Freelance Finance

The problems that arise with money and the freelance life are often ones of organization. If you set up your financial accounts properly, your financial goals will be right in front of you every time you check your finances. The way I see it, every independent worker should have at least FOUR bank accounts:

1. The Spending/Bill-paying Account (This is held at a LOCAL BANK and is the account into which you deposit every check you receive.)

2. The Emergency Account (Held at an ONLINE BANK and contains 3 to 6 months of living expenses.)

3. The Tax Account (Held at an ONLINE BANK and collects the money you need to pay your estimated and yearly taxes.)

4. The Retirement Account (Held at an ONLINE BANK and collects the money you want to contribute to your retirement until you have enough to start investing.)

In the coming days, I’ll talk about each of these four accounts in greater detail. But for now, let’s just say that I consider these accounts to be the minimum you must have to run a successful freelance business. Later, when you’re ready to advance, I’d consider adding two more accounts:

5. The Medical Account (held at an ONLINE BANK and where you set aside money for health insurance premiums, Health Savings Accounts (HSAs), etc.)

6. The Dream Account (held at an ONLINE BANK and where you sock away money for your future dreams: a house, an apartment, a car, a business, or for your future children.)

You might think that keeping so many separate accounts is confusing, complicated and annoying. Believe me, it’s not. If you don’t have a separate place to keep money earmarked for Retirement, say, you won’t save for retirement. You’ll fritter it away before you have a chance to save it. The same goes for the tax and emergency accounts. If you don’t consistently save money to pay your estimated and annual taxes, you’ll end up slapping your tax bill on your credit card and the whole vicious cycle will begin again. So remember: separate is smart.

We like online banks for a couple of reasons: a) most online banks offer better interest rates than brick-and-mortar banks, b) most allow you to open a new account at will at any time, so you don’t have to make an appointment to visit a bank officer, c) most allow you to nickname your accounts, d) the money is a little harder to get to and spend because you won’t have an ATM/debit card that accesses that account, just the right to transfer money to and from your brick-and-mortar.

Little things make a big difference. Imagine logging on to your list of online accounts and seeing them in front of you with nicknames such as “My Rainy Day Account,” “My Waitin’ For the Taxman Account,” “My To-Be-Invested Retirement Account.” Silly names like this are clearer, more focused, and more personal than a list of account numbers that are virtually indistinguishable from each other.

How much should you save? That’s a question for another day. The simple answer is, YOU decide. For now, start investigating some good online savings banks at Bankrate.com. It goes without saying that you want a bank that pays high interest (usually a money market account), no ATM/debit card, and the ability to assign nicknames to your accounts.

A final word: You may find your current bank can do all this for you, and more. Then it’s a judgment call. Personally, I think it’s better to have a separate bank for your savings. The more obstacles you can put in your way, the less likely you’ll be to raid those accounts on your next online shopping spree. Always check the interest rates because some online banks pay the same anemic rate you’re getting at your brick-and-mortar bank. Don’t assume they’re generously rewarding you with high interest just because they’re online.