Disclaimer: I’m not an accountant or an attorney; these are just some tips from my own experience and what works for me in my freelance business. Managing your freelance finances is a) time-consuming and b) absolutely critical to your survival as a freelancer. So, it’s worth taking some time to consider whether you’re optimally managing your money. And those of you who are more financially oriented than I am, please chime in in the comments.
- Before you do anything else, separate your business and personal finances. Even if you do business as a sole proprietor (meaning that you are not incorporated), open a separate checking account that you use only for business purposes.
- People use various accounting tools and processes, but at the very least, track your total freelance income for the year. Every time a client pays you, enter that amount into something (a spreadsheet, QuickBooks, Translation Office 3000, etc) so that you have a running total of how much you have earned.
- Always, always have a savings cushion, especially if you are your (or your family’s) only income. Freelancing has its highs and lows; some months go like gangbusters and other months drip along. Big clients may unexpectedly change their plans or hire an in-house translator. And if you (or a family member) are too sick to work for an extended period, you’re left without income unless you have disability insurance. So don’t let yourself live paycheck to paycheck. Keep at least 3-6 months’ living expenses on hand in cash at all times.
- Track your total outstanding invoices. For me, this is a big one. Of course you’re going to record your outstanding invoices so that you know whether clients have paid you or not, but you also want to know how much money you should be receiving in the next 30-60 days. This statistic will tell you how aggressive you need to be about looking for or accepting new projects. For example, let’s say that your income goal is $7,000 per month. Every time you issue an invoice, you enter it into an Excel file with a column that totals your outstanding invoices, so that you know how much money clients owe you. So for example if your outstanding invoices only total $5,000, you know that the next month is going to be lean unless you take on a lot more work. But if your outstanding invoices total $9,000, you know that you can afford (at least from the financial point of view) to be choosier about the work that you take on, to work on some non-paying tasks such as updating your website or marketing to higher-paying clients.
- Track your business expenses. The easiest way to do this is by using a debit or credit card associated with your business bank account. That way, you don’t have to comb through your records at the end of the year, wondering whether that trip to the office supply store was for home or for work.
- Establish a business savings account. Another big one: at the very least, you need to set money aside for taxes. Depending on your situation and your tax bracket, this could be anywhere from 25-50% of what you earn. Every time a client pays me, I deposit the check in my business checking account and then immediately transfer 40% to my business savings account so that I am never in a bind when tax time rolls around. And also…
- Use your business savings account as a paid vacation fund. Freelancing doesn’t have many downsides, but one of them is no paid vacation. So, provide yourself with a good quality of life by having a paid vacation fund. For example, if you want to take off 4 weeks per year and work 48 weeks, start by putting $100 a week into your paid vacation fund. Then you’ll have $4,800 to “pay” yourself during your month off.
- Have some sort of retirement plan. My accountant likes to say that “Everyone has a retirement plan. Either you’re saving for retirement or you’re planning to work until you drop.” Retirement strategies are really diverse, and they depend a lot on your expenses, how long you plan to work, if you have kids and how old you’ll be when they leave home, and so on. Plus the not insignificant question of how long you’re going to live. But whatever you do, have some kind of plan in place.
- Set money aside for professional development and (why not) bonuses. It amazes me how many translators spend absolutely nothing on professional development and then wonder why their businesses are stagnating. In order to stay current in our industry, you have to keep your skills, knowledge and contact base current. Meaning that you have to learn new things. Take webinars, read books, do teleconferences, attend in-person conferences, join the Chamber of Commerce. But set aside at least 5% of what you make for professional development. And, if you have a good year, you really deserve a bonus. I once had a boss who left $50 in everyone’s mailbox on the last day before winter break; a manageable amount for the company, and an amount that everyone was excited to go and blow on something fun over the holidays. Consider earmarking some “fun money” for yourself, getting a new technology toy or treating your most valuable colleagues to a good meal at the end of the year!
Other ideas??
“Keep at least 3-6 months’ living expenses on hand in cash at all times.”
Ha ha ha …. that’s a good one, Corinne.
You seem to be forgetting that only people like Mitt Romney (who make 20 million dollars a year on a bad year when they are “not doing much of anything” as he famously put it) are taxed at 12.9%, while people like us are taxed at about 40%, and if you add medical insurance costs, it can be easily 60%.
Thanks Steve! OK, go ahead and laugh, but I think that the 3-6 month cushion is both possible and necessary. One of those “simple but not easy” things, like losing weight or getting in shape: you just have to spend less than you make. To me, the tradeoffs are worth the security.
Sure it’s not easy Corinne, but you’re right, and it’s absolutely vital. After about 10 years or so, you should aim to have a cushion equivalent to about one year’s cash living expenses (including mortgage/rent payments and similar outgoings). That doesn’t mean you can’t dip into it from time to time for major expense items, and then subsequently replenish it. And of course you should also stagger the maturity buckets of your 12-month “pot” so that – even when interest rates are at all-time lows, as they are now – you can still generate a modest amount of interest on at least part of the “rainy day pot”.
Steve, you’re right, saving up that much money is NOT easy! But I agree with Corinne that it’s a necessary evil, though it requires some often-painful decisions. And as hard as it may be to put away that money every month, I think it’s still easier than not having that safety net when disaster strikes.
