How to manage income as a freelancer

Feeling overwhelmed by the unpredictable nature of freelance income? You're not alone.

Many freelancers find it challenging to manage their finances when their income fluctuates from month to month. But with the right strategies, you can create a sense of financial stability.

Let's dive into some tips for managing irregular income effectively:

Understand your cash flow.

Build an emergency fund.

When income isn’t consistent, having a financial safety net is crucial.

Start by setting aside a small amount each month, even if it’s just $50.

Over time, aim to build an emergency fund that covers three to six months of essential expenses. This fund will be your buffer during slow months or when unexpected expenses come up.

Remember, building an emergency fund takes time and discipline, but it’s one of the most important steps you can take to manage irregular income.

Save for taxes.

Freelancers must plan ahead for taxes since they don’t have automatic payroll deductions. Unlike traditional employees, freelancers are responsible for setting aside their own tax money, which can lead to surprises if not managed properly.

Here’s what you can do to stay prepared:

• Estimate your tax liability: Start by estimating your annual tax liability based on your income, tax rate, and any applicable deductions. The IRS provides a self-employment tax rate of 15.3%, which includes Social Security and Medicare taxes. However, your actual tax rate may be higher depending on your total income and location.

• Set aside money regularly: Once you have an estimate, set aside a percentage of every payment you receive—typically around 25-30%—in a separate savings account dedicated to taxes. This approach ensures you have enough to cover your tax bill when it’s due and prevents any last-minute scrambling.

• Make quarterly estimated tax payments: To avoid penalties, freelancers should make quarterly estimated tax payments. These payments are due four times a year, and failing to pay them on time can result in additional fees. Use your separate tax savings account to make these payments and reduce the stress of a large, unexpected tax bill.

• Seek professional help: Consider working with an accountant or using tax software designed for freelancers to help you stay organized, maximize deductions, and plan for your tax payments effectively. 

By proactively saving for taxes, you’ll avoid the common pitfalls of freelance tax season and ensure you’re always prepared for what you owe.

Relevant article: Top 8 self-filing tax services: Reviewed and ready to use!

Diversify your income streams.

Relying on a single source of income can be risky for freelancers.

Explore different ways to diversify your income, such as offering different services, creating digital products, or teaching online courses. The more income streams you have, the less vulnerable you are to market fluctuations and client changes.

Here are some examples of how you can diversify your income streams:

1. Offer multiple services: If you have expertise in different areas, consider offering a range of services. For example, if you’re a freelance writer, you could also offer editing, proofreading, or content strategy services. A graphic designer might expand their business to include branding, web design, or social media graphics.
   
   
2. Create digital products: Digital products like e-books, templates, courses, and stock photos or videos can also generate more income. If you have specialized knowledge or skills, consider packaging them into an online course or an e-book. These products can be sold on your website or through online course sites like Udemy or Teachable.
   
   
3. Offer consulting or coaching: Leverage your expertise by offering consulting or coaching services. If you have a lot of experience in your field, clients may pay for one-on-one sessions where you provide personalized advice or guidance. This can work well if you have a strong reputation or a niche specialty. You can also offer these services virtually, making it easy to connect with clients from all over the world.
   
   
4. Develop a subscription-based service: If your freelance work involves creating content or resources that people would pay for regularly, consider developing a subscription-based service. For example, a freelance writer could create a newsletter with exclusive articles, insights, or tips that subscribers pay to receive. A designer might offer a monthly package of new design elements or tools. 

Regular financial reviews.

Make it a habit to review your finances regularly—monthly or quarterly.

Here’s how to conduct a thorough financial review:

• Analyze income patterns: Look at your income over the past few months to identify any patterns or trends. Are there certain months where you consistently earn more or less? Understanding these patterns can help you plan better for the future.

• Evaluate expenses: Review your spending habits and categorize your expenses. Are there areas where you can cut back or where you’re spending more than you thought you would? Adjust your budget to reflect any changes and prioritize important expenses.

• Set financial goals: Based on your review, set short-term and long-term financial goals. Whether it’s saving for a big purchase, paying off debt, or investing in your business, having clear goals will keep you focused and motivated.

• Adjust your budget: Update your budget based on your findings. If your income has been consistently higher or lower than expected, make the necessary adjustments to ensure your budget remains realistic.

By taking a close look at your financial situation regularly, you’ll be better equipped to handle the ups and downs of freelance life.

Looking for how you can continue to advance your relationship with money? Take the Money Mindset Quiz and enjoy tons of free resources to help jumpstart your journey to financial freedom.