Freelancing has always been a popular option for creatives looking for more autonomy and flexibility in their schedules. Now with layoffs, pay cuts, and overall economic uncertainty during the pandemic, millions more have turned to freelancing as a much-needed source of income.
It’s a great way to bring in extra money and may help keep you afloat during economic hardships. However, income and opportunities are often unpredictable, which can present a new set of financial challenges, especially for those just starting out.
Read on for four money management tips every freelancer should follow:
Set Intentional Savings Goals
Long-term savings goals can help you stay on track and reach financial milestones at different stages in your life and career. For instance, you may want to put a certain amount of money toward your retirement savings each month. If you know how much you’d like in savings when it’s time for you to retire, you should determine how much you need to save each month and put that amount toward a retirement plan.
Becoming a homeowner is another major milestone you may be chasing. After all, you probably spend a majority of your time at home as a freelancer. If this is the case for you, you should first determine how much you’d like to spend on your house and base your savings goals on that amount. This is a major financial accomplishment that can take months, if not years, to achieve. In addition to putting money into your home savings each month, you may want to research low down payment home loan options or down payment assistance programs, which may help you achieve homeownership sooner.
Open a Separate Business Account
While it may be tempting to funnel your entire paycheck into your personal savings, it’s important to keep your work and business finances separate. Your business account should be used for business-related expenditures, such as your salary, taxes, retirement fund, equipment, and to hold emergency savings. Any money you earn should be deposited directly into this account and then allocated accordingly. Meanwhile, your personal account should be used to cover living expenses and all other non-business purchases.
As your business account grows, you need to remember to pay yourself. Based on your business budget, you can determine a suitable monthly salary as a percentage of your profits or a set amount and transfer a “paycheck” from your business account into personal savings. While both accounts will grow, having a separate business account will help you guarantee that you’re able to cover business expenses while also supporting yourself.
Establish a Realistic Budget
As unique opportunities come and go, your income may fluctuate month-over-month. That said, your budget may not be set in stone. However, you can get a general sense of your expenses by calculating both business and personal expenses and tracking your spending. Based on your spending habits and recurring expenses, you can ballpark a realistic budget. Understanding your expenses will also help you set a reasonable rate for your work. Based on your client base and your work capacity, it’s important to charge a rate that will cover business expenses and provide yourself with a comfortable stream of income.
You should also plan for seasonality and budget to pad both your personal and business savings if you anticipate slower months. That way, you know you will have funds available even when work is sparse. As a general rule, you should aim to have at least 6 month’s worth of expenses saved up in each respective account. In these months, you’ll also want to be more strategic with your purchases to ensure you don’t spend beyond your means.
Account for Taxes and Benefits
As a freelancer, you have certain tax obligations that you must consider. In addition to standard income tax, you will need to set aside money to cover self-employment tax, which amounts to around 15.3% of your earnings. Exactly how much you owe will depend on your state and city, but you should be prepared to put at least 25% of your income toward taxes. Conversely, some business expenses may qualify as tax write-offs, which can save you money at year’s end. Tracking your spending is the best way to account for both taxes you owe and can earn back.
Being your own boss has its benefits, but it also means you won’t have the same access to common company-provided benefits like health, dental, and vision insurance policies. These are coverages that you will need to seek out individually to ensure you’re covered should an illness prevent you from working. Some benefits like health insurance are also mandatory by law, so you should plan to incorporate them into your budget. Others may just make sense given your personal circumstances.
Freelancing provides an excellent alternative source of income, as well as the ability to work on your own terms. By learning how to effectively manage your money, you can stay in good financial health and set yourself up for a more rewarding career.