Credit: More and more people are turning to freelance employment to make a living or provide extra income, but managing your finances as a freelance employee is much different than one might expect.
According to a 2017 study by the cloud-based accounting and invoicing software, FreshBooks, the number of Americans working for themselves could triple to 42 million by 2020. This same study suggests that of the next 27 million freelancers to enter the gig economy, 42% will be Millennials.
In other words, more and more young professionals are choosing to ditch traditional career paths for self-employment. However, doing so is not without its challenges. For one, income can be highly unpredictable and sporadic, even if fairly lucrative. As a result, its imperative that freelancers learn how to properly manage their money so they can stay afloat during the slower times. These five money management tips will help freelancers build a strong financial foundation.
1. Build a Budget
Income can be tremendously sporadic as a freelancer. For example, you may have negligible income one month and a windfall the next. Although it may seem like a difficult idea to budget with a sporadic income, it’s not as hard as it might appear. If you’ve been freelancing for quite some time already, you should have a good idea of your average monthly income, even if it fluctuates a fair amount. Also, your fixed expenses are exactly that – fixed. You should have a good idea of how much you need to make each month to cover your basic needs.
When you have stronger months, put away any surplus into an emergency fund and/or retirement savings. Building financial independence as a freelancer is all about keeping the big picture in perspective. Don’t spend your extra money from a stronger month just because you have it.
2. Prepare for Taxes
As a freelancer, you’re likely to not have taxes withheld from your income. Instead, you’re paid the full agreed-upon amount and issued a Form 1099. You might have multiple 1099s if you work for different freelance companies. Keep these in one place and well-organized. (For related reading, see: The Purpose of 1099 Forms.)
The IRS generally requires you to make quarterly estimated tax payments if you’re self-employed. Use your 1099s and a self-employment calculator to figure out how much you’ll likely owe. Make saving for this part of your monthly budget so you don’t derail other financial goals when the funds are needed to pay taxes.
3. Track Your Income
Most freelancers are sole proprietors, and it’s common to commingle business funds with personal funds. In other words, they’ll have freelance income and business expenses entering and leaving the same account they buy their groceries or pay their rent with. This can make tax season an enormous headache and also get you into trouble by spending money meant to be used for something else.
To avoid this, set up separate accounts to keep your business and personal funds separate, and take advantage of a good accounting software to simplify your life and keep tabs on business finances. Another added bonus of staying organized is you’ll have historical data to draw on and can make business decisions related solely to your business income and expenses.
4. Get Health Insurance
The reason it's important to have health insurance is the same reason it's important to maintain an emergency fund: A financial emergency can happen unexpectedly at any point. An emergency fund can only go so far. If you end up in the hospital and are unable to work for long periods of time, it could spell disaster if you’re not prepared for it, especially if you have a spouse or kids who are dependent upon you and your income. (For related reading, see: Top 5 Health Insurance Providers for the Self-Employed.)
Many freelancers avoid purchasing private health insurance because of the anticipated cost, but many are unaware there are subsidies and other affordable options available. Plus, it’s better to be covered and not need the insurance than to not be covered and need it.
If you have a family, you should have life insurance as well to protect them in case something happens to you.
5. Save for Retirement
Just because your money comes in waves or is unpredictable at times doesn’t mean you can push retirement savings to the wayside. Long-term financial goals are still important and should be accounted for in short-term decisions. Even if you’re making sporadic contributions, you’re still saving and reaping the tax advantages of retirement accounts.
Once your budget is in place, you should have a good idea of what your positive cash flow tends to be each month. Carve another slot in your budget from this for retirement savings. As your income grows, your contributions can continue to grow. The point is to get started as early and contribute as often as possible so the power of compounding can take over.
Being a successful freelancer requires being a successful manager of your money. There’s no quicker way to put yourself out of business than not knowing how to manage your money. Focusing on these five aspects of your personal finances can improve your freelancing business.
(For more from this author, see: 3 Side Hustles for Millennial Entrepreneurs.)
This article was originally published on Investopedia.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
