In this era of the Gig Economy, side hustles, and entrepreneurship, many people are freelancers. Working this way can offer flexibility and unlimited earning potential, for sure, but it can also bring a learning curve when it comes to managing your money. Financial planning for freelancers means knowing how to handle things like tracking income and expenses, planning for taxes, and investing for retirement.
Mastering freelance money management can take some time and focus, but it’s a worthwhile pursuit if it helps you to achieve your financial goals. The better you understand how to manage finances as a freelancer, the easier it can be to get ahead.
To help get on the right path, read on to learn, among other topics:
• Why financial planning is important for freelancers
• How to create a budget as a freelancer
• How to track cash flow
• How to separate business and personal expenses
What Is a Freelancer?
A freelancer is someone who gets paid to complete work on a per-job basis. Freelancers are independent contractors, not employees. A freelancer can work with multiple clients on a contract basis, performing a variety of tasks.
Why does understanding this definition matter for freelance money management? It’s important because freelancers are not entitled to the same financial perks as hourly or salaried employees.
As a freelancer, you’re responsible for handling things like retirement planning, health insurance, and taxes yourself. You also won’t have paid vacations and holidays the way employees do, which may factor into your cash flow and money management planning.
Why Financial Planning Is Important
What is financial planning? Financial planning is the process of creating a plan for managing your money. A financial plan can include both short-term and long-term goals and the steps you’ll need to take to achieve them. For example, your financial plan might include a strategy for paying off student loans or saving money toward a down payment on a home.
Financial planning for freelancers is important because you’re in charge of deciding what happens with your money. Learning how to manage finances as a freelancer can help you to:
• Create a workable budget, even if you have irregular income
• Formulate a plan for saving for retirement
• Stay on top of your tax obligations
• Streamline expenses so you can avoid debt
• Plan for emergencies or unexpected costs
Planning can be a pathway to good financial health. And it’s an opportunity to develop positive habits and improve your money mindset, both of which can benefit you throughout your freelance career.
11 Tips for Financially Planning as a Freelancer
If you’re new to freelance money management, you may not know where to start or what you even need to be doing. Having a blueprint to follow can make it easier to develop a workable plan for managing money. Here are some essential steps to include in your financial plan if you have a freelance mindset.
1. Having and Maintaining a Budget
A budget is a plan for spending the money you make each month. If you want to be better with money as a freelancer, then creating and sticking to a budget is non-negotiable. It will help you both understand and optimize your finances.
When making a freelancer budget, start with income first. If your income is irregular, it can help to create an average as your baseline. So you’d add up all the money you made from freelancing over the past 12 months, for instance, then divide by 12 to arrive at a monthly average income.
You can then plan out your expenses (more on that in a minute), using that average as your baseline. You’ll tally how much money flows out for necessities every month, and see how much profit you are making.
When you have higher-income months, you can stash extra money in savings to help cover expenses in months when income is lower. You’ll also want to put money towards savings for an emergency fund and retirement (more details below).
2. Giving Yourself a Consistent Paycheck
When you freelance, there’s no such thing as a weekly or biweekly paycheck. Instead, you might get paid on different dates each month, depending on how your clients handle payments.
That can lead to uncertainty about when to pay bills. You can avoid that issue by giving yourself a consistent paycheck on a regular schedule. So you might pay yourself a set amount on the 1st and 15th of each month, for example.
To do that, you might need to set aside enough money to cover one month’s worth of bills in your checking account first. That way, you can pay yourself according to the schedule you set without having to worry about overdrawing your bank account.
3. Keeping Track of Your Expenses
Tracking expenses is central to managing money better as a freelancer, especially if you’re worried about going over budget. It’s important to keep tabs on both your personal expenses and your business expenses so you know how much you’re spending each month. When adding up your business expenses, be thorough: Do you rent an office? If so, don’t forget about the electrical bill and any cleaning services as expenses.
Also track the costs of legal fees, insurance, website hosting and any online advertising you may do. Some of these charges can be billed annually, and you may lose sight of them since they don’t recur.
Keeping up with business spending also matters from a tax perspective. There are a number of tax deductible expenses for freelancers that can help to reduce your tax bill.
For example, you might be able to write off marketing expenses if you maintain a website for your business or claim an office at home tax deduction. Having a paper trail to back up those deductions is a good thing if the IRS targets you for an audit.
4. Timing Your Freelance Projects
Staying booked and busy is every freelancer’s dream since no work means no income. Timing your freelance projects can help to keep your income and cash flow consistent, so that you’re not struggling to stay on top of the bills. For example, if you’re a freelance writer, you might set deadlines to allow yourself enough time to invoice for your work (and get paid) before certain bills come due.
There’s another dimension to timing to consider as well. It’s important to think about how much time it will take to complete a project when setting rates. Underestimating the amount of time involved could cause you to shortchange yourself when quoting rates to clients. A good rule of thumb is to assume that any project will take 20% to 50% longer than you think it will. Then base your rates on that higher number.
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5. Paying Down Your Debt
Debt can be a stumbling block to getting ahead financially as a freelancer. If you have student loans, a credit card balance, or other debt, it’s to your advantage to create a plan for paying them off as quickly as possible.
If your income is irregular, your budget should be designed to ensure that your most important living expenses are paid first. You can then decide how much room you have left in your budget to commit to debt repayment.
Also, consider ways to make your debt less expensive. Refinancing student loans, for example, can help you to get a lower rate and monthly payment, which can ease budget strain. You can also consolidate credit card debt with a better APR (annual percentage rate) or even a rate of 0% with a balance-transfer offer. This can help you save on interest and pay off your debt.
