This is an excerpt from The Money Guide for Freelance Writers: How to Manage (And Feel Good About) Your Finances.
When you first start a freelance writing business, the goal is simple: earn enough money to stay afloat while doing work you enjoy.
But as time goes on, most of us want to do better. We want to earn more for ourselves and our family.
With success, however, comes financial housekeeping. Even when you do your best to keep things simple, you’ll need to take on some financial chores to keep your business in good standing.
I call these “chores” because most freelance writers want to focus on writing, not on business. But the more you learn about how to manage your money, the easier it becomes. And the more organized you are, the more money you’ll take home.
How to organize your finances as a freelance writer
Want to stay on top of your business finances? These ideas will help you stay organized and better track your expenses, profit and progress.
Here are six money-management tips for freelance writers.
1. Separate your personal finances from your business
This is a relatively easy step to take, but too many of us don’t do it from the beginning. If you combine business and personal finances initially, it can be a difficult habit to break.
Keep your personal money separate from money that comes in and out of your business. Why bother, you might say, when as a sole proprietor, you are the business?
Because when everything is combined, it’s difficult to see how much money comes into the business (revenue), how much goes out (expenses), and how much is left over for you (profit).
It takes a little effort to get this set up, but it’s worth your time. Here’s how to go about it:
Open a separate bank account for the business
Rather than putting all your money into one tangled-up pile in your personal account, open a separate account for your freelance work.
Business bank accounts sometimes have different rules than personal bank accounts, so make sure you’re aware of any minimum balance requirements or other rules to avoid getting hit with unexpected fees. Consider different banks to see which offers the best set-up for what you need.
While this doesn’t work for everyone, my preference is to house my business account at the same bank as my personal account, and link the two together. That way I can log into one bank online and see both accounts, and seamlessly pay myself without fees.
Open a separate credit card for the business
Avoid using your personal card for business purchases. If possible, open a new card that offers rewards, so you benefit when you spend. If you’re into airline points, you might get the business equivalent of the personal credit card you already have, so you can collect points on one airline for both cards.
Then be diligent about putting all business expenses — and only business expenses — on that business credit card. This will make it infinitely easier to track expenses. Rather than collecting dozens of paper receipts, you can simply use your credit card statement as a log of all expenses.
Open a separate PayPal account for the business
If you use PayPal to get paid or purchase items for your business, open an account for your business, so you don’t end up using your personal one. PayPal requires a different email address associated with each account, so use your personal email for your personal account and your work email for your work account.
Alternatively, just keep one PayPal account for business, and don’t use it for personal purchases.
2. Pay yourself regularly
Get in the habit of paying yourself on a regular basis, basically a transfer of money from your business account to your personal one.
Keep a running list of these payments to yourself. As with some of the other tips here, this is not required for sole proprietors, but it’s a good habit to start for a few reasons:
- It helps keep your business and personal expenses separate
- It makes it easier to estimate your earnings, which could give you peace of mind
- If you ever choose to become an LLC with an S-Corp tax designation, you’ll be accustomed to paying yourself on a regular basis
Some freelancers find this practice helps with their personal budgeting, too. By paying themselves on a regular basis, they know how much they have to spend on living expenses each month.
If possible, set this payment to yourself lower than what it could be, and adjust your lifestyle to match. Let a bit of extra money accumulate in your account over time, so if you have a month or two where you don’t earn as much as expected, you’ll still have enough to pay yourself as promised. And if your business profits more than you expect over time, increase your paycheck, and put that money toward retirement, savings, or something special.
3. Be smart about invoicing
Long gone are the days of tediously creating each invoice by hand in Microsoft Word, receiving a check in the mail, depositing it and checking it off on a spreadsheet.
Today’s invoicing tools make life as a small business owner so much easier. Even if you stick to a Google spreadsheet or Excel to track your big-picture financials, you’ll still want to rely on an automated service to invoice your clients.
Freshbooks tends to be popular — here’s a beginner’s guide to Freshbooks — but new options are always popping up on the scene, as well.
The Write Life reviewed some of the most popular invoicing options for freelancers. Try them out and see which one works best for you!
Even the most basic invoicing programs should offer these benefits:
- An easy way to create professional-looking invoices with your company logo. Once you create one invoice, you can duplicate that invoice and make changes the following month. Using that template, it should be easy to add extra fees or services.
- Online payment options for clients. While some clients still prefer to use old-school checks, you’ll find most clients appreciate an online option that makes payments easy for them. Payments that go directly to your business PayPal, Stripe or bank account make things easier for you, too!
