Unlike more “traditional” employment, as freelancers, we do not receive a consistent paycheck or employer paid benefits like sick leave or holiday leave. This somewhat unpredictable side of our freelance writing business means we must put solid and effective processes in place to ensure the financial side of our business runs as smoothly as possible.
What does this entail?
First, determine HOW you will be paid.
Start by considering which payment method will suit you and how you run your business the best. The options you have available:
Some clients, usually the bigger clients, will have a preference for a payment method. My best advice is to have several different means of receiving your payment.
Currently, I use PayPal and Bank Transfer. However, I am currently looking into payment via credit card with Stripe.
Decide between a Personal and a Business Bank Account
Regardless of if you choose to use a personal or a business type bank account, you need to keep your personal and freelancing finances separate. This way you can easily track your income and expenses, as well as maintain clear records. You do not want to have to sort through all your bank transactions trying to work out which ones were business and which were personal. It is a giant headache waiting to happen!
So, keep it simple. Set up a separate bank account for your freelance writing business.
Once you have your account set up you can get started!
Once the money starts rolling in, you can decide how you divvy up this money. At this particular point in time the accounts I have for my business are:
Daily Expenses Account.
This is where all my client money is deposited. If they pay through PayPal, I will transfer it all to this daily account.
This account is where all my regular business expenses are paid from. I work out how much I need in here to cover business expenses with a little bit extra and make sure it never drops below that total.
My “Daily Expense” account is my hub, the hot spot of the operation. All my bank transfers, all my income and expenses occur here. From this account, I will divvy my morning up accordingly to tax, superannuation, slush fund and a “wage” paid to our family account.
Once a month I deposit a total of 35% of my earnings into this account to ensure I have enough to cover any taxes I may need to pay at tax time.
This account is where I have saved money for emergencies, such as unexpected business expenses or if my business goes through a “dry” month. I aim to always have at least $5000 in here at all times.
Other freelance business owners will also have a savings account. I don’t have one at this point. I am using any extra money after I have divvied it up into the above accounts to put towards our family mortgage and our family savings account.
How I manage my finances as a freelance writer.
First off, know how much I need in Daily Expenses Account to cover business expenses each month.
At the end of each month, I take these steps:
- Consolidate all my earnings into Daily Expenses (transfer from PayPal if that’s where clients have paid).
- Look at my accounting software (Rounded) to see how much I have earnt that month.
- Take that monthly figure and break it down into:
- A wage. Although this number is normally a set figure I do need to make sure that I have earnt enough in the month to cover this.
- Business expenses.
- Superannuation payment.
- Tax payment – transfer to my tax account.
- Slush payment – if my slush account has dipped below my $5,000 goal then I top it up.
- Any leftovers I transfer into either our family savings account or mortgage.
This may sound like a lot of work, but with careful tracking and an account that is solely for my freelance business, it really is a matter of a few minutes to have it sorted.
Tracking your finances.
This has to be one of the MOST important aspects of your business. You need to have a simple, easy and effective way of tracking your finances. This also includes great invoicing software.
There are so many out there – Xero, QuickBooks, MYOB to name a few.
I personally use Rounded. It is an Australian online accounting software aimed at freelancers and sole traders. I can track my income and expenses as well as send invoices with Rounded. The best part is it helps to calculate taxes and you can attach receipts to each expense so everything is collated and ready to go for tax time. You can even give your accountant permission to access your Rounded account!
Great accounting software like this goes a long way to help you keep meticulous financial records. You can see your outgoing expenses, what you have earnt, what invoices are waiting for payment and most will provide a tax year outlook so you can see how your business is sitting.
Create a financial plan.
No business is complete without some kind of financial plan. It doesn’t have to be in depth, it can be as simple as I want to earn X amount of money per month. Setting yourself this goal gives you something to work towards and will help you strategise ways of earning that amount.
You can set yourself a budget for your freelance writing business. One of the best things about being a freelance writer is there is not a lot of outlay and expenses. However, what little you do need to spend you must ensure you are earning enough to cover.
Part of your financial plan should be paying yourself a set salary or wage. When you are first starting out this may seem a long way off. And it can be. When I first started as a freelance writer I was earning very little, but soon my account was seeing regular instalments. Before I got too excited and went on a shopping spree, I set myself several goals and outlined a financial plan.
- Goal 1: save enough into my Daily Expenses account to cover 12 months of business expenses
- Goal 2: save $5,000 into my Slush account.
Once I achieved these two goals, I started the monthly steps I outlined above. Again, it may seem to take ages before you are paying yourself a regular wage, but I promise if you set this up from the start it really will help alleviate stress around money.
Make sure you understand and budget for your business expenses.
There is nothing worse than getting a bill and not having enough money in your account to pay it.
To make sure this never happens, mark down in your calendar when all your business expenses are due – website renewal, email hosting, tax bills, accounting software subscription, etcetera. Once you know when they are all due you can ensure you have enough money left in your account to cover them.
It pays to also understand what sort of things you can claim as a tax deduction. The best way to do this is to chat to your accountant. There are many things you can claim because you work from home, from things like mortgage repayments, Internet bills, computer, phone bills.
Plan for the dreaded freelance famine!
It will happen.
The dreaded freelance famine.
There will come a time in your freelance writing business where you are struggling for clients, invoices go unpaid, and you have no new work lined up. Your account will take a huge dive as no income is coming in.
This is where your slush account is vital.
This is your “emergency fund”.
You slush fund is the account you dip into when you need to cover business expenses and you have not had enough money coming in that month.
However, you must replace this money as soon as business picks up again.
I have saved $5,000 into my slush account. This is not actually that much. The reason behind this is that we are not reliant on my freelance wage to cover our expenses as I still have a consistent wage coming in from my nursing shifts. Other freelance writers who do not have another source of income to fall back on will save much more. Think 1 year of expenses, and I mean ALL expenses. Rent or mortgage repayments, bills, petrol and insurance. They save enough money and put it aside to keep a roof over their head for if work dries up.
Now you know how to set up your basic finances for your freelance writing business.
Make sure you take these simple steps to ensure you can easily track your finances and see your savings grow!
- Set financial goals
- Write a financial plan
- Set up HOW you will be paid
- Create your bank accounts
- Invest in a good accounting software
- Save! Save! Save!
How do you set up your finances? Are you reliant on your freelance writing income or do you have another source? Drop into the comments below, I would love to hear from you.