A study by Freelancers Union and Upwork estimates that 57 million Americans are currently freelance, which is about 35% of the US workforce.
Freelancing has a lot going for it – you have more flexibility in your schedule and can choose the clients you work with. Even if you already have a full-time job, freelancing is a great way to earn extra income and develop your skills on the side.
However, freelance work has its own set of challenges. As your own boss, you need to manage your finances and set aside enough for taxes. Bad financial planning habits can lead to cash flow problems.
What changes can you make to better manage your finances? How can you make sure you have enough time for rainy days and taxes?
Basic Financial Planning Habits for Freelancers
Read on to learn key financial planning habits that every freelancer should know.
1. Set up a separate business account
Whether you are a freelance or starting a new business, it is important to keep your personal and business expenses separate.
Separately open a business account to pay for your business related costs and receive payments. Then you can pay yourself a “salary” by transferring it to your personal bank account every two weeks or monthly.
Keeping separate accounts may sound like a chore, but it makes filing taxes easier. With a business account, you can keep track of your prints without going through every line of your personal bank statements.
If you have a separate account, you can also see exactly how much you spend in your company. This can highlight areas of waste and identify where you can save. If you’re paying for a phone line that you rarely use, you can cancel it and reallocate that money.
2. Make use of the business resources
Freelancing or starting a new business is certainly exciting. But at the beginning there is also a steep learning curve.
When you work as a freelancer, you learn new things along the way. This can leave you feeling overwhelmed or making poor financial decisions because you lack the right information.
Because of this, it is important to use reliable first-time founder resources to make the best financial decisions.
For example, you may want to set up a Limited Liability Company (LLC) to protect your personal assets and limit your liabilities. But how do you form one and what are your tax obligations? Should you even make one?
By using reliable resources, you can save valuable time and make important decisions. They also help avoid a lot of the guesswork as you can quickly find the answers you need.
3. Build an emergency fund
“Feast or Hunger” is something every freelancer is familiar with. This means that you either have a lot of customer work or not enough to do.
This difference in income makes building an emergency fund all the more important. It enables you to weather financial storms and cover sudden expenses like medical emergencies or home repairs.
How Much Should You Save? Most experts suggest having enough in your emergency fund to cover three to six months of living expenses.
If you really want to be sure, save money for a year. This gives you a healthy financial cushion when you find yourself between projects or faced with unexpected costs.
Many banks offer linked savings accounts that you can use to put money aside. There are also a number of low risk places where you can set up your emergency account and earn interest.
4. Put money aside for taxes
Another essential financial planning habit is to set aside money for taxes.
Many employers withhold taxes from workers’ paychecks and submit them to the IRS. Instead of paying a flat tax, over time you pay what you owe.
However, if you are self-employed, clients are typically not withheld tax from your salary. This means that it is your responsibility to keep track of your debts and pay them on time.
The self-employment tax is 15.3%. Make a habit of setting aside at least as much of your paycheck plus any state taxes you may need to file as well.
If you expect to owe $ 1,000 or more in federal income tax, you may have to pay quarterly taxes. You can use Form 1040 ES to estimate how much tax you owe.
5. Don’t forget about life insurance
Freelancers often overlook life insurance. But it is one factor that you need to consider in order to secure your family’s future in case something should happen.
You can choose between term insurance or life insurance, depending on whether you want to be insured for a specific period of time or permanently.
The insurance you choose and the amount you buy will depend on factors such as age, gender, income, lifestyle and your family situation.
For example, if you are young and have no children, your life insurance needs will be different from those who are older and are starting a family.
Not sure how much life insurance you need? Experts suggest multiplying your income by 3 to 15 times to estimate how much life insurance you should buy.
If you’re a 30-year-old woman who makes $ 40,000 a year, you can consider a policy worth $ 120,000 to $ 600,000.
This is just a quick rule of thumb. Hence, it is important that you speak to a life insurance agent.
6. Remember to save for retirement
If you are going into business for yourself, you need to think about retirement. Even if you love what you do, you won’t be able to do it forever.
Just as you put money aside to build your emergency fund and pay your taxes when you need to file an application, you should also make a habit of saving for retirement.
A Roth IRA (Individual Retirement Account) is a good option for the self-employed. You can contribute up to $ 6,000 per year plus an additional $ 1,000 if you are over 50.
With a Roth IRA, you can make contributions with dollars after taxes. This offers tax free growth and you can withdraw from your account at any time with no penalty.
Consider setting up automatic bi-weekly or monthly referrals to your Roth IRA to make this a habit.
7. Use credit cards only for emergencies
It’s easy to get charged with credit card debt if you’re not careful. Before you know it, you could owe thousands of dollars on a card with a high interest rate.
One of the biggest mistakes you can make as a freelancer is using your credit card as financial security. This can result in credit cards being used to the maximum whenever unforeseen circumstances or emergencies arise.
A bad credit score affects your ability to get approval for loans in the future, whether you’re looking to grow your business or improve your home. Using the services of a credit repair company can help you get your credit back in good shape.
When you earn points or receive cashback with credit cards, you must pay your bank statement in full to avoid interest payments.
8. Use technology to optimize your work
A freelance professional’s life is often weighed down by cumbersome tasks. This includes scheduling meetings, creating invoices, managing new projects, and keeping track of notes.
Using notebooks or even spreadsheets can work for a while. However, as you start acquiring clients and working on new projects, you will find that these tools are extremely limiting. They also take valuable time off other meaningful work.
Fortunately, technology allows you to streamline and centralize your work so that you can spend more time doing the things that add to your bottom line.
With CRM software or customer relationship management, you can manage interactions with your customers in one place and nurture leads that get in your way. This way you can personalize every interaction and leave a lasting impression on your customers.
Of course, technology is only as useful as you make it. When you use CRM software, you get into the habit of recording customer interactions and tracking metrics like sales. This is a great way to identify your most valuable customers.
9. Consider investing additional income
So you have a well-funded emergency fund and enough money to cover your taxes. You have already made a good start.
When you have extra income, don’t just leave it in your checking account where it won’t bring you much. Consider investing in other vehicles to grow your wealth.
Here are different types of investments that you can consider:
- Investment funds
- tie up
- High Yield Savings Accounts
- Certificates of deposit
- Exchange Traded Fund (ETF)
And if you have children, you can also check out children’s investment accounts and give them a head start on their future.
Freelancing gives you the flexibility to choose your clients and work your own hours. But you also need to be more disciplined with your money. It’s important that you put aside enough for an emergency fund and your taxes.
Through healthy financial habits, you can position yourself for long-term success and meet all of your obligations.