Freelancing has always been a popular option for creatives looking for more autonomy and flexibility in their schedules. Given layoffs, wage cuts, and general economic uncertainty during the pandemic, millions more have turned to freelance work as a much-needed source of income.
This is a great way to raise extra cash and can help you stay afloat in economic troubles. However, incomes and opportunities are often unpredictable, which can present a number of new financial challenges, especially for those who are 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 meet financial milestones at different stages of your life and career. For example, you might want to put a certain amount of money into your retirement savings every month. When you know how much you want to save when you have to retire, the best thing to do is determine how much you need to save each month and use that amount towards a retirement plan.
Becoming a homeowner is another important milestone that you may be pursuing. After all, you probably spend a lot of your freelance time at home. If this is the case for you, the first step should be to determine how much you want to spend on your home and base your savings goals on that amount. This is an important financial achievement that can take months if not years to achieve. In addition to putting money into your savings every month, you may want to look for low down payment home loan options or down payment assistance programs that can help you get home earlier.
Open a separate business account
While it may be tempting to put 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 expenses such as salary, taxes, retirement fund, equipment, and emergency saving. Any money you make should be deposited directly into this account and then allocated accordingly. In the meantime, 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 an appropriate monthly salary as a percentage of your profit or a set amount and transfer a "paycheck" from your business account into personal savings. As both accounts grow, having a separate business account can ensure that you can cover business costs while supporting yourself.
Establish a realistic budget
When unique opportunities come and go, your income can fluctuate from month to month. That said, your budget may not be set in stone. However, you can get an overview of your expenses by calculating both business and personal expenses and tracking your expenses. You can create a realistic budget based on your spending habits and recurring expenses. Understanding your expenses can also help you set a fair price for your work. Based on your customer base and work capacity, it's important to work out a tariff that covers business expenses and provides you with a comfortable stream of income.
You should also allow for seasonality and budget to balance both your personal and business savings if you anticipate slower months. That way, you know that even with sparse work, you will have funds. As a rule, you should try to save at least 6 months worth of expenses on the respective account. During these months, you'll also want to be more strategic with your purchases to make sure you're not spending beyond your means.
Account for taxes and benefits
As a freelancer, you have certain tax obligations that you need to consider. In addition to normal income tax, you will have to reserve money to cover self-employment tax, which is around 15.3% of your income. Exactly how much you owe depends on your state and city. However, you should be willing to spend at least 25% of your income on taxes. Conversely, some business expenses can count as tax write-offs, which can save you money at the end of the year. Keeping track of your expenses is the best way to take into account both taxes you owe and taxes you can get back.
Being your own boss has its perks, but it also means you won't have equal access to general, company-provided benefits like health, dental, and eyesight insurance. These are coverage that you need to find individually to make sure you are covered in the event that illness prevents you from working. Some benefits such as health insurance are also required by law, so you should plan to include them in your budget. Others may only make sense based on your personal circumstances.
Freelancing provides a great alternative source of income, as well as the ability to work on your own terms. By learning how to manage your money effectively, you can stay in good financial health and prepare for a more rewarding career.
About the author
Vipul is a professional blogger and online advertiser based out of Bengaluru, India. Always on the lookout for new ways to make money, Vipul explains all the possible ways that can help anyone make passive income online. You can connect on Twitter, Linkedin & Facebook