A study by Freelancers Union and Upwork estimates that 57 million Americans are now freelancing, which represents about 35% of the U.S. workforce.
There’s a lot to like about freelancing — you have more flexibility in your planned, and you can choose the clients you work with. Even if you’re once manipulating a full-time job, freelancing is a great way to earn extra income on the side and build your skills.
But freelancing has its own set of challenges. As your own boss, you need to manage your finances and putting aside enough for taxes. Poor financial planning attires can result in cash flow problems.
So what alters are you able adopt to better manage your finances? How can you ensure you have enough set aside for rainy days and taxes?
Essential Financial Planning Habits for Freelancers
Keep reading to learn all-important financial planning garbs that every freelancer should know.
1. Establish a Separate Business Account
Whether you’re freelancing or starting a brand-new crusade, it’s important to keep your personal and business expenses separate.
Open a business current account, separately, to pay for expenses related to your business and receive fees. Then you can pay yourself a “salary” by transpose to your personal bank account on a biweekly or monthly basis.
Keeping separate chronicles might sound boring, but it’ll stimulate things easier when you enter taxes. A business accounting tells you keep track of your reductions without sifting through each course on your personal statements.
Maintaining a separate account too lets you see exactly how much you’re spending in your business. This can foreground areas of waste and identify where you can save. If you’re paying for a phone line you rarely use, you can consider canceling it and allocating those funds elsewhere.
2. Take Advantage of Business Resource
Freelancing or starting a brand-new business is certainly exciting. But there’s likewise a steep understand arch in the beginning.
Working as a freelance means you’re learning new things along the way. This can cause you to feel devastated or perform bad financial decisions because you lack the correct information.
That’s why it’s important to take advantage of reliable resources for first-time founders to become the very best financial decisions.
For example, you might wish to form an LLC( Limited Liability Company) to protect your personal resources and restriction your obligations. But how do you form one, and what are your tax obligations? Should you even form one?
Using reliable reserves can save you valuable day and help you constitute crucial decisions. They too help eliminate a ton of guesswork, as you can quickly find the answers you need.
3. Build an Emergency Fund
“Feast or famine” is something that every freelancer is familiar with. It means that you’ll have either tons of patron succeed or not enough to do.
This went income becomes building an emergency fund even more important. It allows you to weather financial commotions and cover any abrupt outlays, like medical emergencies or home mends.
How much should be used save? Most professionals indicate having enough in your disaster money to sheathe three to six months of living expenditures.
If you want to be really secure, aim to save for a year’s worth of outlays. This will give you a healthy monetary cushion if you’re between projects or have an unexpected expense.
Many banks furnish linked savings account you can use to put aside money. There are also a number of low-risk homes you can put your emergency account in and pay interest.
4. Set Aside Money for Taxes
Another all-important financial planning habit is to set aside money for taxes.
Many employers withhold taxes from employees’ paychecks and send them to the IRS. Instead of having to pay one lump sum in taxes, you’ll pay what you owe over era.
But if you’re self-employed, patrons generally won’t withhold taxes from your liquidate. This represents it’s your responsibility to keep track of what you owe and pay on time.
The self-employment tax is 15.3%. Get in the habit of setting aside at least that much of your paycheck, plus any government taxes that you might also need to file.
If you expect to owe $1,000 or more in federal income imposition, you might need to pay quarterly taxes. You can use Form 1040 ES to estimate how much taxes you’ll owe.
5. Don’t Forget About Life Insurance
Freelancers often forget life insurance. But it’s such factors you must consider to secure the future of your family should anything happen.
You can choose between term or entire life insurance, depending on whether you want to be covered for a specific period or permanently.
The insurance you choose and the amount you purchase depends on factors like age, gender, income, lifestyle, and your family situation.
For example, if you’re still young and not married with any children, your life insurance needs will be different compared to someone who is older and causing their own families.
Not sure how much life insurance you need? Professionals hint multiplying your income by three to 15 meters to estimate how much life insurance you should buy.
If you’re a 30 -year-old woman making $40,000 a year, then you might consider getting a policy that’s worth anywhere from $120,000 to $600,000.
This is just a quick rule of thumb, so it’s important you speak with a life insurance agent.
6. Remember to Save For Retirement
Striking out on your own means that you’ll need to think about retirement. Even if you adore what you do, you won’t be able to do it forever.
Just as you’re setting aside money to build your disaster fund and remunerate your taxes when you need to file, you should also get in the habit of saving for retirement.
A Roth IRA( Individual Retirement Account) is a good alternative for self-employed beings. You can contribute up to $ 6,000 per year, plus an extra $ 1,000 if you’re over 50 years old.
With a Roth IRA, you can make contributions with after-tax dollars. This offers tax-free growth, and you can withdraw from your note at any time without incurring any penalty.
Consider setting up automated biweekly or monthly transports to your Roth IRA to make this a habit.
7. Only Use Credit Cards for Emergencies
It’s easy to become saddled with credit card debt if you’re not careful. Before you know it, you could find yourself owing thousands of dollars on a card with a high interest rate.
One of the most difficult corrects you are eligible to start when working as a freelancer is employ your credit card as monetary insurance. This can result in maxing out credit cards whenever unforeseen circumstances or emergencies come up.
A bad recognition compose will affect your ability to get approved for lends in the future, whether it’s to grow your business or improve your dwelling. Using the services of a credit repair company can help you get your credit score back on track.
If you use credit cards to earn extents or get cashback, make sure to pay your statement balance in full to avoid paying interest.
8. Leverage Technology to Streamline Your Work
The life of a freelancer is often weighed down by cumbersome tasks. These include planning confronts, initiating debits, organizing new jobs, and keeping track of notes.
Using diaries or even spreadsheets may work for a go. But as you start bringing in clients and working on new projections, you’ll find these tools particularly restraint. They too take away valuable age from other meaningful work.
Fortunately, engineering allows you to streamline and centralize your work, so you can spend more day on the things that contribute to your bottom line.
With CRM software or Customer Relationship Management, you can manage interactions with your purchasers in one place and encourage guides that come your way. This allows you to personalize each interaction and realize more of a lasting thought with your clients.
Of course, engineering is only as helpful as you make it. If you’re squandering CRM software, get in the habit of recording client interactions and tracking metrics like receipt. This will allow you to identify your most valuable clients.
9. Consider Investing Extra Income
So you have a well-funded emergency fund and set aside enough to cover your taxes. You’re once off to a great start.
If you have extra income, don’t just let it be engaged in your checking account where it won’t earn you much. Consider investing in other vehicles to grow your net worth.
Here are different types of investments you can consider 😛 TAGEND
StocksMutual fundsBondsHigh-yield savings accountsCertificates of depositExchange-Traded Fund( ETF) Real owned
And if you have children, you might also look into investment notes for adolescents and give them a head start on their future.
Freelancing gives you the flexibility to choose your clients and work your own hours. But you too need to be more disciplined with your coin. It’s vital that you putting aside fairly for an emergency fund and your taxes.
By adopting healthy financial wonts, you can position yourself for long-term success and match all your obligations.
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