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This post is the first half of our two-author, two-part series on smart saving.

Many Freelance Switch readers are probably aspiring professional freelancers with a day job. Shama Hyder earlier provided 5 steps for switching from side gig to full time. There’s one really important step that Shama alluded to and that I’d like to expand on: savings.

Before you jump into full-time professional freelancing, you want savings. (Read further below for an explanation why, beyond the obvious.) Do not venture into full-time freelancing without savings.

General Savings Tips

1. Save for the future.
   Don’t save for next week, next month, or later this year. Lean periods in freelancing careers can and do ruin marriages and family relationships. Think like a business owner, not like one person constantly looking for freelance work. Use longer-term investments such as bonds or blue chip stocks (that you’ve researched well).
2. Use liquid investments.
   Put most of your “will need it soon” money into liquid investments such as an online savings account (OSA) or possibly some mutual funds. Do your research before investing in either. Some OSAs and funds have ridiculous front- and backend fees, as well as penalties for early withdrawal. If you end up with one of these, you’d have been better of keeping your cash in a cookie tin!
3. Have an emergency fund.
   Determine what consitutes an emergency, how much you can afford to keep, and then keep it somewhere that’s easy to get at (i.e., liquid investments.)
4. Keep taxes separate.
   If at all possible, have a separate bank account for the taxes (income, property) you will be paying.
5. Do automatic withdrawals.
   Whether for debt payments, setting aside taxes, investing, or long-term savings, automatic withdrawals enforce a schedule and reduce the time you spend on personal finances - an activity most people seem to despise but need to do anyway.
6. Use secure Internet connections.
   Don’t do online banking or PayPal transactions over public Wi-Fi access. Should be obvious, but in case you need a reminder.
7. Pay yourself.
   Even if it’s only a small amount weekly, bi-weekly, or monthly, pay yourself out of freelance earnings. This forces you to keep your fingers out of your business funds, makes accounting easier, and ensures that you don’t build resentment towards working. It’s important to mentally separate work and business funds.
8. Keep a financial spreadsheet.
   In addition to keeping ALL your receipts (for possible deductions), make a habit of keep an Expenses and Savings log book updated regularly (daily, weekly). You could do this in a print log book, but also keeping a spreadsheet means being able to file taxes more easily. You can “see” your expenses collectively, which might give you clues as to where you’re spending too much. There are all kinds of free web-based spreadsheets (such as Google Spreadsheet and Zoho Sheet), or if that makes you uncomfortable, the desktop based Open Office, which is like MS Office but free.

Types of Savings

I’ve broken down savings into five types, below. You won’t necessarily need five different bank or online accounts, but you need to mentally separate the funds, and keep them separate.

1. Operating Capital

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This is what you need to keep your freelance business running smoothly and your personal finances covered. Costs to cover, as applicable.

1. Day to day items such as office supplies.
2. Less regular but necessary business expenses, such as equipment (computers, printers, mobile devices).
3. Car expenses: gasoline, parking, car payment, potential maintenance.
4. Clothing allowance and laundry costs. That is, if you don’t have an in-home washer and dryer.
5. Rent, heat, hydro.
6. Groceries and meals.
7. Hygiene items - especially if you work offline
8. Phone costs. (You can probably deduct some of this. Make it easier by using a dedicated phone or cell phone for business.)
9. Internet costs: access, hosting, domain names.
10. Health and property insurance. Also, business insurance, if your clients require it.
11. Any other monthly debt payments for “necessary” items.

Add up these and any other “necessities” for one month, then multiply by 6. Six months operating capital is the minimum recommended to have on hand. But if you have other people relying on you financially, I’d recommend at least another 2-3 months.

I say this from hard experience - operating capital is crucial to success as a freelancer. It is a business. Things might seem rosy when you make the switch to full-time professional, when all kinds of new contracts come in, but downturns are commonplace for freelancers. If you can’t weather those downturns with savings, freelancing will be a rough life that will make you miserable.

