Basic Money Management for Illustrators

As self-employed freelancers, illustrators need to pay particularly close attention to how they manage their money. Do it correctly and you can pay your taxes easily, save for your future, and retire in style. Neglect it and your financial health may not be as rosy. These are my suggestions for managing your money:

Separate your business accounts from your personal accounts

The first thing I’d recommend is getting dedicated business accounts. You should get a checking account, savings account, and credit card that are tied exclusively to your illustration business. This is important for a variety of reasons:

• Any business expenditures flow directly through your dedicated business accounts.
• Taxes are way easier to compute since everything you’ve spent money on is in one place.
• If you’re incorporated, this is a must since you won’t be able to pay for business expenses out of your personal accounts.
• Most business credit cards offer cash back incentives. You can get some good free money if you use them wisely!

For me personally, I pay for everything related to my business out of either my business checking account or my business credit card. There’s no need to separate receipts at the end of the day or do any kind of crazy tracking—it’s all in my monthly statements. And every April when it’s time to do taxes, I simply export my expenditure logs to an Excel spreadsheet with easily itemized deductions. Super simple! Plus, every few months, I cash in the rewards on my business credit card to get an extra $50–$100 that I can flow back into my business. What’s not to like about that?

Pay quarterly taxes

If you wait until the end of the year to pay your taxes you could be in for a huge surprise. I once neglected to do that and had a whopping $14,000 bill I had to then cough up money for. Yikes! Paying estimated quarterly taxes negates that uncertainty. And, if you find you’ve overpaid, you’ll get a nifty refund in April. Pretty sweet!

Save one third of everything you make for taxes

Speaking of taxes, as a freelancer, taxes are not taken out of the money you collect from your clients. Therefore, you need to pay them to the government yourself. A good rule of thumb is to reserve 33% of every payment you receive for taxes. If you have a business savings account (as recommended above), throw that money in there to collect a little interest before you use it to pay quarterlies or year-end taxes. This will also give you a much more accurate view of how much money you really have when you look through your different accounts.

Open an IRA

Freelance illustrators don’t get 401(k)s like people with traditional jobs. The burden for saving for retirement is completely on us. To do this, it’s advisable to open an IRA (Individual Retirement Account). IRAs are meant for long-term savings. They allow money to be invested in a variety of ways that offer a higher rate of return than a savings account. The catch, unfortunately, is that you can’t withdraw the money until you reach retirement age or else you’ll face some pretty stiff financial penalties.

There are two main types of IRAs: Traditional IRAs and Roth IRAs. In Traditional IRAs, taxes are paid when you withdraw money upon retirement. In Roth IRAs, taxes are paid now. Most financial experts recommend Roth IRAs for younger people to lock in the lower tax rate.

Assuming you’re not over the income limits to qualify, you can save up to $5,500/year total in a Traditional or Roth IRA. (Or $6,500/year if you’re over the age of 50.) It’s recommended that you max out every year if possible.

However, you may also want to save more than $5,500/year for your retirement. Luckily, you can open one other type of IRA: a SEP IRA (Simplified Employee Pension IRA). A SEP IRA allows you to save up to 25% of your freelance earnings or $54,000—whichever is less. You’ll have to compute that number with your accountant at the end of the year, but it’s a relatively simple thing to do. Also worth noting: SEP IRA’s are taxed like Traditional IRAs—you’ll pay the taxes when you withdraw.

Personal Savings Account

Lastly, I’d highly recommend having a nice chunk of fluid cash at your disposal. Typically, in your regular savings account, you’ll want at least six months worth of living expenses covered. That way, if any injuries befall you or you have a particularly rough patch, it won’t be the end of the world.

Outside of that, you can also investigate other savings options to keep cash on hand should you ever decide to purchase a home, buy a new car, go on a fancy vacation, or anything else that immediate access to money without withdrawal penalties allows you to do. One suggestion: set a savings account to auto-transfer a specific amount of money into it every month that won’t hurt you too terribly. That way you can treat your savings as set-it-and-forget-it and before you know it, you’ve amassed a pretty good amount of cash!

Summing up

Managing your money takes some setting up and a little bit of discipline but once you do it, you and your illustration business will be much healthier. The trick is to create a plan and to stick with it—that’s the only way to make it work.

One thing worth noting: this advice should be helpful to everyone but is written from an American perspective. If you live and/or operate your business in another country, you’ll most likely have different types of accounts available to you and different types of qualifications for those.

Finally, please note that this is just my advice and I am not a financial planner or professional consultant so this advice should not be construed in any kind of legal way. Before making any financial decisions you should consult with a professional accountant or other financial representative to make sure that you’re managing your money wisely and legally.

Have fun with your money!