Budgeting and Financial Planning for Freelancers
Budgeting and financial planning are some of the most significant challenges for freelancers. It’s hard to budget when your income is irregular, but your expenses are pretty predictable.
Some months, your income is great. You’re busy, you’re billing, and the money rolls in.
Other months are like tumbleweed rolling across the desert.
But every month, the outgoing is the same—the rent is due, and groceries need to be paid.
So, how do you stabilize the incoming and outgoing to make both more manageable?
Overcoming Irregular Income—Smooth Out the Money Coming In
Assuming you have enough work to keep you busy, you’ll want to have the money coming in more regularly or at least more predictably. That’s commonly called your cash flow. In other words, how much money is in the bank?
Many freelancers are still getting paid 30, 60, or 90 days after they’ve finished a project. That means their cash flow can be very “lumpy”. They’re always waiting for money.
Ask For and Collect Upfront Deposits
If you haven’t asked for a deposit when you start a project, now is the time to start. Maybe this is new to you, and perhaps you think your clients would never pay deposits, but have you asked?
Getting deposits is quite common in the freelance world. I wrote about starting every project with a deposit here. On Twitter, I asked how freelancers get deposits, and many answered. Have a look and learn how others did it.
Asking for a deposit before beginning a project ensures you receive some income immediately. A typical deposit can be anywhere from 30% to 100% of the project cost.
Imagine a $2,000 job. You ask for and get a 50% deposit. That means you have $1,000 now and get the other $1,000 when you complete the job. That’s much better than waiting for the total amount.
For Bigger Projects, Get Milestone Payments Including the Deposit
Larger projects can take months to complete. Instead of waiting until the end of the project to get paid, break down the work into phases, with payments tied to specific deliverables or timeframes.
This can help you maintain a more regular income. For example, you could receive a 30% deposit, 30% halfway through, and 40% upon completion.
That smooths out your cash flow and manages the “feast or famine” cycle.
Here’s more detail on how to improve your cash flow and make your income more predictable.
Change Your Payment Terms
Are you still using old-fashioned payment terms like “Net 30 Days”? These were common when you printed an invoice, mailed it, and then waited for a check to come back to you in the mail.
But hey, we’re in the digital age now, so faster payment is much easier. Try “Net 10 Days” or even “Payable Upon Receipt”.
Even if you’re getting a deposit, what about the rest of the payment? So, your terms could be: “50% Deposit, remainder Net 10 Days”.
Make sure you let clients know what forms of digital payment you accept. This might be Stripe, PayPal, one of the other payment platforms, or perhaps easiest of all, direct bank transfers.
Important: Review Your Terms & Conditions Before You Start With a New Client
When you onboard a new client, take a few minutes to go over your Terms And Conditions. T&Cs should cover revisions, payment terms, and, where necessary, legal terms.
Here are all the details on terms and conditions for freelancers.
Create Retainer Agreements For Ongoing Work
If you have clients where you’re performing similar work each month, consider implementing a retainer agreement. For example, let’s say you’re writing blog posts for a client.
With a retainer agreement, you could suggest that you want to create a schedule of two posts a month, and you would get paid for that on a retainer agreement.
It would be the same every month. That gives you a predictable income stream and helps foster a long-term relationship with the client. Generally, a retainer is paid in full at the beginning of the month for the work covered under that retainer.
That makes the admin easier for both you and the client. One invoice, one bill to pay on a consistent, predictable basis.
Retainers work well for designers, writers, or developers who can offer ongoing content creation, updates, or maintenance.
Use a Contract Template for Freelancers That Works For You
While many freelancers refer to contracts, we simply called them estimates and included all of our Terms and Conditions on the estimate.
When you learn how to write detailed estimates, you’ll get paid for all of the work you actually do. This is where many freelancers fall down. Their estimates are too skimpy. Make sure you include everything so that you can get paid for everything.
Here’s a contract template for big projects that you can tweak as needed.
