Most people suck at managing money.
In 2014, 1 in 5 Canadians reported saving nothing for the year.
In fact, according to the Toronto Star,
…the average [Canadian] household has roughly $1.64 in debt for every dollar of disposable income.
And I don’t imagine that figure is much better in the United States or elsewhere in the world.
So when it comes to quitting your day job to start an online, service-based business — you might need a bit of financial guidance to get started.
And that’s okay!
I’d be happy to help.
Now, please understand, I am not an accountant, a tax lawyer, or a financial adviser. But I did leave behind six-figure earnings to start freelancing. And at the time, I had no clients to start with… just me and my computer tucked away in a corner of my house.
A house that I had just spent a good portion of my savings on, including the down payment, closing costs, and renovations.
So what I’m about to share with you are seven simple financial tips for your first year of freelancing… some advice that worked well for me, and can work for you, too.
Consider this a bit of a lesson in common sense from someone who has been where you are now.
(1) Mitigate Expenses
Alright… the first thing I’m going to dive into is budgeting. More specifically, drastically reducing your expenses before you take the plunge into full-time solopreneurship.
Well, because budgeting is one area of finances almost no one likes… so let’s get it over with first, shall we?
To begin, let me share a story with you…
Household A on your street earns an annual income of $65,000. If you ask the heads of Household A how much it costs them to live each year, they’ll tell you $65,000. There isn’t a penny to spare.
Stroll down your street a bit and ask Household B the same question. The heads of Household B will tell you they earn $75,000 each year, and it costs them $75,000 to live. They’re just getting by.
Unfortunately, this is the story in many households across Canada and the United States. We don’t live below our means — we spend every dime we earn, and in a lot cases, more than we earn.
It keeps us in a perpetual cycle of working at jobs we don’t like to buy things we don’t need, just to give off the appearance that we’re more successful than we really are.It keeps us in a perpetual cycle of working at jobs we don't like to buy things we don't need, just to give off the appearance that we're more successful than we really are.Click To Tweet
Now, I know what you might be thinking…
“No, not me, Brent! I’m good with money. I save a few dollars each month, and I don’t buy fancy, frivolous things.”
Well, if that’s true, great!
But have you ever tracked what you do spend your money on each month?
Most people would be shocked if they looked at some of their daily and monthly expenditures on an annual basis.
See, the heads of Household B — Mr. and Mrs. Smith, let’s say — buy a fancy coffee from Starbucks every morning for $3 each. Multiply that over 240 working days each year, and that’s $1,440 — or nearly 2 percent of their annual income.
Now add on dining out, new clothes, entertainment, piano lessons, and more…
All the disposable income being spent on those categories starts to add up, doesn’t it?
Before you start freelancing, I strongly urge you to find every possible avenue to cut your personal expenses.
I often tell the story about how I bought a house and quit my job to start freelancing in the same day. That’s a true story, and it’s true that I started out with no customers and no idea what I was doing.
But what I routinely fail to mention is that the mortgage payment on my house in Fort Erie is less than half of what my rent payment was on my apartment in Toronto.
Yes, moving to Fort Erie cut my expenses, and it gave my wife and I adequate space to each work independently on our own freelancing ventures.
But enough about me… let’s get to the point.
The painful truth?
I’m recommending strongly that you severely slash your expenses before leaving your day job.
- Reduce your cell phone plan, cancel your cable TV subscription, and go back to using the free version of Spotify.
- No more dining out of any kind — including coffee runs — and cut back on expensive meat and cheese while shopping for groceries. Potatoes and beans are cheap!
- Your family can use the in-house Walmart brand of soap rather than the fancy Bath & Body Works stuff.
- And yes, your kids will survive being pulled out of piano lessons for the next few months. Keep them busy by having them wash your dogs and mow your lawn — that way you can fire your groomer and landscaper, too.
Are you getting the point?
Everyone — and I mean everyone — in your household should be prepared to make some sacrifices until you have a regular monthly freelance income coming in.
My best recommendation?
Track everything you, your kids, and your spouse spend money on in a month. Then figure out how you can cut that number in half — at least for now. I would hazard a guess that most households in North America could slash their spending in half and still live a higher quality of life than billions elsewhere in the world.
(2) Understand Money
- Planning to win the lottery?
- To marry rich?
- To receive a large inheritance?
Then you’d better start learning how to make and manage your own money.Planning to win the lottery? To marry rich? To receive a large inheritance? No? Then you'd better start learning how to make and manage your own money. Click To Tweet
Most of all, I f*cking hate it when I hear people say,
“I’m not good with money!”
Then get good, dumbass!
And get good in a hurry.
Ignorance is no excuse. Even if you aren’t good with money — or numbers in general, for that matter — your financial success is your responsibility and no one else’s.