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6. Separating Business and Personal Expenses
Keeping business and personal spending separate is a good idea for a few reasons. It makes it easier to create budgets for personal expenses and business expenses, so you know what you’re spending on each one. And you may encounter fewer headaches at tax time when trying to claim freelance tax deductions if business expenses are separate.
Opening a business bank account is a simple way to separate your spending each month. You can link it to your personal checking account in order to pay yourself your regular paycheck. You may also consider opening a separate business credit card to cover freelancing expenses if you can afford to pay the bill in full each month and avoid interest charges.
7. Investing in Insurance
As a freelancer, you don’t have access to employer-sponsored health insurance. So if you want to get covered, you’ll need to purchase a policy yourself. Self-employed individuals, including freelancers, can buy health insurance through the Health Insurance Marketplace.
When comparing health insurance plans, pay attention to:
• Copays and coinsurance
• Coverage limits
You may also consider applying for health insurance through Medicaid if you have little to no income or financial resources. Eligibility for Medicaid is based on your income, household size, and assets. You can apply through your local department of social services.
In addition to health insurance, you may also want to look into insurance for your business. Liability insurance, for example, can protect you against claims arising from copyright infringement, libel, or defamation. That type of insurance can come in handy if you’re sued.
8. Having an Emergency Fund
An emergency fund is money that you set aside for unexpected expenses; say, a major car repair or medical bill. As a freelancer, an emergency fund can be invaluable if your work assignments dry up or you get sick and are unable to work temporarily.
In terms of how much to save for emergencies, three to six months’ worth of expenses is a commonly-used rule of thumb. But you might want to double or even triple that amount if your freelance income is irregular or you’re worried about a sustained client drought.
Keeping your emergency fund in an online savings account can be a great option if you want to earn a solid rate on your money. The interest (or annual percent yield, or APY) tends to be higher than what bricks-and-mortar banks offer. Online savings accounts can also charge fewer fees than traditional savings accounts.
9. Accounting for Taxes
Freelancing means you don’t have an employer taking out taxes from your paychecks. So you’ll have to handle taxes yourself.
Generally speaking, the IRS requires you to file an annual tax return and pay estimated quarterly taxes if you expect to owe $1,000 or more for the year. Quarterly taxes are essentially an advance payment against the amount of tax you’ll likely owe for the year.
Estimated taxes are due four times a year, typically:
• April 15 (1st payment)
• June 15 (2nd payment)
• September 15 (3rd payment)
• January 15 of the following year (4th payment)
Failing to make those payments on time can trigger penalties. If your state collects income tax, you’ll also need to make estimated payments to your state revenue agency.
You can use an online tax calculator to gauge how much you’ll need to pay for estimated taxes each quarter. It may be helpful to set up a separate business checking account or savings account to hold the money for those payments. As your clients pay invoices, you can allocate part of each payment to your tax account.
If filing taxes as a freelancer seems overwhelming, consider talking to an accountant or another tax pro. A tax expert can help you figure out how much to set aside for taxes and how to maximize deductions in order to lower your tax bill. You may be surprised to learn about some business tax credits you didn’t know about.
10. Investing Your Money
Investing is key to building wealth since it allows you to take advantage of the power of compounding interest. If you already have an emergency fund in place, the next step in freelance money managing is creating an investment portfolio.
You can start with a retirement account if you don’t already have one. Freelancers can use traditional IRAs, Roth IRAs, SEP IRAs, and solo 401(k) plans to save for retirement. Each of these plans can offer a tax-advantaged way to save for the future. You can supplement your retirement savings with investments in a taxable brokerage account.
When investing as a freelancer, consider your risk tolerance and how much you have to invest, based on your budget. You may need to start with a small monthly amount, but you can build on that over time. And the most important thing is to start saving and then be consistent with your investment strategy.
11. Taking Advantage of Resources
Financial planning as a freelancer can be easier when you have the right tools and resources. For instance, some of the things you might consider incorporating into your plan include:
• Budgeting apps
• Tax management apps
• Online bank accounts for freelancers
• Investment apps
You can also search online for resources to help with things like insurance and tax planning.
Managing Finances With SoFi
Between managing deadlines, tracking invoices, and keeping up with client needs, freelancing can be demanding. Finding ways to simplify money management as a freelancer can save you valuable time and money.
Opening a SoFi bank account can make keeping up with personal spending and saving less stressful. Our Checking and Savings keeps your money in one convenient place, without the high fees that other banks charge. And you can earn a competitive APY on deposits to help you grow your money faster.
How is freelancing paid?
Freelancers can get paid in a number of ways, depending on their clients’ preferences. For example, clients can send payments through PayPal, Stripe, direct deposit, or paper checks. When negotiating a freelance contract with a new client, it’s important to understand how and when you’ll be paid for the work you perform. In some professions, it can be typical for clients to take 30 days or longer to pay invoices.
Do you need insurance if you are a part-time freelancer?
If you freelance part-time while working a full-time job, you may be covered by a policy from your main employer. But if you have no insurance coverage at all, it could make sense to buy a policy for yourself through the healthcare marketplace. You may also want to look into buying separate liability insurance for your business.
What are some good freelancer jobs?
There are lots of ways to make money as a freelancer. Some of the highest-paying freelance gigs can include copywriting, graphic design, and editing. There are also a variety of freelance jobs that may be desirable because you can set your own hours, such as driving an Uber.
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