How Freelance Workers Can Avoid Crippling Debt

We live in an increasingly freelance economy. Instead of going to the same office every day and collecting a taxes-withheld paycheck every two weeks, we're not working on projects and getting paid in full. We're visiting multiple offices, or working from home. There are many positives to take from this modern movement, but there are also new realities to grasp.

The lack of a steady paycheck, combined with the need to save for taxes, can put many freelancers in a hole. There is no worse feeling than having the tax bill come due and not having money in the bank to pay it -- everyone dreads the IRS, even more so when they owe money. The sporadic nature of freelance paychecks can also lead to overspending. That makes budgeting an even greater priority.

For freelancers seeking more security in an increasingly insecure world, here are some money management tips to keep you out of debt.

1. Pay the government first

Most personal finance advice suggests you pay yourself first. By that they mean, before you do anything with your money put a certain portion in long-term savings. Those savings will help you with any number of financial issues down the road, from mortgages to retirement. Unfortunately for freelancers, the advice was geared towards employees who have taxes withheld from their paychecks. For freelancers, the paying the government comes before paying yourself.

The first thing you'll need to do is estimate your income for the year. That can be tough for freelancers, but it is necessary all the same. Check out the 2013 tax brackets and guess where you'll fall. (Also read the following paragraph for calculation of taxes owed.) That's just a starting point, though. You'll also have to pay state taxes. Worst of all, you're on the hook for all Social Security tax; in the traditional employee structure, the company foots half that bill.

Many, if not most, freelancers opt to pay their taxes quarterly. This is sensible in many ways. If you pay the lump sum at the end of the year, you'll be charged an interest penalty. This is not possible for many beginning freelancers, but it is recommended once you can afford it. And if you're paying the government first, you can afford it soon.

2. Calculate your living costs

Working as a freelancer means choosing your projects wisely. There are projects that might sound perfect for you, but the terms and conditions can limit not only how much money you make, but when you get paid. That can ruin you financially. Freelancers must choose projects that will allow them to fulfill all of their living requirements. This requires understanding your living costs; few people do.

Author Dan Baum discusses figuring out your monthly nut, which means not only how much money you spend, but where you spend it. Knowing where you spend it will allow you to know where you can make cuts, if necessary. The most important point he makes: "knowing how much you spend every month will tell you exactly how many days you can devote to a given piece of writing." It applies to any kind of freelancer, though. If you spend $1,200 per month but take a freelance job that pays you only $1,000 per month, you're going to fall into debt quickly.

Before you do anything else, make sure you set up an experiment to track how much you spend on a monthly basis. Track each individual purchase. QuickBooks provides accounting software for Mac (the preferred freelancer platform) that will make the job easy. That will give you a good idea of what rates you need to charge and what projects you can undertake.

3. Keep meticulous records

This issue is covered above, but it deserves further attention. Freelancers don't have the same level of benefits as traditional employees. For the most part, they're on their own. If a company needs to make cuts, it's typically freelancers who get the axe first. If a company is in dire financial straits, they might try to avoid paying you for work done. The only way to avoid this is keeping meticulous records of what you've done.

Every time you submit work to the company, make sure you retain copies. Get read receipts for emails. Take screenshots of everything. Ensure you receive confirmation from your immediate supervisor for any submissions. In other words, cover yourself from every angle. If there is an opportunity for them to screw you out of money, they could very well take it. Don't leave them openings to even try.

4. Pay yourself

While there might be a consideration or two that come first, paying yourself remains an important factor for freelancers. Creating future savings can help enormously, as described above. If you fail to pay yourself, you are essentially working paycheck-to-paycheck. That kind of situation can ruin the life of a freelancer in many more ways than it can a traditional employee.

Remember, freelance contractors can't fall back on unemployment insurance. They also aren't eligible for severance packages. If a job ends and there is none in the immediate offing, that creates a period of non-earning. The quickest way to bankruptcy is through non-earning. That makes savings a crucial factor for freelancers. Save now, so that you're protected from future uncertainty.