- Track outstanding invoices. Wonder whether your core client has paid your last invoice on time? Log into your invoice system, and you can quickly get your answer. Most systems make it easy to send reminders to clients about overdue payments, too. Just make sure you specify payment terms in your contract (for example, payment is due 15 days after receipt of invoice).
- Time-tracking. In addition to invoicing, some invoicing software offers an easy way to track how you spend your work hours. Do this religiously, and it will provide wonderful insights into which clients eat up most of your time, where you’re earning your highest hourly rate and how many hours you’re spending on your own blog or digital products.
If you prefer to create your first few invoices by hand, here’s an invoice example to give you an idea of what to include.
4. Track expenses diligently
Whenever you buy something for your business, keep track of the expense.
Why? Because when tax time comes around, you’ll be taxed on your business profit after expenses, not on your revenue.
In other words, you’ll be taxed on how much your business has left after expenses, not how much money you bring in.
For example, if you bring in $50,000 over the year and spend $25,000 on supplies, your taxable income is only $25,000.
You need proof that you spent that money so it can qualify as a deduction. That’s where tracking expenses comes in.
I find the easiest way to track business expenses is to have one credit card for the business and put all expenses on that card. You could do the same with a debit card connected to your business account. My expenses accumulate automatically in my Quickbooks account, but if you don’t use an accounting software, you can also simply cut and paste expenses from your credit card statement and add them as line items in a Google sheet, then organize them by category.
Using a credit card might not be a good move if you have a history of overspending or not paying off credit cards. But assuming you can use it responsibly — that means paying it off every month so you don’t rack up interest — putting all your expenses on one card makes things easier.
Now, here’s a trap we don’t want to fall into. Sometimes when we see our revenue increasing, we spend more liberally. Necessary expenses are OK, of course, and it’s even OK to spend big on something you believe will help you continue to grow your revenue (like a business coach, for example).
But don’t let business expenses get out of hand just because you’re earning good revenue. Remember, no matter how much you earn, if your expenses are high, your take-home pay decreases. And you need that take-home pay to support your lifestyle.
5. Review profit and loss every month
You don’t need a fancy tracking software to do what all the big companies do on a regular basis: create your own Profit & Loss statement.
You can do this in a simple spreadsheet. Create one column to tally expenses and another to tally revenue. Then subtract your expenses from your revenue, and you’ve got your business profit.
Or ask Google for a template: here’s a free one for Google Sheets, for example.
Don’t forget, you still have to pay personal taxes out of that profit, so your take-home pay will be less than that profit number.
Review your Profit & Loss statement (P&L) on a monthly basis; a good rule of thumb is to sit down at the beginning of each month and review last month’s P&L.
This is also a good time to set aside money for your estimated quarterly taxes.
I find a monthly P&L review keeps me honest in terms of where I am, and it helps me stay focused on where I’m going. Ideally you want to see that profit number increase every month until you hit your income goals.
6. Create a monthly checklist
With all of this knowledge under your belt, it helps to have a repeatable system for all your financial tasks. That way you know what you have to do every month and don’t miss anything important.
Try creating a checklist that includes the items we’ve discussed, plus anything else you need to do for your business. Then decide when is the best time to complete those tasks, and schedule that time on your calendar for each month.
I do most of my financial tasks at the beginning of each month, reviewing everything for the previous month. Doing these tasks all at once saves time and stress.
Your checklist might include:
- Pay your business credit card or look at how much you paid if it’s set up for automatic payments
- Review invoices you sent the previous month. Did all of your clients pay on time? If not, send reminders (or let your invoicing system do that automatically)
- Send new invoices to clients for work you’ve done or work you’re about to do, depending on how you prefer to invoice
- Pay yourself
- Pay any contractors or freelancers you worked with this month
- Update your revenue and expenses in a Google Sheet, QuickBooks or wherever you track everything
- Review your P&L to see how much you’ve earned or lost before taxes
- Calculate the tax you expect to owe and put that money aside
Your goal should be to automate as many of these tasks as possible.
Paying your business credit card bill, for example, is one that’s easy to automate with most credit cards. If you use QuickBooks, you can set up integrations with your bank and credit card that automatically records your revenue and expenses. Paying yourself can also be automated with a simple transfer from your business bank account to your personal one.
When this is all complete, take a few minutes to think about that P&L and the big picture. How does your profit compare to other months? What about revenue and expenses? If expenses were unusually high, what did you spend money on?
And most importantly, are you on track to reach your goals?
This is an excerpt from The Money Guide for Freelance Writers: How to Manage (And Feel Good About) Your Finances.
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