Freelancers are a growing part of the American workforce. A 2020 report revealed that 59 million Americans freelanced in the past year, which is 36% of the country’s workforce. Many of these gig economy workers and independent contractors are in the fields of art and design, entertainment, construction, and architecture and engineering.
People freelance for a variety of reasons, including using it as a temporary solution after being laid off, working a side gig to earn more money, and/or building a new career or small business. They may lean into independent contracting because it gives them more flexibility than a traditional job or simply because they have an entrepreneurial spirit. Giving up a regular paycheck doesn’t have to spell financial ruin. It’s possible to build a solid financial future while working in the gig economy. Here are five smart financial strategies for how to manage your finances as a freelancer.
1. Build an Emergency Fund.
Not everyone has the ability to plan for going freelance. Some workers are thrown into the deep end after a layoff—particularly during the pandemic. However, can plan ahead for a freelance career, it’s wise to build an emergency fund beforehand. If you’re already a freelancer, consider this your next financial goal. Most financial experts recommend having six months of savings in your emergency fund.
As a freelancer, you may want to plan for more. You may have to call upon your emergency fund in a crisis, but you may also have to tap into it to float you financially. You may experience gaps in work or encounter delays from when you finish projects and receive payment. Having a healthy balance in your savings account will provide a financial cushion to ride the waves of freelancing.
2. Create a Budget.
Budgeting {https://stateecu.com/category/budgeting/} is a valuable financial plan for anyone, but it’s especially vital for freelancers. By working independently, they become responsible for many financial services and needs that employers usually cover. For example, freelancers need to make a plan for carrying (and paying for) their own health insurance, life insurance, and disability insurance. Depending on the type of work, freelancers may also need to carry liability insurance specific to their fields. Next, freelancers need to have a plan for retirement and use the power of compound interest to age gracefully — at least when it comes to finances.
Lastly, freelancers must pay their own personal income tax at the state and federal levels. Many freelancers utilize separate savings account or accounts to set aside funds to pay corporate or annual taxes. Although tax liability rates can vary widely due to a number of factors, such as the state you’re living in and your income level, experts recommend setting aside 25% of your income so you’re not surprised by a massive tax bill. Creating this budget from the outset can also help you set your rates since you’ll have a solid grasp of your financial obligations.
3. Open a Separate Business Account.
Establishing separate business accounts from your personal accounts is savvy in several ways. First, it’s easier to track your business’s income and expenses when you’re not worrying about separating out your family’s grocery bill from the new laptop you purchased for work. Second, it’s easier to detach your business liability from your personal liability when these are separated. Finally, business accounts offer banking solutions that help your business operate more smoothly — from having access to wire transfers to seamless integration with enterprise-level accounting software — that traditional, consumer accounts don’t offer.
4. Hire a Professional Accountant.
Many independent contractors are skilled in their area of expertise but going freelance requires you to become an expert accountant, too. If you don’t want to pick up that skillset, it’s wise to hire a professional accountant who can oversee your profit and loss statements, and keep everything organized when the tax collector comes calling.
5. Only Use Credit Cards in Emergencies.
It may be tempting, or sometimes even seem necessary, to finance the next phase of your business’s growth on credit cards. Or, if you run into a gap in work, you may find yourself calling on your credit card to cover your bills. You could easily find yourself thousands of dollars in debt, incurring a high-interest rate, and no strategy to pay it back.
With more debt, your credit score will decrease. That will affect your long-term financial future because a poor credit score affects your ability to be approved for business or private loans. Instead, plan ahead for big purchases and use a savings account as your backup rather than credit cards. If you’re using a card to build points or get cash back, make sure you pay your statement balance off each month to avoid accruing interest.
With these smart strategies in place, you’ll be able to build a healthy financial future — even while taking a less traditional work route.
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