retirement or you’re planning to work until you drop.” Retirement strategies are really diverse, and they depend a lot on your expenses, how long you plan to work, if you have kids and how old you’ll be when they leave home, and so on. Plus the not insignificant question of how long you’re going to live. But whatever you do, have some kind of plan in place.
- Set money aside for professional development and (why not) bonuses. It amazes me how many translators spend absolutely nothing on professional development and then wonder why their businesses are stagnating. In order to stay current in our industry, you have to keep your skills, knowledge and contact base current. Meaning that you have to learn new things. Take webinars, read books, do teleconferences, attend in-person conferences, join the Chamber of Commerce. But set aside at least 5% of what you make for professional development. And, if you have a good year, you really deserve a bonus. I once had a boss who left $50 in everyone’s mailbox on the last day before winter break; a manageable amount for the company, and an amount that everyone was excited to go and blow on something fun over the holidays. Consider earmarking some “fun money” for yourself, getting a new technology toy or treating your most valuable colleagues to a good meal at the end of the year!