Don’t Put All Your Eggs in One Basket
This was a problem I had for about a year. I had one massive client that accounted for about 80% of my billing. That was a dangerous way to live.
Luckily, I found more clients to reduce my reliance on that one, and that client stuck with me for many years.
If you find yourself in that situation, you must do whatever you can to attract more clients. You may have to figure out how to handle the added work—a good problem—but you don’t want to go for too long with too much of your work with just one client.
The best way for freelancers to find new clients may be to look at the clients you already have. Take a look.
Summary For Money Coming In
Here are the six points to remember:
You need enough clients to keep you busy most of the time. If you don’t have that, you have to market your business more. See the link above for finding new clients.
Get deposits to start every job. Start with your next new client as if you’ve always been doing this.
For larger jobs, get milestone payments. Get paid along the way.
Create a formalized onboarding process. Every serious business has one. You should, too.
Consider retainer agreements with at least some of your clients. Review your clients to see which ones are suitable.
Don’t put all your eggs in one basket. If you have a mega-client, diversify asap.
Overcoming Inconsistency—Control the Money Going Out
As a freelancer, you’re running a business. Money comes in, money goes out.
For some freelancers, the money going out is the biggest problem. No matter how much they’re billing, they’re always broke.
If that’s the case for you, you need to sit down with an accountant or financial planner. You’ll want to review:
How much you pay yourself and how you do it
Your expenses relative to your income
Maintaining a cushion in the bank
Getting a personal line of credit for emergencies
How Do You Pay Yourself?
As a freelancer, you should pay yourself like a business. That means you should budget to pay yourself the same amount every two weeks or month.
I can hear the howling now. And I know how many of you pay yourself. You grab all the money as soon as it comes in. Because why? You have bills to pay. You have stuff you want to buy. And besides, there’s more money coming in, right?
Yes, you can work that way. But if you want to work like a business, you should put some discipline and business structures around how you’re paid.
That means looking at your income (amounts and consistency), reviewing your expenses, especially taxes, and then determining how much you can pay yourself on a regular basis.
If you need help with this, I wrote about why freelancers and creative agencies need an accountant. Have a look.
Review Your Expenses Relative to Your Income
Some freelancers are always “buying stuff” for their business: a new laptop, a new camera, lots of lenses, and subscriptions to all kinds of software.
All of it may be justifiable, but can you afford it? Also, be sure you understand how much you can claim as expenses against your income. Long-life items such as computers and cameras get written off over years, so you can’t claim the whole deduction in year one.
Again, sit down with an accountant to review your expenses relative to income.
Maintain a Financial Cushion in the Bank
As part of your financial planning process, you should aim to have about three months of expenses sitting in the bank as a cushion.
Add up your yearly expenses and divide by four. That’s three months of expenses. Yes, you can dip into that as needed, but you should always aim to replenish it.
This cushion may be hard to build up at first. So, do it a bit at a time. Contribute to that cushion every month until you have three months of expenses.
You’ll sleep better knowing there’s money in the bank.
If You Qualify, Get a Personal Line of Credit
Depending on your bank and, most importantly, your assets, you may qualify for a personal line of credit. Typically, banks want you to be a homeowner to qualify so they have some security in case it all goes south.
Personal lines of credit offer much better terms and interest rates than other credit cards.
But, like any other credit card, be careful. You’re still paying interest.
Your line of credit should be viewed as insurance. If you’re living off of it, you need to fix it asap.
New Book For Freelancers
I’ve just published How to Become a Successful Creative Freelancer. It’s the essential business guide for freelance writers, designers, developers, filmmakers, and photographers.
Whether you’re just starting as a freelancer or have years of experience, you’ll learn a lot from this book.
It’s broken down into easy-to-understand chapters with strategies and tips you can use today. Not just “what to do”, but also “how to do it”.
It’s available now in Kindle ebook and paperback on Amazon.
Want to Grow An Agency? The Agency Book is For You
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The book is packed with useful information to help creatives start and grow their business.
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