Freelancing Guide: Managing Your Finances
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Freelancing Guide: Managing Your Finances
With the freedom of freelancing comes the responsibility of managing your own finances. How well you manage your finances can help to ensure you thrive as a freelancer. Below, we’ll outline guidelines on how to stay on top of your finances. We’ll also briefly discuss pay rates and negotiation as a freelancer.
Separate your personal and work accounts
Freelancers can keep track of their bank accounts in different ways. Some only have one bank account, and keep track of their personal and work accounts through their own bookkeeping.
To stay even more organized, you can create a separate bank account for your freelance income. This is a good way to make sure your spending is proportional with your income. It will also help you stay organized for taxes. As a contractor (ie: if your U.S. tax form is a 1099), you will need to save funds for paying taxes since your employer will not withdraw this for you automatically. Designate bank accounts whichever way makes the most sense to you. Some find it helpful to have a personal and business accounts, while others may have as many as 4 different accounts: personal, savings, freelance, and tax fund.
Track your spending and earning
Because freelance is flexible, the amount of work you get - especially early on - can vary. Keeping track of how much money you earn versus how much you spend will help with managing your finances. Apps like Mint.com can be helpful tools to start tracking your spending habits.
Keep records current
Keep up with your finances by scheduling regular “booking hours”. Whether it’s every Friday or twice a week, schedule reminders to stay on top and make bookkeeping a habit. You’ll thank yourself!
Being detail-oriented and committed to a job is a great asset when completing your finances. Save receipts, track small purchases, and be comfortable with your purchases. This will help you budget more effectively and can help when you file your taxes.
Be proactive with taxes
Taxes are rarely viewed as the best part of freelancing - but they certainly are one of the most important to address. Set calendar invites to get started early. Seek professional assistance if needed. There are also many new apps to help with this process.
Pay Scale and Freelance Rates
Pay can be one of the most daunting financial topics of freelancing. To answer the question, “How much should I charge?” We recommending answering a few questions for yourself first.
What are the average pay rates for this type of work in the area?
A simple web search can help with finding these answers.
- What is the client asking for?
Before deciding on payment method, have a clear understanding of what a client is looking for and the level of complexity of the work.
- How demanding is the client?
A client's expectations and level of involvement might take more time and energy. Be sure to consider this when quoting your rate.
- What is your level of skill?
Your level of skill will likely affect the amount of time and overall quality of the work you produce. Be honest and transparent with your client, and charge accordingly.
- Should I charge hourly?
If you charge hourly, be mindful of what you bill. You should not charge for any mistakes made, or any time spent catching up on your learning.
- Should I charge by project?
Charging by project is a good option if you have a clear sense of how long it will take you to complete your work.
Once you have answered these questions, you should have a better sense of how to best charge clients for your work.
Pay Negotiation: Preparation and Mindset
As a freelancer, an essential skill to hone is the ability to negotiate for a competitive pay rate. To prepare your negotiation strategy, start with the 6 steps below.
- Your Minimum Acceptable Rate (MAR)
To begin, decide on what the lowest equivalent hourly rate you are willing to accept is.
A general way to calculate this is by using this formula:
((personal overheads + business overheads) / hours worked ) + tax = MRA
- Billing Format
Will hourly or per project benefit you most? Consider how this may increase your earning power over time.
- Contextual Value
Appraise the value of your work in your client’s eyes. For example, what impact will your work have on the client? For example, is this a large impact project that is used by an international audience? If so, you might have leverage to charge a higher rate than for a low profile project.
When negotiating, research what other freelancers are charging for similar work. Compare their rates and abilities to yours to be sure you are charging a reasonable fee.
- Supply and Demand
How many clients are you working with and what’s your availability? The more in-demand your skill set, the more you are likely able to charge. On the flipside, if you are offering a service that has lower demand, or more competition, you will likely have to adjust the amount you charge to accommodate these factors.
- Indirect Benefits
When selecting a project to work on, also consider the indirect benefits you may receive for the work beyond payment. Future client relationships, exposure to a new market - all of these are worth considering. If you are in the early phase of building your clientele, it's important to have an open mind!
Don’t forget! Rates can change over time. For more detailed information on pay negotiation, check out this informative article.
Pay Negotiation: Language and Phrasing
Much like negotiating a salary offer, articulating your desired pay rate with poise can offer great benefits. Below, we’ve highlighted a few quick tips on how to approach communicate your negotiation. We’ve also include a link to Udacity’s resources on salary negotiation.
- Avoid naming your price first.
- If you have to state your rate, give your highest and wait for their response.
- If you are counter offered with something lower, take time to craft a thoughtful response.
A thoughtful response to counter an offer might look like: “Thanks for getting back to me! I usually charge $60 an hour for a project of this level. I know that’s a big leap from $30/hour. Would $50/hour be something we could discuss? Let me know.”
Alternate Forms of Payment & Benefits
Looking to work at an early stage start-up, or some other type of smaller organization? You may need to consider how alternate forms of payment can best serve your interests. Here are a few guidelines for accepting alternate forms of compensation.
- Minimum wage + Equity
If you are working with an early stage startup, the company may not have the funds to pay you a high hourly rate. Instead, they may offer you equity. Though this can be a good option if the company succeeds, we recommend choosing offers that at minimum pay you minimum wage + equity to cover your bases.
- How will you benefit?
If a company can’t offer you your desired pay, consider the other ways you are benefiting from completing this work. New clients? On the job training? A great reference? Think about the whole picture, and numeric sum.
- Ask around!
If you aren’t sure if your offer is a good deal, be sure to consult your community. Great places to ask include Reddit, Quora, Stack Overflow, and Udacity Slack Channels.