Managing your finances as a freelancer can be tricky. From invoicing to taxes, there’s quite a bit you need to think about and stay on top of. I was so excited to get paid when I first started freelancing. The extra income was genuinely life-changing. All I could think about was the extra money coming in, and the things I could do with that money. Managing my freelance finances properly, and responsibly, didn’t even cross my mind. I just told clients how much it would cost, sent them my PayPal email address and waited to get paid.

This method worked nicely for a few months, mostly while working on smaller projects for people in my local area. It wasn’t long before I started getting asked for invoices, alternatives to PayPal, if I was VAT registered, and other seemingly random questions. Those questions sparked a bit of panic. I started to question if what I was doing was the right way to do business, or even legal. So I figured it was time to start taking the income I made from freelancing seriously and start managing my freelancer finances properly.

In this article, I’ll try and break down everything I learnt about managing my freelancer finances in the hopes it’ll help someone avoid the same mistakes I made.

Invoicing

When I first started freelancing, understanding what an invoice actually is was a lesson I had to learn quickly. I’d seen invoices before, but to me, they were just bills—simple pieces of paper showing what someone needed to pay or had paid for a product or service. While this is almost true, there’s a bit more to it than that.

An invoice is more than just a bill at the end of a project. It’s a formal document detailing the financial transaction between you and your client. Think of it as an official request for payment that outlines the services or products you’ve provided. It’s not only a record of your work but also a crucial document for accounting and tax purposes, both for you and your client. For an invoice to be considered ‘valid,’ it needs to include specific information.

Managing Finances as a freelancer. Image of a invoice template with notes showing the key points an invoice must have
Getting your invoices right is important. There are a number of things an invoice must have to be valid.

Invoicing is something I wish I’d figured out much earlier in my career. As soon as you start working with businesses or get yourself an accountant, they’re going to want to see invoices. There are a variety of services available that can help you create and manage your invoices. Most accounting software has integrated features for raising and sending invoices, which can streamline the process significantly.

Spending the time early on to get your invoicing process right has so many benefits. It’ll help you get paid promptly, it looks professional, and it’ll make your accounting so much easier.

  • Key Takeaway: Spend time figuring out an invoicing process as quickly as you can. You want to be ready to send invoices as soon as you start billing your first client.

Track Your Time and Bill Accurately

I wanted to be paid for the time I was working. I’m pretty sure every freelancer wants to be paid for the time they work. But if you’re not tracking your time, how can you accurately bill for it?

Back when I first got started, I didn’t track any time. I just guessed. If I was billing by the hour, I’d get to work and then estimate what time I started and how long I’d been working. This is incredibly inefficient and resulted in me losing so many billable hours. Not only that, I wasn’t actually logging all the work I did. If a client needed Google Analytics set up, I figured it’s a 10-minute job so I’ll just do it. Replying to emails or hopping on calls… equally quick jobs so it doesn’t matter right? Wrong. Those quick jobs might only take a few minutes, but minutes become hours, really fast.

I first really became aware of the issue when I was looking over a statement of work from a solicitor. I couldn’t believe they were billing for everything. They had itemised everything from contract writing to reading an email (£56 for 6 minutes of reading by the way). Initially, I questioned why they’d be so pedantic, but then I realised they weren’t. They’re just billing accurately for their time. And you should too.

So now I religiously track my time. I have a time-tracking app available on every device I use or carry. The first thing I do when I start any kind of work is start a timer. Sure I don’t always bill for the time (I still don’t bill for reading an email from a client – but I log it), but keeping a record means I can bill accurately and get paid for every minute I work.

  • Key Takeaway: Get used to tracking your time. You can only get paid accurately for the work you do if you know exactly how long you spent doing it.

Accounting & Recording Your Freelancer Finances

Accounting and taxes may not be one of the most exciting aspects of freelancing, but keeping accurate financial accounts, and considering your tax obligations at every step, will save you some major headaches further down the line. Keeping accurate and up-to-date financial accounts is the cornerstone of a healthy freelance business. Without proper accounting, it’s easy to lose track of your income, expenses, and overall financial health. Not to mention, sooner or later, the tax man will come for his share. And not having his share ready can have serious implications.

