How To Become Financially Independent as a Freelancer

Are you a financially independent freelancer? If yes, congrats! You’re in the top 1% of the world’s freelancers. If not, read on to find out how you can master your finances and build a sustainable freelancing business.

The importance of financial independence for freelancers

Did you know that 28% of Americans have savings below $1,000? That means that they are one small mishap away from losing their home, or their car, or their health, or their credit score.

There is no reliable global data of this sort, but we can safely assume that most of the world is worse off. Here in Montenegro, I estimate the number of people with less than $1,000 in savings to be at least 50%.

If you don’t have savings as a freelancer, you are one bad client away from bankruptcy. And believe me, no matter how good your client management is, you will have some bad clients. I’ve had a few in my 13-year freelancing career. Luckily for me, the first one hit me while I was still young, single, and I had no bills to pay.

That one bad client cost me an entire month’s earnings and even got me suspended from the freelance platform where I found the job.

That’s when I learned my lesson.

Most freelancers struggle with financial planning

When you’re on a roll, you begin to feel invincible. It’s human nature. It’s what athletes feel when they’re in the zone. But nobody is in the zone forever. Eventually, something happens. An injury. A personal setback. An insurmountable obstacle. An impossible client.

When it hits, you think “I can just get more work” and you move on. But days pass and all the projects you find are no good: poorly paid and poorly matched to your talents. The rare ones that look good require a lot of effort to apply to. You jump through the hoops, ace the interviews, and… nothing.

You feel increasingly uneasy. Your confidence is low, the money is running out, and the pressure is rising.

If only you had enough financial security to take your time, wait for the right opportunity, and learn some useful skills in the meantime.

The consequences of poor financial decisions in freelancing

When you find yourself out of clients and running out of money, you are suddenly under a lot of stress.

As you watch the money seep out of your accounts, you begin to lower your standards. You apply to all kinds of projects, you lower your hourly rate, and you try to rush through proposals to get the end result. If it gets bad enough you end up working for less money than when you started freelancing.

In addition to that, you:

Feel stressed.
Can’t invest surplus money because there isn’t any.
Start to question your career choices and your capabilities.
Have to listen to people telling you to go back to a regular job.

Doesn’t sound too great, does it?

Achieving financial independence as a freelancer

I hope I’ve scared you sufficiently to make you set financial independence as a primary goal in your career.

When you’re financially independent, you can withstand periods of bad luck, illness, or family troubles with dignity and patience. You don’t have to lower your standards, stress yourself out, or take crap from anyone.

Now, let’s look at some concrete steps towards making yourself financially independent.

Step 1: set up a financial infrastructure

First off, you need to have a strong financial infrastructure that can withstand unexpected catastrophes.

Case in point: in 2019, all freelancers who use Payoneer for payments/invoicing had all their funds frozen and their cards unusable for a few weeks. It was scary and it forced a lot of freelancers to borrow money, not to mention deal with all that stress.

The reason for the outage was completely unexpected: Payoneer’s card issuer Wirecard failed and brought down the system with them.

Lesson: redundancy is key.

You should have:

Multiple bank accounts.
If possible, accounts in different countries.
If possible, accounts in different currencies.
Multiple invoicing methods.
Multiple payment cards.

In 2018, I started an American LLC and flew all the way to New York just to open a bank account for it. When Payoneer failed, I switched to the LLC for billing. These days, flying to New York is unnecessary - you can simply open a Wise account online.

I still use the LLC and related infrastructure to accept payments from platforms like Udemy, Skillshare, and Amazon.

I suggest you make a list of the above and start crossing it off until you have every bit of redundancy you can.

Step 2: learn, learn, learn

Half of US adults lack financial literacy. The rest of the world likely has similar stats on average. While the economy is not a zero-sum game, it’s good to know you can outpace half of the population simply by having basic knowledge.

But we should aim for more than basic knowledge.

As a freelancer, you are not only a person but also a business, so you should at the very least understand the basics of:

Taxes.
Interest rates.
Bookkeeping.
Stock market investing.
The currency market.
The real estate market.

Sounds like too much? Don’t worry. Start with a basic understanding of your country’s taxes and read a book or two on stock investing (not day trading, but long-term investing) and economics. Once you have a decent grasp of these, the rest gradually falls into place if you show a bit of interest.

