Working as a freelancer can pose many challenges. If you’re a freelancer, chances are your work palette is different from the typical nine to five employee. As a freelancer, you make your own hours, dictate your own rates, and decide which projects you’d like to work on. You are essentially your own business and you can decide to run it how you see the best fit. However, to be successful in this line of work, it all starts with how you save and manage your money. Whether you own your own business or are considering freelance work in the near future, here are some tips you should keep in mind in order to save money while maintaining your financial stability. to ensure you are financially stable while allowing you to save money in the process.
Set Your Goals
If you set your goals from the beginning, you will be able to determine what you need to save before you get to where you need to be. Regardless of whether you’re a freelancer or you work full-time, the money you generate likely goes towards everyday household bills and necessities.. There may be additional wants and hobbies you would like to engage in that will typically cost extra money. In some situations, your goal might be to clear your debt. In other cases, you might be looking to purchase a house or be able to maintain your mortgage with your current finances. Some circumstances might have you working towards taking your family on vacation or buying a new car for your birthday. When creating your financial goals, think about what it is that you want to accomplish first and anticipate how long it will take to get you there. Having a clear goal will get you on track to saving and managing your money the right way.
Identify Your Net Income
Unlike nine to five jobs, freelancing requires you to work contract to contract. With that being said, it’s crucial to make note of how much money you’re yielding each month. As a freelancer, your contracts can vary from six months to a year. Because of that reason, there might be a circumstance where you might have more money in one month than another month. These can vary from six months to a year. When you are in the contract you are expected to be paid according to your contract agreement. Once the contract is up, you will need to renew it. Otherwise, you won’t be working with that employer any longer. There are many cases where freelancers work jobs that are project-based. Usually, when the project is over, you move on and before you know it, you’re on to another project. Keeping track of how much money you will bring in over the course of a year is important in order to stay financially stable overall. If you have contracts that will end around the same time, start looking for opportunities months in advance. You want to set yourself in the best position possible for a consistent and stable income. Working as a freelancer means time is money. It’s never too early to start identifying which jobs you allocate most of your time to and which jobs are most profitable for you.
Where is Your Money Going?
Money management is key simply because you have to keep track of all of your finances. Figuring out where you are spending your money is essential in being able to save in the long run. As a freelancer, here are important things to keep in mind when tracking your money.
Track Essential Bills
Make a list of the essential bills that you need to pay every month. These bills include your groceries, rent/mortgage, and other utilities. Since we live in a digital world, most payments are done by card and can be tracked easily by looking at your bank statements. Tracking your expenses will help you figure out where you can make adjustments. Start with listing your fixed expenses such as bills, rent, mortgage, or car payments. Chances are you won’t be able to cut back on all of these, but you will be able to identify changes you can make. For example, if you are a homeowner looking to reduce the amount of money you spend on your home to free up more cash, looking into what it costs to refinance your mortgage might be an option for you. Refinancing can help you clear some debt while providing you additional cash to use how you see fit.
Track Your Debt
It is important to keep track of the debt that you owe. Debt can come in the form of credit card bills, school loans, or any other expenses you have that require monthly payments. For some people, tracking down some bills can be difficult but you can always sign up for a free credit report check. Additionally, there’s a helpful list of money tracking apps you can sign up for to track your expenses as well.
Create a Budget
Creating a budget is an essential tactic when it comes to managing your finances and saving money. Budgets give insight into what you are working with and where your money is being allocated. Your budget represents exactly how much money you spend each month and how much money you plan to save, all so you won’t overspend. As you create your budget, keep in mind that you need to subtract deductions such as social security, 401(k), and taxes. Once you have your budget set, it’s best that you continuously stick with it or it can lead you to financially unstable situations. You don’t want to run into a scenario where you are spending money that you don’t have.
Open a Business Account
As you create a budget for yourself, it can be helpful to open up a banking account strictly for your business. Using the same account for your business and personal spending can quickly become confusing. To make sure your budget is accurate, you want to avoid any confusion by mixing personal expenses with the funds you need to run your business successfully. Use your personal account for fun activities, entertainment, hobbies, online shopping, and so on. This way, when you are looking at your bank statements, you won’t have a hard time differentiating what expenses are for your business and which are personal. You’ll have a clear view of your expenses and where there are any changes you might need to make for yourself.