The difference between being good and bad with money is the difference between retiring at 50 or 65…
…it’s the difference between traveling and just pinning pictures to your dream board…
…it’s the difference between sending your kids to an Ivy League school or a community college.
And with the amount of information freely — or inexpensively — available to you, you have no excuse not to understand money.
No, you don’t need to go earn a degree in economics, but how about starting by reading a book…?
Here are three I highly recommend:
Do you know what all three of these books have in common?
They focus on regular people with typical earnings.
None of them talk about hiding your family fortune in offshore accounts… rather, they focus on simple strategies to pay yourself first and make saving automatic.
Buckle down and get good with money — understand the numbers — especially going into your first year of self-employment. You can become very wealthy without having to earn $500,000 a year.
(3) Know Your Runway
You don’t need to accumulate a small fortune before quitting your job to start freelancing.
Whether you source small jobs through Fiverr or through Upwork, you can make your first few dollars within a matter of days.
What you really need to be concerned with at first is covering your shortfall. Even after mitigating your expenses down to — let’s say — $2,000 per month or less, you may still have a shortfall to cover if you only earned $700 in your first full month of freelancing.
It isn’t uncommon for new freelancers to work hard in the early days for very little money.
For instance, one of my favorite freelance writers, Elna Cain…
…often talks about how her first writing gig(s) earned her a whopping $1.50.
Now, for some people, this isn’t a major concern. Some people start freelancing as a side hustle, and build up their freelance earnings while holding down their day job. Once their side hustle is bringing in enough revenue to live on, they leave their job.
And if that’s what you want to do, go for it.
For me, I knew that wasn’t the right option.
I tend to perform very poorly when my focus is divided in two places.
I knew that diving in with both feet was the only option for me.
So when I left my job, I had 3-4 months worth of expenses saved in a cash account that I could easily access. This was my runway. You may wish to save a bit more, or you might be comfortable with less… either way, while you’re still working, it would also be a good idea to apply for a low interest line of credit you can fall back on if your runway runs out.
The last thing you want to be doing is cashing out your 401k or RRSP — or racking up high interest credit card debt — because you ran out of cash.
And whatever you do — start working your ass off as quickly as possible to win your first freelance jobs. Here’s a list I put together of 11 different types of freelance jobs and how to price them. That ought to help.
(4) Keep Receipts
A simple financial tip for your first year of freelancing? Keep every receipt for every purchase that is even slightly related to your business.
Because one of the best things about being self-employed is that you can write off a lot of your regular monthly expenses.
Do you use 10 percent of the space in your house as a home office?
You can write off 10 percent of your housing expenses, including your utilities.
Do you use your personal cell phone for business calls?
You can write off 50 percent of your monthly cell phone bill.
Did you purchase a domain name for your business, or perhaps a hosting package?
Most likely, you can write off the entire thing as a business expense.
The simplest explanation I can give you for writing off business expenses is as follows…
When it’s tax time next year, hire a good accountant to prepare your tax return. If you know how to do it yourself, great… but for me, it isn’t worth my time. And if I make a mistake, I could end up having to invest more time and money down the road to correct it.
So I’d rather have a professional do it right the first time.
And I recommend you do the same.
Take all of your accumulated receipts to your accountant, and let him or her sort through them.
He or she may conclude that you indeed earned $45,000 last year, but you have $6,000 of legitimate expenses to write off. That means you will pay taxes on $39,000 of earnings rather than the original $45,000.
Pretty cool, right?
Of course, if you want to save some time and money next year, you could prepare your own monthly profit and loss statements… often referred to as a P&L Statement for short.
All this means is that you track your own monthly earnings and expenses and self-report those numbers to your accountant.
Gina Horkey — a name virtually synonymous with freelancing excellence — makes a point to not only do her own profit and loss statement each month, but to share the results with us on her blog!
It’s rather simple to do, actually… a few minutes spent on this each month will give you a sense of how much to save for taxes, and how much you are presently earning.
Would you like me to send you a free P&L Statement template you can use?
My gift to you.Brent Jones is giving away his template for tracking your monthly revenue and expenses. Would you like him to send you a free copy?Click To Tweet
Just make sure to use it!
(5) Save for Taxes
When you work for yourself, you start thinking about your money a little differently, don’t you?
Let’s say — in your day job — you earn $2,500 gross bi-weekly. Your net pay after taxes and deductions is $2,000.
In most cases, you probably budget your spending based on that second number. Every two weeks, you get $2,000, so you have to make sure that amount covers all your expenses. In fact, you don’t even think of the $500 in deductions on your pay check as an expense because it happens automatically.
But it is an expense.
And that becomes apparent very quickly when you are self-employed.
You suddenly have to start saving money for tax season, which comes straight off the top of your earnings each month.