2. Emergency Funds

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These funds are much harder to define and to size up. The amounts you keep for emergencies depend on your circumstances and even the country you live in. For example, when it comes to health, Canadians are on average a bit better covered than Americans. Hospital and surgery costs can climb into the thousands, unless you have a good health insurance plan, which is something that a lot of freelancers neglect.

Other “sources of need” for emergency funds are old cars that break down or go kaput, relatives out of work, illness in general. I’m sure you can think up more. Sitting on your ass at home all day freelancing can cause a variety of illnesses, and if you’re too busy to be active, you’d better make financial allowances for healthcare.

3. Taxes

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Every time a client pays you, approximate your income tax rate, apply it to determine what you might owe (before deductions), and immediately set these funds aside. If you can’t/don’t want to keep them in a separate bank account, then keep very good tabs on the totals - such as with a spreadsheet - and do not dip into these funds. If you do not have to pay quarterly installments, then you might consider putting this money into an online savings account, which give the highest savings interest rates at present. Do not put these funds into mutual funds or other semi-risky or risky investments.

If you have a mortgage, you will owe regular city property taxes. Set aside tax funds for this purpose as well. Unless you have an overwhelming reason not to do so, you can use the same account as you do for your income taxes.

Even if you cannot claim enough deductions to reduce your taxes, you can at least earn some interest on the amounts - which likely won’t happen if you stuff them in a regular bank account.

4. Long-term and Retirement Savings

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Dr. Andrew Weill was on PBS recently and said that some scientists believe that we humans might achieve ages of 1,000 years, and that this could happen in our lifetimes. Dr. Weill doesn’t believe that himself (if I understood correctly) and neither do I. Though I do believe 100 might become more commonplace. (My own father is nearly 80 and he used to think he’d be like his immediate relatives, who all passed away before 45, or even younger.)

However, if this Methuselah factor is true, then in any society that thinks 65 is old and doesn’t respect the elderly and/or give them work opportunities, freelancers especially need to save for the long-term. Thinking of your mortality is never easy, but it’s a necessity. If you do stay healthy after retirement, you will probably want to do more than sit at home or garden, and it will take funds. Your savings, plus compound interest, will have to take care of the general cost of living decades from now, plus any activities you’d like to enjoy. However, if you wait to start a long-term fund, you lose out on a lot of the power of compound interest.

5. Play Funds

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You know the old saying: “All work and no play makes Johnny a dull boy.” It applies to both sexes, but goes beyond just being dull. Humans are social creatures, and not allowing yourself to “play” once in a while affects emotional, mental, and physical health. You simply cannot work non-stop and not accumulate negative effects upon your health.

Decide what you can afford, based on earnings, for non-work activities - even it’s a couple of movies each weekend with someone, a dinner out, or a vacation.

The Emotional Benefits of Saving

If you’re an offline freelancer (and sometimes online), there’s something else you might have to contend with, if you go full-time: jealousy. My experience is that even when you’re not after the job of the employee of a client, some people will want to think you are. They’ll also think that you’re making lots more money than they are, and that they should have your job. (I’ve earned far less overall in my career as a freelancer than I would have as a full-time salaried employee doing similar work. There have been long periods of no work. I just happen to like the variety and freedom of being a freelancer.) They can and will make your life miserable - especially if you have the audacity to ask questions, even if it’s your job to do so.

If you’re a hot-headed, passionate but hard-working person, that kind of response can get to you emotionally, affecting your prospects and ultimately your finances. This in turn can drive you to a state of mind where you seem desperate basically because you are. Which almost guarantees you won’t get work when you need it most.

On the flipside, being nonchalant is far more likely to ensure you’ll get the contracts you apply for (assuming you’re qualified). The best thing you can do for your freelancing career is to save up the funds that allow you to automatically be in a nonchalant state of mind. When you’re not worrying about how you’ll pay the bills this month, you won’t come across desperate, and you might even exude quiet confidence - the key to getting contracts and building up even more savings.