I think the cushion rule applies whether or not you are a freelancer. Also, I am personally aiming for a 12-month buffer instead of 3-6. Still plodding towards it…
I admire people who can live frugally like Corrine or Andie …. but they are not married to my wife, nor do they have to pay my kids’ credit cards.
The 3-6 months’ living expenses is possible to achieve over time by saving a *fixed percentage of every translation job* for that purpose. I know. I used mine a couple of times before the most recent time, when I used it to emigrate from Zimbabwe to Portugal five year’s ago. It sure takes a long while to build it up again if you do have to use it!
@Steve: Since when do kids have credit cards? Judging from your profile pic, your children must still be quite young. 😉
Nice blog, as always, Corinne.
Hire a GOOD accountant. Discuss your business with them your regularly.
@Allison
1. My blog picture is from 1999. The way I look now, I thought it would be better to use a picture when still sort of looked like a human being.
2. My two sons are 23 and 24. Since the younger one just graduated from college in May, I only pay for his cell phone and car insurance now, until the end of the year, but for the last four years I was paying for his books, food and thinks like that through a credit card that he was using while the bills came to me.
I had a similar arrangement with my older son up until about a year ago. You can’t save anything when you don’t control expenses.
The one who just graduated is now working as a research chemist toward his MA and PhD while he is making enough money to pay his own expenses now.
So maybe I will be able to finally start saving money now, although I still don’t really quite believe it.
separate your business and personal finances: don’t assume that you will have to pay to operate a business account. I have two personal accounts, one is used for business and the other is personal. the bank know and don’t mind (in fact they suggested it). a professional recommended having the two accounts with different banks, I haven’t done it, but I think it’s a good idea. not all banks are created equal. pick one that is small-business friendly.
Track your total outstanding invoices: this year I switched from an Excel spreadsheet to Zoho (http://www.zoho.com) and its a vast improvement. I’ve got the paid-for account and it’s well worth the money as the time and frustration savings are gynormous.
Thanks for the Zoho tip, Seycen. I’ve been using manual methods so far but I hope to be busy enough to move towards automated tools soon. How long have you been using Zoho? Do you like it?
I use Quickbooks. I used a CPA to get my chart of accounts done first but since then it has been easy enough to keep up. Accountants love Quickbooks!
Hi Corinne,
Great post. I want to add this: https://www.waveapps.com/
It’s completely free and you can manage both personal and company expenses. Also completely automated so you can see where your expenses are going. Also has an invoice function.
Cool Canadian company that’s doing lots of good. Please check it out,
Anthony
I like the paid vaction fund idea best. It’s the part about actually putting the money in the fund that gives me the headaches!
Good article Corinne,
Yes, managing the financial side of things is not easy, but it is not easy for anyone and any business owner.
Two things used to amaze me (now I’m just saddened by them):
1) How many translators (and “translators”) just wake up one day and decide that this is what they are going to do. No business plan, not giving any consideration to the business side of being a freelancer. They would have never started their own “real” business, but they so heedlessly declared themselves translators and because they don’t perceive it as a “real” work or business, they conduct themselves accordingly. This leads to all sorts of issues for them and the profession in general.
2) How so many claim that it is hard to make a living off translation, citing all sorts of abusive practices and ‘hard realities’, while neglecting to acknowledge their role and responsibility in the formation of those practices and realities. Even worse, even when presented with the facts they don’t lift a finger and continue to hide behind excuses and passiveness (and cry about it – usually online).
So thank you for this article that might give freelancer a more balanced view on the financial aspects of being a provider of a commercial serivce.
Shai, I never thought about #1 but you make a good point. I suppose I was lucky in that I a) I had always assumed growing up that I *would* own my own business someday because my parents had, and b) for a time, a friend and I were very serious about starting up a full-service translation agency, so we wrote a business plan, consulted with our local SBA many times, brainstormed sales and marketing ideas, etc. Ultimately we dropped the idea, but it brought a lot of things into focus for me for my own freelancing business.
I think there is a real need in our industry for guidance on how to do (and grow!) business. Corinne’s book addresses that sore need, but there is certainly room for much more. Whenever I go to conferences, what I see translators drool over more than anything else are business tips from successful colleagues.
Anyone up for it? 😉
I think a freelancer should be very careful about #4, the amount of money they’ll be receiving in 30 – 60 days. Experience taught me from the hard way that a freelancer (or actually any business owner) should never trust the money they’re supposed to receive in a period of time. There’s always a chance that, that money may never arrive which makes all those plans depending on the future money very vulnarable.
Hi Ms. McKay:
I came across this article of yours while I was looking for a bookkeeping template for freelance translators and I just wanted to tell you that, as a newbie freelance translator who embarked on this journey a couple of months ago, I really found this piece to be very helpful and practical!
Though I am kind of having a hard time making ends meet this month, I’d try to follow what you said and hopefully that’ll pay me off eventually!
Once again I appreciate the practical pointers you shared with us!
I’ll keep reading your blog when I have free time 🙂
Great, glad it was helpful!!
I find it awesome that you made a list of tips so that freelancers can keep themselves on top of their expenses. Among these, I would recommend the tip of keeping a tally of one’s total income for a year to my classmate, who wants to start art commissions soon. With that, I would recommend her to a local bookkeeping service as early as now. That way, she can avoid getting penalized for not paying her taxes right.
This is great summary for freelance translators, I cannot stress the importance of lifelong learning in this industry, which helps to provide quality translation services and retain loyal customers.
Great article for those who are or want to become freelance translators.