And the more you earn, the larger a portion you will need to save for your taxes. For your first year of freelancing, I would recommend saving somewhere between 20 to 25 percent of your net earnings — after expenses — for taxes… more if you have an exceptional first year.
Save that amount each month in an account you don’t easily have access to. That way, you won’t wind up accidentally blowing your tax savings in Vegas one weekend.
Doing this each month also forces you to think about your finances a little differently.When you work for yourself, you start thinking about your money a little differently, don't you?Click To Tweet
Here’s what I mean…
Let’s say you want to buy something that is $100.
When you had a steady bi-weekly net pay of $2,000, you simply put aside $100 to make that purchase.
But as a self-employed freelancer, that item doesn’t cost $100 anymore. It costs $133.
Because you have to earn $133, and save 25 percent — $33 — for taxes, in order to have $100 available for that purchase.
Personally, thinking of my purchase decisions this way helped me to spend less and live more frugally in my first year of freelancing. I hope it does the same for you.
(6) Learn Local Tax Laws
This isn’t something you have to worry about on day one… but at some point, you may need to begin charging your clients sales tax on the services you render.
How much tax and on what types of jobs…?
I can’t say.
I don’t know the tax laws in your country, state or province. But if I were you, I would find out sooner rather than later.
For me, living in Ontario, once I earned more than $30,000 in total, top line revenue in any consecutive 12-month period, I had to begin collecting GST or HST from my Canadian clients.
And let’s be clear — the government isn’t going to give you or I any bailouts. If it was your legal duty to register your business and collect sales tax — and you failed to perform that duty — you could be fined, jailed, or made to pay back what was supposed to be collected.
When it comes to the CRA (Canada) or the IRS (United States), don’t f*ck around. Know your responsibilities.
I’ll leave that point with you.
(7) Spend Very Little, if Anything
I decided to save the best point until last, which is spend very little — if anything — in your first year of freelancing.
…and nowhere in either of them do I see,
“Invest your life savings year one to get started!”
Your only real expense you need to get started running an online, service-based business is a website.
Yes, you may need to invest $10 to buy a domain name.
Yes, you may need to invest $100 to $150 for reliable shared hosting.
But no, you don’t need a premium WordPress theme or plugins.
To be totally honest…?
My first website — the one I set up back in 2014 when I first started freelancing — was ugly as hell.
And guess what?
I still won clients.
So when it comes to fancy logo designs, business cards, office space, a faster computer, and so forth… skip it.
At least until you start making a healthy income.
Want to invest in a few extra Connects on Upwork…?
Maybe… but have you exhausted other freelance job platforms first?
Even courses and other avenues for eLearning should be purchased sparingly in your first year. There are enough free resources online to keep you busy learning all year without having to invest in many paid products, if any at all.
And be proud of it.
And don’t let any so-called gurus online try to convince you otherwise.
The True Cost of Poor Financial Habits
Let me conclude this post by sharing something with you… I wasn’t always good with money.
When I was 19 or 20, I started a business of sorts. I ran a local franchise for a direct sales company, and I just knew that I would be a millionaire within a matter of years.
- I spent frivolously,
- I ate almost every meal at expensive restaurants,
- And I bought a new car I didn’t need.
…the list goes on.
Within a year, my business not only didn’t profit — I actually lost money.
And my personal spending habits had racked up more than $60,000 in high interest credit card debt.
How high was the interest?
Well, I once calculated that if I were to go get a regular day job, my first $45,000 or so in earnings would go towards covering nothing but my minimum payments.
So, being a young college dropout, and not seeing a clear path out of my predicament, I declared bankruptcy.
I lost my car and some of my belongings were repossessed. I couldn’t even qualify to get a cell phone in my own name for the next several years, let alone another credit card.
And the apartment I next moved into was undesirable, to say the least. My credit score was so poor, I couldn’t qualify to live anywhere else.
Why do I share this story with you?
Because even though freelancing requires very little upfront investment to start, it can take a little while to earn a significant income.
I worked very hard in the early days of freelancing — long hours — and within a few months, I was earning enough to comfortably survive on. Several more months would pass — the better part of a year — before I replaced my day job earnings.
And had I not adequately prepared financially to start freelancing, the past could have repeated itself for me.
So please, follow these financial tips for your first year of freelancing… how smart you are with your money in the early days could ultimately make or break your success.How smart you are with your money in the early days could ultimately make or break your success.Click To Tweet
And if you didn’t already, please download a free copy of my monthly profit and loss statement:
Good financial records are extremely important to your overall success. You’re not just a freelancer — you’re a businessperson now, too. Remember that.
What other financial advice would you give to new freelancers? Share your thoughts in the comments below, and I’ll be sure to reply.