Basic Money Management Guide for Freelancers

Eric Linhares

Fortune favors the prepared.

Previously, I stated that cash flow mismanagement is the reason for 82% of small businesses failures. Freelancing being a business, subject to variable income, it makes sense to set up a strategy in advance to minimize this risk.

These are guidelines you can follow to the letter or tailor to your needs and preferences.


Budgeting is just the process of coming up with a financial plan to achieve your goals, personal or business-related. There are many ways to do it, but they all have one thing in common: gosh, they’re boring. OK, one common upside is preparing your finances for the future without constantly worrying you could be misallocating resources. Remember to have a goal-oriented approach and don’t get too caught up in counterproductive details.

The 50/30/20 Rule

Take what’s left of your income after taxes and business expenses, divide it in three unequal parts.

  • 50% are for needs you can’t neglect without a severe negative impact on your quality of life.
    • Needs: rent, utilities, groceries, transportation for work, health care, mortgages, prescription medications, minimum debt payment, necessary clothing, child care and the like.
  • 30% are for wants that aren’t essential.
    • Wants: unnecessary clothing, eating out, cinema, cable TV, gifts, cosmetic treatments, unnecessary transportation and the like.
  • 20% are for savings and debt repayments.
    • Savings: retirement, stocks, crypto-currencies, emergency funds and so on.
    • Debt repayments: reducing debts by going beyond the minimum payments part of the 50% is allocated for.

If sticking to the above is too difficult for you, move the numbers around until you hit upon a formula that works. The rule isn’t set in stone.

The 7+ Account System

Having several accounts, each with a different purpose, is useful to keep you from splurging money due to the government or your daughter’s wedding on the latest Playstation. With experience, you’ll know when it’s appropriate to move funds from one account to another, but it’s typically a good idea to be strict until a new habit becomes second nature.

  1. Taxes Account: check the laws where you live to figure out how much you must add to this account and never use this money for anything else. Prioritize this account to prevent headaches in the form of penalties.
  2. Business Account: use it to fund business-related expenses and find out whether they’re tax-deductible.
  3. Needs Account: intended for the 50% of your income (after taxes and business expenses) dedicated to your needs.
  4. Wants Account: intended for the 30% of your income (after taxes and business expenses) dedicated to your wants.
  5. Debts Account: intended for part of the 20% of your income (after taxes and business expenses) dedicated to debt repayments.
  6. Retirement (savings) Account: as governments worldwide struggle to maintain a working Social Security system with declining birth rates, you better take care of your future self.
  7. Safety (savings) Account: should be fed until you have one year of needs and wants covered for emergencies, since freelancers don’t have access to unemployment benefits.

Add other accounts as you see fit. For instance, you may want one for holiday trips (want) or your children’s college (savings).

Basic Bookkeeping

Tracking your expenses is the best way to make sure they’re kept under control. Bookkeeping is the process of recording financial transactions, whether you’re receiving or spending money for your business. You also keep digital and physical documents as proof of such transactions for negotiation and legal purposes.

Andrew Blackman recommends a simple spreadsheet whose template you can download by clicking on the sidebar attachment to his excellent post. Read it in its entirety, seriously.

In short:

  1. Create a spreadsheet for each year since you started freelancing.
  2. One tab is for your Income.
  3. One tab is for your Expenses.
  4. On each tab, add a column for date, client or payee, depending on tab, amount received or spent, again depending on the tab, and details (purpose) of the transaction.

Documents endowed with probatory value, like invoices, receipts and bank statements, should be given immediately understandable names, scanned and added to folders organized by category (Income, Expenses), year and month, in hierarchical order, for speedy retrieval. Blackman also advises you to save the original physical documents in physical folders under the same organization system, just in case your government doesn’t accept scanned copies.

Reducing Expenses

As a freelancer, your income is unpredictable, but your expenses don’t have to be, for the most part. The best way to reduce them across the board, especially housing, is to live in an inexpensive area. Small towns often have everything you need at a cheaper cost, if you don’t require luxury or an endless supply of paid entertainment options. In my experience, people tend to be friendlier and more laidback, too. A good rule-of-thumb is to look into the HDI rank of the place you’re considering moving to.

5 tips to help reduce your expenses:

  • Food: you can save money by preparing your own meals and giving intermittent fasting a shot, if you’ve ever wanted an additional reason to improve your health through diet.
  • Socialization: instead of buying overpriced booze in environments that encourage status signaling, drink at home with your buddies, get into active hobbies like playing music in a band, going camping with enthusiasts or practicing team sports - you get the drill.
  • Gym membership: most Gym memberships go unused. Why bother paying for something you don’t use? Cancel your membership and take up calisthenics and jump rope to remain fit.
  • Transportation: selling your car will save you money on gas, taxes, maintenance and insurance.
  • Electricity: learn the benefits of cold showers and purchase energy saving light bulbs.

For even more tips, read this comprehensive list by Trent Hamm.

Getting paid

Charging clients is no fun, but it isn’t supposed to be. All your hard work will be for naught if you can’t pay your bills. Consider this an important part of your job and overcome the psychological discomfort of demanding what amounts to fair and timely compensation for your efforts.

5 tips to get paid on time

  • Bill immediately: a down payment has the double benefit of winnowing out probable deadbeats and rewarding the time spent discussing and researching the requirements of your client.
  • Invoice weekly: or at least frequently. Given 30 days is the standard term for payment, if you don’t invoice frequently, it may take months to receive your money. Consider shorter net invoices as well.
  • Clearly state payment terms in writing: make it clear that you’ll only send your client the files they requested after compensation on an agreed upon date, allowing for reasonable exceptions.
  • Facilitate payment: by offering several options, like PayPal, credit card, electronic funds transfer, Bitcoin and so forth, you enable your clients to pick the one they deem most convenient.
  • If late payers refuse to comply, take legal action: contracts and the law are only useful if you’re willing and capable of enforcing them, which may cost time, money and peace of mind. Politely but firmly ask for payment first. Failing that, try to cut a deal, even if at some loss. No deal? Either move on or lawyer up, knowing doing so will likely burn bridges.

Break any of the rules above if you realize it’s the best course of action, just avoid doing it out of irrational fear. Think you’re working for free for much of your time? Read Chloe Brooks’s 10 Things You Don’t Charge Freelance Clients For But Definitely Should.

Do you have experience managing money as a freelancer? Your tips may be useful to others. Share them in the comments!