In today’s day and age, more and more people are turning to the gig economy to make a living or provide extra income. According to a study done in 2017 by the cloud-based accounting and invoicing software, FreshBooks, they suggest the number of Americans working for themselves could triple to 42 million by 2020, with Millennials largely leading the way. 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. If this sounds like you, use these 5 money management tips for freelancers to 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. You may be thinking, “well, how am I supposed to budget with that?” Fortunately, it’s not as hard as you think. 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 – so 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, sock away any surpluses into emergency savings and/or retirement savings. Building financial independence as a freelancer is all about keeping the big picture in perspective. Don’t go spending that extra money 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 1099. You might have multiple 1099’s if working for different companies or on different freelancing sites. Keep these in one place and well organized. The IRS generally requires that you make quarterly estimated tax payments if you’re self-employed. Use your 1099’s and a self-employment calculator to figure out how much you’ll likely owe. Make saving for this a 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’ll 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 earmarked for something else.
Instead, 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 make business decisions with related solely to your business income and expenses.
4. Get Health Insurance
Life can throw curveballs your way at any moment, it’s one of the reasons we maintain emergency funds. An emergency fund, however, can only go so far. If you end up in the hospital or 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 that are dependent upon you and your income. Many freelancers avoid purchasing private health insurance because of the anticipated cost, but many are unaware that 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 that will 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 put 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 also requires being a successful manager of your money. There’s no quicker way to putting yourself out of business than not knowing how to manage your money. Hopefully, these 5 tips have turned your attention towards specific things you can implement or improve upon in your own freelancing business. However, if you’re still struggling to manage your business cash flow or just feel lost in general when it comes to this stuff, don’t hesitate to schedule a free consultation and we’ll point you in the right direction!
Chad Rixse grew up in Anchorage, Alaska, but has lived in the Seattle area since 2007. He majored in Spanish at the University of Washington where he honed his fluency in the language and discovered his passion for travel and connecting with other cultures. He’s a self-professed golf addict who can never seem to get his fill despite still struggling to break 100.