How to become financially independent as a freelancer


Being our own boss is a rewarding process but it can also be a financially stressful venture. The money in our bank accounts come and go instantly, and without a plan in place, a life-changing event can significantly erode our freelancing business (yikes).

It’s a scary thought and a reality that we tend to easily ignore. As a business owner, we have plenty of short term goals and responsibilities. But we must stop and think about the future viability of our time and resources, and have a plan on how to ultimately achieve financial independence.

Being financially independent means different things to different freelancers. To some, it means having enough cash to run their business operations while traveling the world. To others, it means saving for a home where they BlueHost can set up their home office operations and have plenty of time for their spouse and kids. And for some, it means having enough money to achieve work-life balance and enjoy night outs with friends without worrying about the bills.

Whatever financial independence means to you, having sufficient money to spend freely and not living paycheck to paycheck is the dream lifestyle. To get there sooner, here are four actionable steps you can take today to own your future:

Step 1: Know your take-home income

 

The first thing is to check the financial pulse of your freelancing business. Review your past financial performance and determine what direction your venture is going. If you are spending more than you’re earning, think about whether the goodwill you’re accumulating is valuable.

If you’re living paycheck to paycheck, then maybe think about how you can increase your income potential. The question you want to tackle here is: Are you charging enough for your time?

An insight to your after-tax income is a great starting point to determine your price floor because it allows you to adjust your billing rate accordingly. For example, a $10,000 client invoice is your gross income not your take-home pay so don’t expect to have that money in your bank account.

Expect that a small portion of the $10,000 goes to operating expenses to get the job done, and then a substantial portion goes to taxes – 15% for federal tax, 15.3% for self-employment tax, and 8% for state tax. So on a $10,000 project, you can potentially only net less than half.

Knowing this amount allows you to calculate your after-tax hourly rate and determine if you’re charging enough for your time.

 

 

Step 2: Figure out the cost to achieve your financial goal

 

Your financial goal has to be measurable in time and dollar amount. When you subtract your take home pay from the total cost of your financial goal, the difference is the money that you are allowed to spend for basic necessities – this is your allowable expenses.

Here is the basic math formula you need to pay attention to:

[After-Tax Take-Home Pay] – [Cost of Your Financial Goal] = [Allowable Expenses]

If your goal is to travel to an exotic place once a year, figure out how much money you’ll need to travel and when you need this money by. Since the cost of your financial goal is fixed, you either need to increase your take home pay or lower your allowable expenses in order to make the above equation work.

Step 3: Know where your money is going

 

Now that you know the price for your time and the cost to achieve your financial goal, you need to know how you can live within your allowable expenses.

First, compare your allowable expenses with your actual expenses from your personal and freelance business. If the difference is substantial, then you need to know where your money is going so you can make the necessary adjustments to close this gap.

You can use a simple excel sheet to track all your expenses, but if you have hundreds of transactions per year, I suggest using an automated expense tracking app like to track both your freelance business expenses and personal expenses simply by connecting all your accounts: business and personal checking, savings, credit cards, etc.

Once you organize your finances, examine your 5 major expenses. For your business, major expenses are generally going to be for taxes, advertising, operational, and educational. For your personal, major expenses are generally going to be for rent, food/drinks, shopping, transportation, and utilities.

By itemizing your expenses, it is easier to identify which expenses are important and which ones can wait until you reach your goal. If you’re struggling to live within your allowable expenses, then Step 4 is for you.

 

 

Step 4: Mentality Shift

 

Yes, trick your brain from impulse purchases. We all have to do it because we’re constantly bombarded with ads of instant gratification.

 

By Argel Sabillo


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September 16, 2016
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