Before you quit your job, make sure you’re ready to handle the financial burden of freelancing. This checklist can help.
Ready to jump from your 9-to-5 to full-time freelancing? Great!
From making your own hours to setting your own fees, freelancing has tons of benefits.
But what many startup ‘lancers don’t know is that freelancing can also be costly. You are, after all, essentially starting a business. Plus, you’re moving from steady paychecks to the unknown territory of a variable (and, sometimes in the beginning, nonexistent) income.
So before you jump in head-first, take this financial checkup to be sure you’re ready for the freelancing life:
1. Check your startup costs
Starting a freelance business is pretty cheap, as far as startups go. You don’t have to rent a huge office building, buy your own high-tech software system or even hire employees. But that doesn’t mean starting a freelance business won’t cost you.
If you want to land great clients and make decent money, you’ll have to invest in your startup. Before you go full-time, find the money for common startup costs. In fact, it may be best to go ahead and pay for these things out of your paycheck now, before you even jump ship!
Common freelancing startup costs include:
- Website design
- Website hosting
- Business cards and other marketing materials
- Memberships for online services (such as bookkeeping services, etc.)
- Memberships for helpful professional organizations
- Other necessary equipment and tools
If you can cover these expenses, great! Move on to the next step in your checkup. If not, hold up. Take time to save enough money for your startup costs before you freelance full-time.
2. Assess your budgeting skills
Money management skills are important no matter what your job. But for freelancers, they’re even more essential.
Right now, you’re used to a steady paycheck. Sure, if you’re an hourly worker, there might be some variance. But you probably get a check on a set schedule and know ahead of time about how much you’ll make.
When you’re a full-time freelancer, you can kiss that consistency goodbye!
While many of us eventually nab steady, long-term clients that give us an even-keel base pay, this isn’t often the case for newbies. You may deal with a roller-coaster income for quite some time.
So be sure you can prioritize your spending. See where you can cut back on your budget for months when you may not make as much money.
3. Examine your backup plan
We all would like to think we’ll be six-figure freelancers within months of launching our businesses. But that very rarely happens.
Many freelancers have to work hard for months (or maybe years) before they steadily earn a decent income. This is normal, and you should expect it — even as you hope for a better, easier outcome for yourself.
Before you start freelancing, form some sort of backup plan. (Click here to tweet this thought.) This could include a part-time job or side hustle to pay the bills while your business gets going, a well-funded emergency savings account or even the option to move back in with the ‘rents while you get on your feet.
While you don’t necessarily need a fully funded six-month emergency fund to safely transition to the freelance life, you do need some sort of financial backup plan just in case!
4. Understand your ongoing expenses
Often, you’ll hear new freelancers exclaiming in excitement that they’re earning $20-$30 an hour on a job. That’s much more than they made at their old $12/hour gig. Or so they think.
Freelancers have many more expenses than typical full-time workers. You’ll have to pay for everything from printer paper to health insurance, and those costs add up.
And then you’ll have to pay your own taxes. In fact, you’ll pay at least 15 percent of your income in self-employment FICA taxes, and that’s not to mention income taxes.
Don’t forget you’ll no longer get paid vacation or sick days, either. If you don’t work, you don’t get paid. So you need to be sure you’re getting paid enough so you have the luxury of a vacation or a day out with the flu.
All these costs quickly add up and turn your $30/hour gig into a minimum wage slog. While your hourly rate goal will certainly depend on your industry, experience and cost of living, Carol Tice says most freelancers should aim to make at least $100 per hour.
Did you make it through the checkup? Do you understand your startup costs and ongoing costs? Do you have a backup plan for your finances, and are you prepared to live on a variable budget?
Excellent! You may be ready to start freelancing full-time.
If you’re not quite there yet, don’t worry. Take some time to prepare financially, and your freelance career launch will go much more smoothly in the long term.
Abby Hayes is a full-time freelance blogger, copywriter and journalist. She’s also the founder of FinanceforFreelance, a blog dedicated to helping freelancers make the most of their money. Check out her freelance tax guide, 42 Money Saving Tax Deductions for Freelancers, if you’re ready to make the most of your freelancing income at tax time!