Save for Emergencies
Unlike those who work nine to five, freelancers can be in situations where they are out of work for periods of time. As you create your budget, it’s important to think about the possible worst-case scenarios that could occur. If there’s anything we’ve learned from last year’s pandemic, it’s that life can change within the blink of an eye. It’s crucial to create an emergency budget to have on hand. Emergency funds should have at least three to six months’ worth of money. These funds should be able to cover your living expenses in hopes that you will be able to find another source of income while you rely on your emergency fund. Lifestyles vary, so it’s important for you to calculate how much money you set aside for emergencies.
While it can be difficult to prepare for unforeseen circumstances, creating an emergency budget for yourself can buy you time while you are looking for your next line of work. If you’ve secured a contract for a new job but it’s a month out, leverage your emergency budget to keep you stable. Once you start your new job, begin adding back the money that you used in the previous months. You want to always schedule to add back to ensure you have enough to cover you if something unexpected happens.
Understand Your Taxes
To make sure your money is working best for you, take the time to understand how freelance taxes work. If you make over $400 as a freelancer monthly, the Internal Revenue Service, or IRS, will consider you self-employed and require you to file taxes as a business owner. In addition to that, you’re responsible for paying a 15.3% self-employment tax that will represent what you pay in social security and healthcare. You are also accounting for the half that is normally covered if you worked for a traditional employer. As traditional employees use W-2 forms to file their taxes, freelancers file their taxes using a 1099-MISC form. You will receive those forms from your clients who pay you over $600 or more.
File Your Taxes Quarterly
If you are expected to owe $1000 or more as a freelancer, you should try and pay your taxes quarterly. If you’ve been a freelancer for a few years, take a look at last year’s return to estimate how much you think you should owe. However, if you’re new to freelancing, you’ll want to make sure you are putting money away to cover your taxes. If you’re worried about overpaying, or not paying enough,he IRS will issue you a correction for any amount you’ve paid or owe. The deadlines for filing the tax return are January 15, April 15, June 15, and December 15, 2022. If you are a married freelancer, there are things your spouse can do to help reduce your tax bills such as increasing their withholding taxes to help pay off your expenses.
Hire a Tax Professional
Keeping track of your finances, deductions, and taxes, while still maintaining the day-to-day obligations for your job can be challenging. Hiring an accountant or CPA who is knowledgeable in freelancing can be beneficial, especially around tax time. Not only can they help you manage your taxes, but they also might be able to find ways for you to pay less money back on your return. Financial situations can change in the blink of an eye and having additional support to help manage that will prevent you from having a complicated time during tax season. Tax professionals can help keep track of your statements and can help you stay ahead of the curve when it comes to changes in tax laws.
Track Your Deductibles
When you work as a freelancer, you are viewed as your own business. Being self-employed, everything you do affects your business. Your workspace, office supplies, and travel for business meetings are just some of the few things you need to be successful as a freelancer. Keeping track of these expenses is important because once tax season comes around, these can be used as a tax deduction to reduce how much money you need to pay back. As a freelancer, it’s important to know the type of deductions you can list on your tax return so that you can owe the least amount of money at the end of the year. For example, if you are a freelancer who works from home you can take advantage of the home-office deduction. You will be able to write off expenses like utilities used to run the space of your office as well as office supplies and furniture. Each auctionable has a set of requirements they have to meet. Take the time to learn about the types of deductibles you are eligible for. Keeping track of your finances can be difficult, so it can be useful to leverage helpful resources so that you can stay on track.
Plan for Retirement
Whether you are a freelancer or a traditional employee, retirement planning is always something that should be accounted for. While traditional employees can take the 401(k) their jobs offer them, freelancers have the chance to take charge and set up their own. Chances are, you don’t want to work for the rest of your life and look forward to retirement. Although it might feel as though you always have to be focused on your day-to-day, don’t hesitate to plan for the distant future. A 401(k) could be a good option for someone freelancing. This plan allows the same contributions as a traditional 401(k). Another option for retirement is filling out an IRA. A SEP IRA allows you to contribute up to 25% of your earnings. These are some of the simplest options to start saving for retirement.
If done correctly, being a freelancer can be as fulfilling as any traditional job. You can be in charge of your own fate and work on projects that you are passionate about. If you work on managing your money and planning for the time ahead, you can have a successful career as a freelancer. Fully develop your plan and you can be a freelancer up until you retire. While retiring after being able to freely work on projects that matter to you sounds inspiring, it’s all the more reason as to why you should make sure your finances are in order to set you up for success.