One thing you want to avoid as a freelancer is getting those dollar signs in your eyes as soon as you see some cash coming into your business. It’s very dangerous to look at that pile of money and assume it’s all yours for spending!
So in this article, I want to talk about a very simple but effective way to manage the money that you earn and ensure you don’t get carried away.
Table of contents:
- Adapting the Profit First System for Freelancers
- The Formula for Separating the Money
- Using the Profit First System as a New Freelancer
- Learn More About How to Build a Sustainable Freelance Business in our Skillshare Course
- Related Articles
Adapting the Profit First System for Freelancers
The system I want to introduce you to is based on the popular Profit First system, created by Mike Michalowicz. However, I’ve simplified and adapted it a little for our needs as freelancers.
To start with, you need to find a bank account that will allow you to easily separate your money into different vaults. Alternatively, you can do it via a spreadsheet, if you are really disciplined and organised.
I find that physically separating the money into different vaults helps to make the separation feel more real. For me personally, it works much better when I keep the money in different silos. This is why I recommend signing up for a business account which allows you to do this easily, early on.
Once you have the right account, it’s time to start dividing the money coming in using the simple formula.
The formula for separating the money
Whenever money comes into my freelance business – no matter the amount – I always use this formula to separate the money into different vaults and avoid any potential headaches at the end of the financial year.
Let’s say a client has paid me £1,000. I immediately split it using the following percentage:
I take 5% of the money as profit and 48% as my salary – this is the money that I use to cover the cost of living and use the rest however I want.
Next, I allocate 25% to expenses – this money serves to cover all costs that occur while doing projects – for example, software subscriptions, external services, marketing costs, and similar.
Finally, I put 22% in a vault dedicated to taxes. This gives me some wiggle room and ensures that I’m always prepared for the tax bill at the end of the year. Also, putting this money aside – out of my main account – removes any emotional attachment to it – it doesn’t feel like it’s my money, and I don’t feel like I miss it when I have to pay the taxes. It’s just like with traditional jobs, where you don’t see the money that goes straight to a taxman, so you don’t count on that money.
The best thing about putting aside 22% of your earnings for taxes is that, usually, you will have some money leftover too, that you can then keep for the next year (or treat yourself!).
The Profit First System for new freelancers
The philosophy of the Profit First system for freelancers is simple – you should be earning a living from your business, but you should also be investing in it as you go. This simple system allows you to do that, cover your taxes, and spend only the amount of money you can afford to , which is why it’s especially beneficial for new freelancers.
Of course, you can and should adjust percentages in the categories as your freelance business grows and you learn more about your business needs.
But I recommend giving it a go with the above percentages as you learn about your own freelancing business, or until you get comfortable with managing your finances.
You can even take the system further if that will work for you and split the salary into further categories such as savings, groceries, utility bills, pension etc.
I put aside 10% of my salary into a pension pot for example – otherwise, I would easily forget to put money into it.
If you have any questions about this system, please don’t hesitate to drop them into the comment section below and we’ll do our best to reply to them as soon as possible!
Until next time,
Maja
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