Being a freelancer has several benefits. As a freelancer, they have the unique capability of selecting clients, the flexibility of choosing working hours, and in controlling workload. Being able to work on various projects also provides freelancers with an opportunity to broaden their horizons as they are being exposed to different industries and tasks.
However, there are also some challenges in choosing this type of work arrangement. Since a freelancer is not committed to an employer for the long term, benefits are not provided. The income is also irregular as it depends on the clients and the completion time of projects. Another significant hurdle in freelancing is the handling of finances. Because money is an essential factor, here are some approaches to simplify economics for freelancers.
Freelancing does not provide you with a steady stream and a guaranteed amount of income. There would be times when you have projects that offer more salary than what you expect, but there would also be instances when there are few or no projects at all. With this in mind, it is essential to perform budgeting wisely.
Some would suggest to budget one to two months ahead. Include in your allocation possible future and unexpected expenses aside from your monthly fees. Generous estimation is also encouraged as it is better to have more leftover rather than ending with insufficient funds. Strict adherence to your budget is also highly encouraged.
When getting your monthly compensation, you can choose to allocate a specific portion and separating it or maximizing the entire amount. Whichever method you select, ensure that you have covered and enumerated all monthly payments. Common budget categories to consider are rent or amortization, utility bills, credit card payment, loans, and savings, among others. You can also add another variable type that you can assign for emergency expenses such as union dues, medical bills, parking tickets, and any other small incidentals.
To better understand the flow of your finances, it is better to have a record of how much you are making and spending. Map out your clients and identify seasonal versus repeat projects. This historical view of freelance income will provide a clear idea of how much you are earning throughout the year, along with the expenses. This information will then assist in planning your budget per month and in identifying if there is a need to find more projects to sustain your needs.
Having a separate account relating to freelancing is ideal for tracking related expenditures and earnings. You can simplify expense tracking with technology through financial apps and online banking. Real-time monitoring of your finances will provide a better understanding of your finances, and the records will help determine deductions for tax returns.
Be Mindful of Taxes and Dues
Identify tax deductions and tax payments that apply to your profession or project. Independent contractor taxes can be daunting and may seem quite complicated, but it is your responsibility to know and understand what it covers. Identify tax deductions applicable to your projects as well as the fees you have to settle. It is also wise to set a reminder for due dates and be mindful of filing periods.
Building an Emergency Fund
Save for situations when you won’t have enough projects to cover your monthly expenses. You must also have an emergency fund since you will never know when sickness will befall you or if an emergency will occur. Start building an emergency fund that is worth three to six times your monthly payments. Then make your way to an ideal fund that would be able to sustain you through twelve months of no income.
Prepare for Retirement
Another challenge with being self-employed is the absence of an employer-sponsored retirement account. But there are various ways to save for your retirement. Banks and financial institutions offer different plans and accounts specifically designed for self-employed and freelancers. Get to know the available pension plans and learn its conditions. Investing is another viable plan with a focus on long-term investment of money in stocks, mutual funds, or other forms of retirement plans. Furthermore, remember to include these investment allocations in your budget.
Increase and Diversify Your Income
You may be lucky to land a project with an ideal client, but the future is always unpredictable. It is better to have other options in place, and diversification may be the key. Increase your income stream and services by continuously searching for clients and taking on different projects. Having several clients will also assure you that you still have an income in cases when you lose a client. It is better to have lesser pay rather than having none at all.
Having various and additional sources of income will also address the fact of increasing expenses. You may strictly follow your budget, but there are instances that the economic situation is not in your favor. An increase in your income stream may be the better solution to inflation and various developments in your life. You can also be assertive in asking for an increase in your rate, especially if you already have an excellent long-standing relationship with your client. Your daily expenses are not constant, so a small amount of increase in your rate will be beneficial in the long run. It is also a prerogative to focus on earning more income instead of reducing the amount you spend. Looking for more opportunities for earning extra income is more effective rather than beating yourself, trying to figure out how to spend less.
Managing finances is a stressful yet necessary process, and applying it to freelancing may add more complexity. To simplify things, it is best to set up a separate account to understand your monetary situation better. A different account will also assist in filing and payment of taxes and dues. With a better assessment of your finances, you can then formulate a budget to work with your income while remembering to build an emergency fund for rainy days and a pension account for retirement. Lastly, having additional and diverse sources of income will ensure your financial stability and in addressing increasing needs.