Surviving as a freelancer

Reader question:

Something that I've been struggling with is how to save and budget as a freelancer (I'm not technically an employee, I bill for my time). With a steady pay cheque, it is a lot easier to track what is coming in and out and predict how my finances will look in the future. As a freelancer it is hard enough to remain afloat with all of the financial peaks and troughs—how can one expect to ever get ahead?

Kelley's response:

Great question! With the economic crisis still mounting, I might suspect more and more employees are facing the fact of working as a freelancer or consultant for several companies as opposed to just one.

The opportunities for advancement, increased income potential and of course, flexibility make this career option an advantage to many. However, you're right that budgeting and income fluctuations can be frustrating.

I generally don't recommend using credit personally to "get by", however, as a freelancer, you need to think like a business. You likely need some corporate basics as well to market your services to your community such as a website, hosting costs, business cards, etc. Keeping good track of the use of this credit might be a prudent option as well as a tax advantage (the interest on a loan is tax deductible if used for business purposes.)

If you are currently employed (thinking about making the move), now is the time to seek that line of credit with your lender. Once you're truly in a "freelance" position, lending becomes more difficult (because of the lack of a steady pay cheque), although, not impossible. Before you start seeking credit, take a look at your credit report (see http://www.equifax.ca/ or http://www.transunion.ca/). Ensure that you have a conversation with your banker before she also pulls your score and give her the details of your situation in advance. If you're likely to be approved, she will still have to pull your report. But if you're not likely to be approved, then the extra "hit" on your report can further pull your score down.

If you need to build your corporate credit, sometimes the only option is a cash secured loan. In this case, an individual puts up say $1,000 for a $1,000 loan. It might sound absurd, but it will build your credit and relationship with that bank should you require further lending in the future.

The most prudent, but often difficult option is to build an emergency fund (over time) that can cover at least 3 - 6 months of your living expenses. As most Canadians, even those with steady incomes don't follow this advice, I have listed using credit as an option. But ensure to start with some savings each month into a contingency fund.

Some other things to think about as a self employed individual are:

• Disability and life insurance. As you don't have a company to fall back on for sick days or disability, you must protect yourself even with a minimal insurance policies. Call an insurance broker for rates as they vary vastly and consider carefully a personal policy as opposed to say the insurance that your lenders offer (i.e. you can purchase life and often disability insurance on your credit card balances, loans, mortgages, etc. but often times, these are much more costly than if you purchased an individual policy. Depending on your health and age, you might be paying far less with a personal policy).
• Start to build good corporate credit and check your report at least once every 6 months. Having a strong overdraft and line of credit can get you through the income ebbs and flows.
• Build a professional team. Bankers, accountants and other professionals can save you time and money. Know when to bring in the pros and remember, to always shop around.
• Lastly, you're now running a corporation even if you're a solo-preneur (a one person business). The only way to ensure that your company will survive is to either A. cut expenses or B. increase income (and of course, a combination of both). How can you address both creatively? Grab a copy at your library or bookstore of my newest book, She Inc. which details both strategies for maximum success.