This Financial Tool Is a Must-Have for Freelancers

I've been a full-time freelance writer for seven years. It's been an exciting journey and a continued learning process. But some lessons have taken me quite a while to master, including financial ones. I didn't always prioritize financially protecting myself in my early freelancing days. If you're a new freelancer or are thinking about transitioning into this lifestyle, I may be able to save you some time by sharing one crucial financial tool that I ignored for too long. I believe all freelancers and self-employed professionals need this tool to protect themselves. Here's why.

Establish an emergency fund before you start freelancing

After experiencing what it was like to live abroad and work a job with a generous number of vacation days, I was willing to do whatever it took to avoid sitting in an office cubicle working a stressful 9-to-5 job the rest of my life. So, when I returned home, I jumped right into freelancing.

As a new freelancer, it can take time and effort to cobble together enough work to pay all your bills. Since I jumped in with both feet, I didn't have an emergency fund those first couple of years. I wish that I had, because I may have felt more confident when work suddenly dried up or when there were months when I barely had enough money to cover my expenses.

I always made it work, but I know those early years would have been less stressful had I had a stash of extra cash to fall back on. I know there was more than one occasion when I carried a balance on my credit card, so I wasted money on credit card interest fees.

If you continue to carry a balance on your credit cards, you can quickly develop a costly credit card debt problem. Luckily, I didn't make overspending beyond my means a habit. But if you're not careful, it can be too easy to rely on credit cards to cover purchases and bills you can't afford. Luckily, you can avoid this if you have emergency savings stashed away.

Here's why you need an emergency fund

When you're self-employed, your income will likely fluctuate. You might make thousands one month and almost nothing the next. It's also possible to lose a client or project without much notice. You'll be left scrambling to cover your upcoming expenses if this happens, so having an emergency fund is a good way to financially prepare.

Another reason to have an emergency fund is because life happens, whether you work a W-2 job or are self-employed. Even if your small business is doing well financially, a surprise costly bill can change your entire financial situation and cause significant stress. You'll feel better knowing you can afford to cover emergency expenses if you have savings in the bank.

Whether you're an established freelancer without emergency savings or are a brand-new freelancer, I suggest you make your emergency fund savings a priority. Here are a few tips:

• Start small: Even if you can only afford to set aside $100 a month, do it. Saving a small amount of money is better than saving nothing. As you continue to contribute extra cash, your savings balance will grow. Every dollar saved adds up and makes a difference.
• Automate the process: When you're busy running a company, it can be easy to be forgetful. If you struggle with remembering to save money, you can automate your savings. Automation can ensure you reach your emergency fund savings goal sooner.
• Earn interest: Make sure you keep your savings in a bank account that earns interest. As your money sits in the bank, you'll get rewarded with extra cash. Opening one of the best high-yield savings accounts is an excellent option.

For additional tips, check out our personal finance resources.