Dealing with financials can be overwhelming for newbie freelancers and even you not-so newbies! But don’t sweat it! You don’t necessarily need to be an accounting expert to run a financially stable business-of-one. And with a little preparation and the right tools, you can show your freelancer financials who’s boss so all your hard work will start paying off (literally!).
So, let’s look at how to handle your finances and avoid some common mistakes we see:
Busy solos are notorious for procrastinating on getting their numbers in order until tax deadlines are looming and can no longer be ignored. c But trying to sort out a backlog of financials in a rush is not fun. And there’s a high chance of making costly mistakes.
To avoid all that, aim to track your income and expenses weekly. Monitoring your income and expenses is also important to see if you’re making a profit. If you’re getting started, you can use a simple Excel spreadsheet for this.
Remember to keep your expense receipts. You can usually deduct certain work-related expenses from your taxable income, depending on your location. This can be effective for lowering your tax bill.
With a platform like Xolo Go, you can easily upload your expense documents and effectively outsource all the hassle and busy work while still optimizing your tax bill like the savvy solopreneur you are!
Budgeting can be a little difficult for solos because unlike a full-time job, freelance income can be hard to estimate. But a budget can show you how to properly manage your money and not spend more than you earn.
Once you track your numbers as discussed in #1, you’ll have a better idea of your freelancer financials. Use the past numbers as guidance to make a simple monthly freelancer budget. For monthly income, you can use an average number until you have a clearer idea of any seasonal fluctuations.
Here are a few key items to include in your freelancer budget other than your freelance income and expenses:
It’s important to have funds to dip into during low-income months and when unplanned situations (like a global pandemic) inevitably happen. Savings can also help you avoid tapping into high-cost credit card debt during emergencies.
Likewise, consider investing for a later date like retirement or to earn a passive income. Make sure to understand what you’re investing in and get professional financial advice so you can properly manage your money.
Set aside an amount for taxes every month to avoid the last-minute stress of finding money to pay your tax bill. Remember, late tax payments can come with steep penalties!
You probably can’t estimate your exact tax bill in advance. So, you can set aside money based on an average rate that applies to you. If you’re unsure of the rate, ask an accountant in your location for some advice.
Don’t forget to check in with your budget weekly to see how you’re fairing, and how you should handle your finances for the rest of the month.
If your earnings aren’t enough to cover your expenses, then you’ll need to find ways to increase your income, reduce your expenses, or do both.
Some solos use their personal bank accounts for business purposes. But looking through bank statements to separate business and personal transactions can be a pain, especially if you wait until the last minute/ tax time.
Separate your business and personal money from the start by opening a business bank account. This can make tracking your freelancer financials a breeze. And you can easily prove your business financials if needed, like when borrowing money or getting a visa.
Here are a few tips on how to manage bank accounts, that may help:
Solos have the option of using a platform like Xolo Go or Xolo Leap that comes with a free business bank account. Xolo Go is especially great for new freelancers who don't have a steady stream of clients yet and need a flexible option for invoicing. Xolo Go has a fixed-rate 5% withdrawal fee whenever you transfer money to your personal account, so they only get paid once you get paid!
Streamlining your invoicing process is important to maximize your income every month. Remember, there’s a time lag between the invoice date and receiving money, depending on the payment terms you’ve negotiated. Staying on top of your invoicing will make sure the money comes in on time to pay those bills!
Creating and reviewing invoices manually takes time, and like all repetitive, yet detail-intensive tasks, are prone to errors. Luckily, with platforms like Xolo Go, you can easily invoice clients across borders and automate your way to error-free invoicing. Xolo's products add the correct VAT automatically to invoices depending on you/your client’s location, which is one small, yet incredibly significant stressor off of your freelancer to-do list!
Good insurance can help you avoid some situations that can otherwise eat into your income.
Just like you need health insurance, consider what insurances you should get for your freelance business. For example, good professional liability insurance can help reduce your liabilities in a lawsuit.
If you’re a digital nomad freelancer, don’t forget to also have good travel insurance!
If you’re a new solo, spending money talking to an accountant can seem unnecessary. But it can save you money later.
Accountants can help you understand how your taxes work so you can do things by the book. They can also help you figure out what business structure best suits you.
Unless you’ve learned the ins and outs of taxes, consider asking an accountant to do your taxes. That way, you can avoid any mistakes and get some tips for the future.
If you’re a digital nomad freelancer, you may have to file tax returns and perhaps even pay taxes in more than one country. So, it’s important to understand your tax residency status to avoid tax problems later.
The financial side of freelancing can often be intimidating, especially if you've never thought of yourself as particularly good at numbers. But remember that your journey as a freelancer will ultimately hinge on not counting yourself out just because you haven't been particularly good at things in the past. With freelancer financials, once you get the hang of it, you'll be well on your way to showing your freelancer financials who’s boss!
Note: The information contained in this document is for guidance only and cannot be considered financial, legal or tax advice.
Thilini is a financial professional turned writer and remote entrepreneur. She held several financial roles in Sri Lanka and Australia before heading off to travel. She's currently based in Mexico.
Thilini blogs about remote business/work life at Momentsing and her hobbies include exploring not-so-widely known places and tropical fruit farming. She uses Xolo Go to effortlessly invoice her EU-based clients.
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