Working as a freelancer is quite appealing to a lot of people. Something about more flexibility and being your own boss attracts people to freelance work. However, as beneficial as freelancing can be, it’s also quite tricky.
That being said, you’re basically self-employed, which means you have to take care of everything, especially finances. As you may already know, freelancers usually don’t have a steady income. You can go for months without work, which means you won’t be paid.
That’s why financial planning is of the utmost importance for freelancers. If you don’t plan for your financial future, you may end up in a rough situation that could’ve been avoided. With that in mind, here are a few tips on how to plan your financial future as a freelancer.
Learn about taxes
Maintaining financial health and planning for a steady financial future involves understanding your expenses. One of your major expenses will be taxes. Since freelancers fall into the self-employed category, they have to calculate and pay their taxes on their own.
This may seem simpler than it actually is because of your volatile income. Moreover, there’s no employer to take care of that part for you. Looking from the IRS (Internal Revenue Service) perspective, freelancers are both the company and the employees, so they have to pay both Medicare and Social Security, as well as pay portions of the self-employment tax for both.
If you understand these expenses, it makes it easier for you to create a budget and plan well in advance. That way, you’ll know how many resources you’ll have to allocate for essential expenses so that you avoid getting into financial difficulties.
As mentioned before, freelancers have unpredictable incomes. That being said, you’ll have to learn how to save money and invest wisely, so that you’ll be able to earn more money. Investing in a personal website is a good idea because that way, you can promote yourself more effectively and build visibility, awareness, and exposure for your freelancing services.
If this means you’ll be able to attract more clients, work on more projects or score well-paid projects, then it’s a good investment. Furthermore, you must evaluate potential investments so that you can determine if they’re worthy or not. Every investment should yield a return on investment.
You must look at your freelancing endeavor as a business, which means you must invest in it and yourself so that you can reach success more seamlessly. However, you must also plan where, when and how much to invest. If you become too reckless, your financial health and future will suffer for it.
Try to get paid on time
Getting paid on time is often quite a challenge for freelancers. It all comes down to negotiating with clients regarding how much they should pay you and when.
If you allow clients to avoid agreed-upon payments or if you don’t create a solid plan for getting paid on time, you’ll only end up in financial difficulties sooner or later.
After all, this is your life and your work, so you have to hold your ground no matter the outcome. Here are a few things you should do so that you get paid on time:
- Automate sending invoices and invoice reminders
- Don’t hesitate to say no
- Research your potential clients before accepting work
- Don’t accept projects where you won’t be working under a contract
- Try to charge upfront – freelancers normally charge 100% upfront for short-term projects, as well as charge around 20-30% for long-term projects
- Set up an automatic billing system
- Maintain a good relationship with clients
Save some money
Saving money with unpredictable incomes is easier said than done. However, it’s not impossible if you learn to budget wisely. What that means is that you should develop a habit of saving excess money instead of spending it on nice-to-haves, at least for a while.
For example, you should consider opening an emergency savings account where you’ll allocate all the excess money you manage to earn. Excess money means everything left over once you cover your expenses and necessities. That way, you’ll have money saved up for rainy days or for potentially profitable investments that may come your way.
Moreover, a good way to save money is to invest in a retirement fund. There are various individual retirement accounts (IRAs) that can help you save money for either retirement or otherwise. For example, Traditional and Roth IRAs are the most common choices people opt for.
There’s also the SEP IRA (Self-Employed). With this IRA, your contributions are tax-deductible, but withdrawals are taxed regularly. But unlike traditional IRA, SEP IRA includes paying lower taxes on withdrawals.
Freelance work is flexible and more comforting than working full-time at some company. However, all that flexibility and working from home comes at a price, and that price is financial uncertainty. Still, if you’re well-organized and you allow yourself to pay more attention to your finances, that uncertainty will quickly turn into financial stability.