When I first got started, everything just went into my personal bank account and I did what I wanted with it. This got messy, really quickly and is not a great way to manage your freelancer finances. It’s not against any law to have your freelancing income going into your personal bank account, but when you’re trying to sort your taxes out, it becomes a bit of a nightmare. So getting a dedicated bank account for my freelancing finances was a game changer.

I got my business account with Barclays and linked the account up to Quickbooks (which was desktop software at the time). It’s surprisingly easy to do your own basic bookkeeping with the right tools and a dedicated bank account. The main takeaway here though should be to absolutely, always, religiously, keep your personal and freelance finances separate.

  • Key Takeaway: Keep your personal and freelance finances separate! Use different bank accounts and never let the two mix. And keep a record of everything you spend money on from your freelancing account.

Prepare for the Tax Man

I can only speak for my experience in the UK when it comes to taxes and managing my freelancer finances. But I imagine the advice is the same regardless of where you are… there’s always a tax man looming. So be ready for him. I was already earning a fair amount as a freelancer before taxes even crossed my mind. I was having a conversation with a friend who was telling me about the hassle of completing his tax return. Then I got home to see that old TV advert reminding me that the tax deadline was looming. So I started digging, and quickly realised I was in a bit of trouble.

While I was busy earning as a freelancer and working full time, I hadn’t considered the fact that the extra money I was earning was taxable! So I scrambled around trying to find the right forms and figure out what I needed to do. Long story short, I got a letter through the post informing me that my freelancing activities for the past year or so meant I needed to pay an extra few (or multiples of a few) thousand pounds in tax. I was caught completely off guard, and trust me, they don’t give you much time to pay up.

So here’s my secret now… any income I receive as a freelancer gets split. 30% goes straight into a holding account, the other 70% goes into my main business account. This isn’t perfect, sometimes 30% won’t be enough. But by saving 30% of everything that comes in, I can guarantee I’ll always be able to cover the majority (if not all) of the tax bill.

VAT

The other thing to think about when it comes to managing your freelancer finances, at least in the UK, is VAT (Value Added Tax). Even as a freelancer, if your income exceeds a certain amount, you need to register and start charging for VAT. Luckily this is a bit easier to manage, as it’s added on top of your regular fee. So if I’m invoicing a client for £5000 worth of work, the actual amount I invoice for would be £6000 (20% VAT). Once the client pays, I take the 20% and put it straight into another holding account. This guarantees I’ll always have all the money I need available to pay my VAT bill. And because you can start claiming back VAT at this point, you’ll usually have more in your holding account than you need.

  • Key Takeaway: Think about what Taxes you may owe as soon as you start earning. And save for them so you’re not left with a big bill and no way to pay it.

Handling Expenses

Every business has expenses. If you’re not aware of them, and don’t stay on top of them, they can quickly creep up on you. This wasn’t so much of an issue when I first got started, but it became an issue later (around the time SaaS became a big thing). So many subscriptions that I needed, for a while, and then forgot to cancel and just paid for them. If you don’t get your expenses right, not only can it cost you initially by paying for things you don’t need, but you could also be missing out on being able to offset expenses against your income (essentially saving you from extra tax).

Having a separate bank account to manage your freelancer finances from will certainly help. But another thing I like to do is keep a spreadsheet (boring I know) with details for all my subscriptions and expenses. Every time I buy something new, or cancel something, I update the spreadsheet. So I’ve always got an accurate record. Then, when I come to reconcile my bank account, I can always check what a certain expense was for.

Importantly, you should keep your receipts and invoices! You can sometimes offset expenses against your income, so you don’t pay more tax than you need to. In the UK, you can do this for so many things (direct business expenses, a portion of your electricity bill, mobile phone bill, even your mortgage/rent). But you can only do it if you keep accurate records. Before you try offsetting things though, I’d highly recommend you speak to an accountant. Getting this wrong could land you in hot water with the Tax Man.

  • Key Takeaway: Keep track of everything you spend, and keep those receipts and invoices! You can use them to optimise your tax obligations.

