How I Manage my Freelance Finances

Over the years freelancing I’ve settled into a routine for handling my business finances (and my personal finances too).

Weekly books

The first part of my routine kicks off every weekend. I’ll sit down and do my bookkeeping for the week. This includes checking all my bank accounts, credit cards, and any other financial account for my business.

Since I’m a solo-operator, I don’t have many transactions to enter each week. Perhaps 20 or so. Many are recurring or subscription transactions. Accounting software can remember recurring transactions which makes entering them semi-automatic.

I’ll also do this for my personal finances. Though it’s more about balancing my checkbook and updating my account.

I don’t hire a bookkeeper because I want to see exactly where my money is going. By checking every week I can take corrective action when something is wrong.

Weekly bills

After doing my books I’ll pay any bills that I have. I try to pay every bill we have, even if it isn’t due yet. That way I don’t have to worry about missing one or having a late payment.

Setting up auto-pay on common bills is also a great time-saver.

Monthly finance spreadsheet

About a week into the new month I’ll take some time to go back and review the last month.

First I make sure every transaction is entered. Credit card transactions and bank interest usually take a few days to clear and be added to my accounts. I think in accrual so I like to make sure things like interest are entered for the month they’re earned.

Once all of the transactions are entered, I’ll run a monthly income statement report. This is a summary of income and expenses for the past month. I use a simple spreadsheet and copy the totals for each main category. I do this for two reasons:

  1. The spreadsheet shows a year at a time so it’s easier to get a higher level view of trends (especially expenses)
  2. The spreadsheet handles my tax savings calculations (described below)

I’ll usually take a few minutes to check how this month ended up when compared to the past few months. Higher than normal training expenses? Oh right, I bought that course on email marketing. Higher product income? That would be my latest book launch. That sort of thing.

Tax savings

My accountant gives me estimates each year for my quarterly tax estimates. The nature of my business makes those very difficult to work with though. Most tax estimates assume that this year will be the same as last year +/- a little bit. With freelancing and product development, I’ve found my income levels swing rapidly back and forth. This can really screw up her estimates, no fault to her.

For example, by mid July this year I already made about 80% of the income I made in all of last year. But I also took three months off from client work so I’ll have no revenue from that. But I also wrote and launched my fourth book so product sales will be up. You can see how hard it would be to make estimates for an entire year.

What I’ve found that works better to cover taxes is to save 35% of all of my net income each month.

Total Income
- Total Expenses (not including salary)
= Net Income
* 35%
= Amount to save

I then transfer this amount to a special savings account I use to pay our taxes. The nice things are at the end of the year we always have the cash needed for taxes and most years there is some leftover.

Since this 35% is based on what I just earned last month, it adapts to how busy I am. Slow month = less net income = less taxes. Busy month = more net income = more taxes.

(I found 35% to be a good percentage for me to cover US taxes, Oregon taxes, our local county taxes, and the various self-employment taxes. You may find you need to save a higher or lower amount based on your specific situation. Talk to your accountant to find out what your average tax rate is for everything and save more than that. Just don’t use your marginal tax rate, that’s something different.)

Monthly Savings

Finally I see how much is left in my checking account. My goal is to have the minimum cash in my checking to pay for:

  • my salary this month
  • my outstanding balance on my credit cards (I pay for everything on my credit card and pay off the balance each month)
  • the minimum amount my bank requires to avoid fees ($1,000 at the moment)

Whenever I have extra cash in there from client payments or product sales, I’ll transfer it to my savings account for my emergency fund. Other months I’ll be a bit short and pull some cash from savings.

That’s how I do my freelance finances for Little Stream Software. I’ve built up the routine over several years and it works great for me.

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