There are several things about my income that I wish I had known before graduation. Would it have changed my freelancing decision as a student? Nope. Would it have made me want to work harder? Definitely. Being a grown-up definitely changes your outlook on money and your income, but “freelance” income in the eyes of other adults doesn’t always match up to the way you think of your income.
Let’s chat about a few different things “grown-ups” don’t tell you about your student freelancing income.
Most of the world considers your income “flaky” and “not very dependable.”
I’m sure you already had a bit of a hunch on this one. Freelance income (student or not) has a bad reputation to being much like a roller coaster. The idea that freelancers often go through feast and famine cycle isn’t just an idea, it is a reality for a lot of freelancers, especially newbies.
Thus, most people who receive a steady paycheck every single month (or twice a month) feel that “freelance” income is a bit flaky. You never know what you are going to get from month to month. This becomes apparent to freelancers who go loan shopping (for either a car or house), as loan officers feel that freelance income is not as dependable as a steady paycheck.
You can work to make yourself a steady paycheck to help give the doubters more reason to take your freelancing income seriously. Doing this can prove to loan officers and those who require knowing your income in order to make a decision that you can manage your money well, and that you have a stockpile of money that can cover you for so many months.
You may measure your growth by gross receipts/sales, but the rest of the world only cares about profit.
Throughout the last five-plus years of my freelancing, the only number I cared about every month was the gross receipts (or sales) number. This number was the total amount of money clients sent me for the month or year. So when people asked me (for insurance or loan purposes) “how much did you make last year,” I gave them the gross receipts number.
Gross receipts doesn’t take into account your expenses or taxes. While I knew that my expenses were super low, no one else believed me. So when I started seeking a loan, the loan officers only cared about my profit number, or gross receipts minus expenses. Notice I didn’t say taxes?
For instance, if your gross receipts was $10,000 for the year, and your expenses were $1,000, your profit is $9,000. However, you still have to pay Uncle Sam out of that money. Most student freelancers will likely be paying 10-20% of their profit in taxes. So 15% of $9,000 is $1,350.
Using those numbers, the loan officer sees that you made $9,000 and considers that your income. However, you may be thinking that you made $10,000, but you only really took home $7,650. So, while we want to give the higher number to make it seem like we make more, most people use the profit number, but that number isn’t really even accurate either because of taxes. Keep this simple math in mind the next time someone asks you “how much do you make” as it isn’t an easy answer.
You still need capital to operate, so this further reduces your “take-home” pay.
Capital, in simple terms, is money and resources available for use to pay for things in your business. So out of the money you make from clients, some money has to go to pay for things such as expenses. You should also put money back for emergencies and a general savings. This money should be left alone and stay with your business. This further reduces how much you can “pay yourself,” or your take-home pay.
Using the numbers above, let’s say that after expenses and taxes, you are left with $7,650. Out of that money, you should save some money for an emergency fund and savings. In addition, if you want to even out your pay from month to month, you should look into putting some money back to help cover you during rough months. With all of these things that should stay with your business (or capital), your take-home pay is much less.
Most people don’t understand this when they think about your freelance income. You are running a business, which means your business needs money to operate and you need money to feed yourself. So while it looks like you made $10,000 in a year, you maybe only “paid yourself” $5,000.
Knowing these things about your income can help you make better decisions in terms of setting goals, talking to people (i.e. loan officers) about your income, and financial decisions when it comes to your business and personal life. This info shouldn’t discourage you, but understanding how others view your income can help you when you graduate and continue to pursue your freelancing.
P.S. I talk more about this and many other topics in my new book, “Student Freelancing 101: A Start-to-Finish Course to Becoming a Student Freelancer.” Pick up your copy at studentfreelancing101.com!