Step 3: track your expenses and eliminate unnecessary ones

There are many ways for money to leak out of your account. Financial failure usually occurs through the death of a thousand cuts. That’s why it’s crucial to track your expenses. You don’t have to keep doing it forever, but tracking every penny for only a month can bring most problems to light.

Are you spending an obscene amount of money on snacks?

Do you have subscriptions you barely use that are costing you hundreds of dollars?

Are you way too generous on social occasions?

Do you need to have a serious conversation with your partner or roommate about your household spending?

The importance of such questions can hardly be overstated. There’s little use in anything else in this article if your expenses are out of control.

Step 4: raise your rates without lifestyle inflation

Once you have your expenses locked in, you can focus on raising your earnings. The crucial thing is to have the discipline to not allow your expenses to creep up along with your income.

If you are making $50,000 per year now and your expenses are $40,000 per year, you can invest 20% of your income. Not bad.

If you can raise your income to $60,000, suddenly you can invest 33% of your income. Great.

But, if you also let your expenses grow by the same amount, to $50,000, you only have 16% of your income available for investing. A huge waste because you succumbed to lifestyle inflation.

Sure, we can treat ourselves on occasion. But the key part of that is on occasion. Taking a 20-day vacation once a year is fine. Increasing your monthly living expenses by subscribing to a bunch of time-wasting services is not.

Step 5: pay off your debt in a logical way

If you don’t have any debt, you can skip this section.

If you do have debt, follow two rules:

Always pay off the debt with the highest interest rates first. If you have a $100,000 student loan with an interest rate of 5%, a $10,000 loan from your parents with an interest rate of 0%, and a $1,000 loan from your local loan shark with an interest rate of 20%, what should you do? Get rid of the loan shark first (also, don’t borrow from loan sharks), then tackle the student loan. Mom and dad will understand.
Leave the low-interest debt alone if you can make higher returns on a reasonably safe investment. I have a 20-year mortgage with a 4% interest rate. Am I trying to pay it off early? Of course not. I can do better if I just keep making the monthly payments and invest my money in the S&P 500, which has an average annual return of 8%. So it makes more sense to me to invest my money than to pay off that debt early. If you want to be even safer, you should look into bonds.

Debt doubles the importance of having a buffer. In addition to a few months of living expenses, you should be able to make your monthly payments for a few months without working. Do the math!

Step 6: invest, invest, invest

Once you’ve got your debt under control, start investing any surplus money.

I’m mostly invested in the S&P 500 stock market index fund, with some money in European and Asian stocks. I also own a rental property in my home city.

Depending on your risk tolerance, you can try more risky investments, but follow the golden rule: never invest in something you don’t understand. Especially if that something is being sold to you by an influencer who has his own interests.

Whatever you do, make sure you diversify your investments. Never put yourself in a position where a single bad investment can ruin your future.

How much do you need to invest to achieve financial independence? That depends on a number of factors. An investment calculator is a good place to start.

Step 7 (optional): consider additional income streams

I know you’re tired of everyone selling you the idea of passive income. There’s no such thing as totally passive income. But some income streams - like our investments above - come close.

Once those stock dividends or rental property income starts coming in, you can leave it on autopilot most of the time.

Then there are potential income streams that require more effort, but offer diversification and an unlimited upside. These include:

Content creation.
Creating your own products.
Consulting.
Outsourcing.
Recruiting.

And more. You can work on these in your downtime between projects and see what sticks. Not everyone is cut out for everything, but you don’t know until you try. If you don’t want to start side projects and would rather focus on your core freelancing services 100%, that’s fine too. Do what suits your temperament.

The ultimate goal: financial freedom, not retirement

I’ve been asked “when are you retiring” more than once. The answer is: probably never, if by retiring you mean “doing nothing”. The day will come when I no longer want to write code, or blog, or teach freelancing. Then I will just do something else.

I can afford to do that because I’m a financially independent freelancer. I can take time off to learn a new skill, start a new business, or just let the creative juices flow, without worrying about next month’s bills.

That is the goal we are talking about here. Once you are there, you will understand how liberating it is.