For a variety of reasons, more and more traditionally employed people are moving to freelance and contract gigs. 

In other industries, some are doing so out of necessity—company downsizing and layoffs, especially in brick-and-mortar businesses, have become more prevalent in the digital age. For stylists, the pandemic accelerated that effect as some salons shut their doors during COVID lockdowns.

But some workers are doing so out of choice. As the pandemic began to ease, people were quitting their jobs at a record rate—nearly 4 million in April 2021 alone. Others, having become accustomed to the greater freedom offered by working remotely, said they’d look elsewhere if they weren’t allowed to continue working from home.

But freelancing has its drawbacks, too. There are no automatic income tax deductions, so you have to keep closer track of your income and file quarterly taxes. And your income is more likely to fluctuate from month to month, so you’ll have to work harder at budgeting. Managing your money doesn’t have to be a nightmare, though, if you follow a few simple principles.

Set a good baseline

It can be tempting to use your best-income month as your baseline. If you got into freelancing because of the “free” part (freedom), you might want to think you’re earning more money than you are. Since income can fluctuate, it’s better to average out your income for the year, taking into account seasonal changes, and use that as your starting point.

You may even want to drop below that number a bit to be conservative. Set aside the extra money you make during more profitable months to cover your expenses during leaner times. You’ll have to continually readjust, too, based on new data. If your business grows, this means you’ll have more money to spend or invest back into your business.

Keep your finances separate

Create separate accounts for your business and personal finances. This will make it easier to track what you’re keeping for yourself and what you’re investing and reinvesting into the business. Of course, it will require two separate budgets. Fortunately, there are some good budgeting apps that work well for freelancers. There are also apps like Square, Trim, and CountAbout, that can facilitate bill payment for you and your clients.

One option worth looking at is registering your business as a legal entity. But weigh the pros and cons. This will cost you extra money at the front end for filing fees and paperwork, but it will also provide you with credibility. If you register as a sole proprietor, you’ll receive all the profits, but creditors will be able to go after your personal property to satisfy business debts.

Bolster your credit standing

Good credit is always desirable, but even more so when you’re running a small business. You’ll need a good credit rating to qualify for loans you may need to make investments as your business grows.

You don’t have to go into debt to build good credit. One strategy you can employ is using a credit card for your purchases, then paying it off every month before you accrue any owed interest. If you’re starting from scratch, try a secured credit card. These work just like a regular credit card, but you pay a deposit up front. 

To know where your credit stands, order a free annual credit report. Take a close look to determine whether anything looks amiss. Make any overdue payments as soon as possible, and look for charges that seem unfamiliar: They could be the result of reporting mistakes or, worse, fraud or identity theft. Fortunately, you can file disputes to fix errors in your credit report.

Plan for emergencies

Financial setbacks aren’t the only kind of emergencies you might face as a freelancer. For instance, what are your options if the power goes out? A good alternative is to have a backup generator that kicks on automatically during a power outage and can keep you on schedule. Price what it would take to purchase a generator and, if you decide to do so, incorporate that into your budget.

If you rely on your vehicle to get to your own salon or the client's venue, you’ll want to keep the car in good shape. This means conducting regular maintenance like oil and filter changes, tire rotation, etc. Check the brakes and the tire tread for wear. Remember: you’ll have to do this more often if you’re putting more miles on your car for business, so you’ll have to create a budget that reflects this.

Think about the big picture

In addition to tax withholding, traditional employers often provide health and retirement plans, so you’ll need to see about providing these benefits to yourself, too. Check out your options through the Health Insurance Marketplace, and look at retirement plans like IRAs and annuities. Consult a financial advisor to find what works best for you.

There’s a lot to think about when it comes to setting up shop as a freelancer. Things a traditional employer often does for you will fall on your shoulders now. But with careful planning and budgeting, you can make your freelance career successful and profitable. 

Author Molly Barnes is a freelancer herself. Find her at digitalnomadlife.org.