As ironic as it may sound, one of the key ways you actually brace yourself to step into the limitless world of business is by knowing your actual limits. While that statement could undergo a few versions of philosophical advice generating a few hours’ worth’s of debate, what I intend to say is that as a freelancer and a self-employed business person, there might be days when you would have to live off a budget. And to make sure those days aren’t too often, it’s probably best to devise a financial plan that works for you and your business in the long term.
If I were to explain to you financial planning, minus the intimidating financial jargon, it pretty much is just a long-term strategy that allows you to cover ongoing and future expenses and helps you mitigate the consequences of a sudden and unexpected change in life.
While financial planning is essential for any working adult, it is particularly more important for freelancing individuals as it helps you manage the uncertainty of work in addition to covering your fixed expenses.
A Step-By-Step Guide To Building A Financial Plan
Step 1 – Know your goals
Any plan is built upon the foundations of your goals and the means through which you seek to achieve them. It is important to define what your short term and long term goals are.
It is essential to define what your short-term and long-term goals are.
- Short term goals can include smaller targets for the near future like saving up for a beach vacation or buying a new sofa for your living room,
- Long-term goals include targets that take at least five years worth of diligent commitment. These include saving up for buying a new house, saving for retirement, clearing student debt, etc.
Dividing your goals into the twin fork of long-term goals and short-term goals is likely to streamline your overall budget.
Step 2 – Make sure your financial goals are SMART.
SMART is an acronym for Specific, Measurable, Attainable, Relevant, and Time-Bound.
Having a number that you need to achieve will help you know what you can or cannot do. The specificity lends itself to the seriousness of the goal, making it easier for you to achieve it.
Make sure the changes in your financial plan are attainable and visible to the naked eye. This will keep you on track.
Planning to save fifty percent of your income in your first month of saving will probably end in disappointment. This will lead to a spiral of discouragement and nobody enjoys that. Make sure your goals are realistic, ambitious yet attainable at the same time.
The relevance of your financial goals is paramount. Always answer the “Why?” to all your financial decisions.
Saving without a deadline is hardly saving. The seriousness of your financial plan will only turn into success when your goals have strict deadlines attached to them.
Step 3 – Get yourself a business account.
Separate your business expenses from your personal ones. One way of doing that is getting yourself a separate business bank account for your freelance needs. Whether hiring a Shopify developer or churning out funds to hire a content writer, make sure all your business-related expenses are carried out in a separate bank account. This will help you keep a track of your expenses and you’ll know where your money is going.
Once you have a separate bank account, start diverting considerable efforts into clearing off as much debt as you can, as early as possible. Once you have a load of debts off of you, your brain shall allow you to think more creatively and the change will lend itself to unleashing productivity into other aspects of your personal and professional life.
Step 4 – Plan Taxes Diligently
In the uncertainty-filled life of a freelancer, only two things are certain – death. And Taxes.
Account for your taxes when you’re hiring a freelancer under you or when you’re generating invoices. Don’t procrastinate filing your taxes until the end of the year. You might be burdened with fines if you miss crucial dates. Using a tax calculator to determine how much you’ll pay for taxes at the end of the year is a wise decision. Divide this amount by twelve months and set aside that amount every month to avoid getting overburdened at the end of the financial year.
Step 5 – Emergencies don’t come announced. But it helps to be prepared for them
As a freelancer, it’s important to have a separate emergency fund for yourself in the bank. This will act as a safety net to fall back upon during times of need.
In addition to that, it will also free you from the burden of doing uninspiring work. Having an emergency fund gives you the freedom to be able to say no to projects that you do not particularly enjoy doing.
Step 6 – Diversification of Income Sources
As is said, only a dumb person puts all their eggs in one basket. Spread them across your baskets.
If the majority of your income is coming from just one client, you’re likely to be in big trouble if things turn sour or if the brand decides to shut down operations. It’s important to not be dependent on just one source.
Try to build multiple different revenue streams, and onboard a larger number of clients from various sectors such that you have others to fall back on in case one decides to call it quits.
In conclusion, financial planning is one way you mitigate the ambiguity that comes complimentary with being a freelancer. Not planning your finances can lead you to a mushy quicksand of debts and added stress.
The nitty gritty’s of your financial plan can differ based on your customized needs and requirements. Cater to all of them before you make outrageous expenses. Do not forget to give yourself a paycheck every month, start small and allocate funds for your future plans. Sounds like a lot, but you’ll eventually do just fine.
Hetvi works as a Product Associate at Refrens.com – Online Invoice Generator & India’s most powerful platform for freelancer’s growth. She has worked for some renowned companies as a Brand and Digital marketing associate. You can follow Refrens.com on Twitter, LinkedIn, and Instagram.