Original post by FreelanceSwitch.com

When I came up with the headline for this article, I figured that many freelancers are so busy that they probably don’t have any time to organize their tax information before they hand it over to their accountants. We’re all so focused on our businesses—who has time to do nice for their accountant? You do, actually. And the payoffs could be big!

It really doesn’t take much to get things together to make things easier for your accountant, and perhaps save time. If you’re like me and you toss pay stubs and receipts into one large envelope during the year, you may want to break things up so your accountant can easily work through your taxes. This saves your accountant time, and it saves you money. Also, I don’t use anything fancy for invoicing (something I need to change, I suppose) but even organizing your Quicken files can be a huge help for the accountant, save you money, and offer more time for you to ask questions and help your business.

You’ll find that little things will make tax time much more manageable for you and your accountant. Here are some easy things you can do to get organized.

Sort your receipts. There’s no reason for your accountant to have to sort through your personal receipts. I always make sure to sort my gas receipts into one pile, and make sure my postal service receipts are in another. Make sure you highlight what items you purchased you are claiming as a deduction—some receipts include other merchandise you purchased that’s not eligible for deductions. I then add up the amounts and put them on a sheet of paper for her stating how much I’m claiming under the various topics.

Sure, I could just let my accountant do it all, but then I’m paying her to sort through my receipts. Who knows if she’ll need to call with questions, which takes more time. This is why it’s good to do whatever you can yourself—you’ll save money!

Compile forms. In the United States, we have a form called the 1099 that explains how much you’ve made with a client for the year. In my case, I haven’t been taxed on these amounts, so I need to make sure I collect all of them (one for each employer, in many cases) before calling in my accountant. I simply put them together with a paper clip and add up the total amount they come to.

I also give my accountant a spreadsheet of what I’ve earned. Some of the amounts there do not have corresponding 1099 forms, so I’m careful to mark them so my accountant can add things up. I also make sure to give her bank and asset statements from the year that cover things like my IRA and CDs. I like to give her all the background materials necessary in one shot.

Question everything. One thing I do each year is make a list of questions for my accountant. This includes questions on things that I’m not sure if I can deduct. This year, for example, I’ll be earning royalties on my book, so I’ll be sure to ask her about that. I also purchased my first home, and there are tax programs that will aid me tremendously.

Think about things you purchased and life events that could change your tax status. Ask your accountant about purchases that you can depreciate over the years. Always make sure to ask when you have any questions—this is what you’re paying the accountant for!

Do your research. For things like healthcare, I always make sure I have all my checks together. I go to the pharmacy, which prints out a list of my co-payments for the year. You may have purchased some business-related books on Amazon that you don’t have receipts for. Anything that could be online or that you don’t have the receipts for, take the time to get those numbers together.

For example, I can deduct the cost of my contact lenses, so I’ll be over at 1800contacts.com to get a yearly statement showing how much I have paid. Little things pay off, especially when you can only deduct them in a year’s time.

Get an accountant. This sounds pretty straightforward, and it is. But it has to be said, because there are so many people who think they can do their taxes on their own, or using a do-it-yourself software program.

I believe anyone who considers her or himself as a business should practice like a business. This includes hiring out a professional who can make sure you’re getting the most out of your deductions and tax standing, someone who can help you institute sound financial practices, and someone who can make sure you’re in compliance with laws. For a hundred or just a couple hundred dollars, you can hire someone who will help you do all of this.

So once you find that accountant, consider taking time out to make sure you’ve got everything together so you can hand it over in one shot. Yes, you pay this person to do the work, but you can simplify his or her job and save money by preparing your statements and deductions. That way, you can rest assured that you’ve done everything necessary to make tax season as breezy as possible.

Got a tax tip to share? There are plenty out there! Post a comment!

Kristen Fischer is a freelance writer living in New Jersey. Her first book, Creatively Self-Employed: How Writers and Artists Deal with Career Ups and Downs is available at www.creativelyselfemployed.com. Her second book is due out this Spring.

Original post by FreelanceSwitch.com