Dealing With Irregular Income

One of the biggest challenges of freelancing is dealing with irregular income. Unlike traditional jobs, freelancing often involves fluctuating income streams that can make financial planning tricky. In the early days for me, it was often feast or famine. I would be inundated with work for months at a time, making more money than I’d ever made in my life. Then, overnight, it disappears. All the client work is done, and I’ve got no more prospects lined up.

There are a few things I did to try and mitigate the famine periods. I started with the obvious… saving. I got myself yet another account (or Pot as my bank likes to call them) and started saving. You’ll be surprised at how quickly you can build this up (but equally surprised at how quickly it disappears when you need it). Even today, when I have a good regular freelancer income, I still set money aside for my emergency fund.

Part of saving includes making cuts, I’d always be looking at my expenses and trying to find ways to cut back. I’ve cancelled my Adobe subscription more times than I can remember at this point, all to save a bit when I knew I wasn’t going to need it.

The final thing I started doing was diversifying my income. Some people would maybe call this building passive income. I looked at what services I could offer on monthly retainers. Combining this with solid service agreements, I was able to stabilise my income. There are still famine periods (that’s just the nature of freelancing), but now those periods aren’t as painful.

  • Key Takeaway: Save as much as you can and optimise your expenses. Don’t be afraid to cut back when you need to. And try to diversify your income, getting clients on regular payment plans in exchange for services you can automate.

The Tools I Use When Managing Finances as a Freelancer

So far we’ve covered quite a few learnings I made when figuring out the best way of managing my finances as a freelancer. So in this section, I want to share the specific tools I use (and what I use them for) to help me do all this.

Invoicing – Perfex CRM

For invoicing, I use Perfex CRM. It’s a self-hosted CRM and project management tool that has invoicing built in. It has a whole bunch of features, and the invoicing module is pretty solid. You can invoice for projects tracked directly in the CRM, bill for time, invoice expenses, set up reoccurring invoices and more. If you need a tool that’ll handle your project management and your invoicing all in one place, then this is a decent solution. One of the main things I like about it is that it’s self-hosted and has a one-time fee. So once you’ve bought it, it’s your forever.

I bundle Perfex CRM with Stripe to handle the actual payment side of things. There are plenty of alternatives to Stripe you can use with the CRM (including PayPal), but Stripe is reliable and has low(ish) fees. It means my clients can pay their invoices with a debit or credit card, Apple Pay, or Google Pay. You can even set up subscriptions and direct debits with it (all integrated with Perfex CRM).

Time Tracking – Toggl Track

I’ve experimented with a bunch of different time trackers over the years, and the one I’ve settled on is Toggl Track. It’s ridiculously easy to use and has all the features you’d need (including being able to set billable rates per project). So I record all my time in Toggl, and then at the end of the day, I’ll tidy it up (making sure I’ve marked what’s billable and assigned time entries to projects). Finally, I’ll export the time entries for each project, and import them into Perfex so I can invoice for it. If you want to get serious about managing your finances as a freelancer, you need to get serious about time tracking.

Accounting and Recording – Quickbooks Online / OneDrive

I use Quickbooks Online for my accounting. I’ve used a bunch of others before, but I find QuickBooks has a good balance between usability, cost, and features. They also have a bunch of free training available (if you have a subscription with them), so you can teach yourself how to do your basic bookkeeping. You can also link Quickbooks to your accounts for easy transaction importing. For storing invoices and receipts, I upload them directly to Quickbooks using the app and keep a copy in my OneDrive (all organised by year and month).

If you want to maximise your tax savings though, I highly recommend you get yourself an accountant. My accountant saved me more in the first year than I was paying them. If you want to get serious about managing your finances as a freelancer, a good accountant is a must.

Banking – Starling Bank

I used to have a Barclays Business account. But that comes with a subscription, and the rate they are closing branches got me looking for alternatives. There’s a world of new online-only banks that’s worth exploring. Starling Bank is the one I settled on. There are no fees for a business account, and the app is great for doing pretty much everything. They also have all the tools you need to set up ‘Pots’ and automate things so you can easily save for your Tax liability or emergency fund.