In 2023, 64 million Americans worked as freelancers. And even the COVID-19 pandemic, which broke a bunch of industries, turned out to be a service to freelancers. Despite the fact that almost 5 years have passed since the quarantine, many have remained self-employed - it turned out that this is convenient for both companies and workers.
The life of a freelancer is full of creativity, freedom, and financial instability. A freelancer's income depends on the number of orders, service prices, market competition, and sometimes personal agreements. For this reason, understanding how to manage money on a freelance basis properly significantly affects the success, financial and psychological stability of a person who has chosen this type of work for himself. In this article, you will learn how a freelancer can ensure financial security for himself.
How Freelancing Changes the Approach to Money and Spending?
To feel financially stable and not live from paycheck to paycheck, it is worth monitoring and planning your finances. This skill is important for both freelancers and employees. However, for the latter, financial planning is usually simpler. Salaries are paid regularly, usually twice a month, and the main mandatory expenses are utilities, rent, food, and possibly a loan. With the transition to freelancing, everything becomes a little more complicated:
- More transfers. Instead of an advance and salary in equal amounts every month, a freelancer can receive several small or large payments per week. Moreover, they are received chaotically and not always on time.
- Different sources of income. Instead of one employer - 2-3 regular clients or one-time orders, the money can come from a dozen different sources.
- The need to monitor payments. In employment, salaries can also be delayed. But there you are, waiting for a specific amount, and you will not lose sight of it. When money comes in randomly from different senders, it’s easy to confuse what you’ve already received and what you haven’t.
- Tax liabilities. Employees usually have taxes automatically deducted from their paychecks, while freelancers have to account for all taxes and file reports themselves. This can be a complicated process, especially if your income is unstable.
- No benefits package. Unlike employees, freelancers cannot access paid vacations, sick leave, pension contributions, or health insurance benefits. These expenses should be taken into account when creating a financial plan to ensure you have additional savings for such situations.
6 Rules for Financial Stability as a Freelancer
The global freelance platform market was $4.39 billion in 2022 and will continue to grow by 16.5% annually until 2030. However, many freelancers have not learned financial planning despite such impressive figures. But a smart approach to your income will help you avoid financial deadlock.
Budgeting
Determine your monthly expenses for food, utilities, health, taxes, loan payments, rent, transportation, and other fixed costs. This amount should ideally be no more than 50% of your income, so there is enough free money for yourself and unexpected expenses. If not enough, consider what you could save to direct these funds to mandatory expenses.
It is recommended that the other half be divided as follows: 20% should be set aside to pay off debts and savings, and 30% should be spent on entertainment, shopping, travel, and fitness. It is important to plan and keep track of expenses as they occur. Special mobile applications such as Mint, YNAB, PocketGuard, or Google Sheets can help.
Creation of an Emergency Fund
Robert Kiyosaki, an author of books on investing, once said: "Wealth is the ability to live without work for some time." The author supposedly reminds us that no matter your income, you must regularly put aside a sum for emergencies. Freelancers with an unstable income especially need to be on the safe side. If you are unable to create a safety cushion right away, you should consider the option of getting quick cash loans online. This will help cover urgent expenses until you can save up the required amount.
Once you're able to save, it's recommended to contribute at least 10% of each income, aiming for an emergency cushion that covers three to six months' expenses. This is insurance so that in the event of a decline in the number of orders, illness, force majeure, or unforeseen expenses, you do not have to rework the budget and reduce your standard of living.
Tax Planning
Freelancers in the US must pay their taxes, which sets them apart from employees with fixed salaries. Taxes for freelancers include self-employment tax and income tax. It is important to remember that this process cannot be postponed. You can face large debts and penalties if you do not prepare in advance.
Self-employment tax is 15.3% of net income and covers Social Security and Medicare contributions. In addition, freelancers pay federal income tax, which depends on the amount of profit. Some states have additional local taxes. Therefore, it is important to set aside money for taxes right away and not at the end of the year.
As a rule, setting aside 25-30% of each earnings in a tax account is recommended. This percentage will help cover taxes, and you will not be in a difficult situation when it comes time to pay. There are two ways to pay taxes: quarterly payments or once a year. Quarterly payments help avoid large sums at the end of the year and spread the burden.
To help you remember to put money aside, create a separate account for taxes. You can transfer money into this account automatically from each income. This will simplify the process and help you avoid spending these funds on other needs. Using accounting software such as QuickBooks Self-Employed will help you track your income and expenses and accurately calculate how much you need to set aside for taxes.
Diversifying Sources of Income
Relying on one source of income is always a risk, especially for a freelancer. If your main income comes from one client or project, you become vulnerable if something goes wrong. Several sources of income are important to minimize such risks.
The first thing you can do is to expand the list of services. For example, a web developer can offer additional services such as setting up ads, SEO, or technical support and creating websites. The more areas, the more opportunities for work.
In parallel, it is worth thinking about passive sources of income. Selling finished materials is a great way. For example, photos, templates, video content, and online courses can be sold on platforms like Etsy, Shutterstock, or Udemy. Such products can generate income without your constant involvement.
Do not limit yourself to local clients if you have experience in a certain niche. Register on freelance platforms like Upwork or Fiverr. You will be able to work with clients worldwide, which will increase the number of orders and help you not to depend on one market.
Investing can also be part of your strategy. Even if you do not want to risk large amounts, investing in stocks or cryptocurrency can become an additional source of income.
Planning for the Future
Freelancers must take care of their pension and insurance, because employers do not provide these options. This is the responsibility of each freelancer, and it is necessary to start thinking about it as early as possible.
Freelancers can open an IRA (Individual Retirement Account) or SEP-IRA for retirement. An IRA allows you to save up to $7,000 per year ($8,000 for people over 50). SEP-IRA is suitable if you have a high income and allows you to save up to 25% or $66,000, whichever is less. Even small contributions can add significantly over time, so do not put it off.
As for insurance, freelancers must arrange it themselves. One option is the Health Insurance Marketplace, a health insurance marketplace where you can choose a policy that suits your income and needs. You can also find insurance through professional associations if you are a member. Insurance will provide you with medical protection that you won't have if you forget about it.
Don't forget about life and disability insurance, too. This is an important protection in case you are unable to work due to illness or injury. It will help you and your family cope with financial difficulties in unforeseen circumstances.
Credit Rating Control
No freelancer is immune to unexpected situations, be it a lack of orders or unplanned expenses. In such moments, a loan may be the only option. And this is where a good credit rating comes in.
A credit rating indicates how reliable you are for banks and lenders. It affects the terms they will offer you. The higher the rating, the better the terms - for example, a lower interest rate on a loan. Also, with a good rating, getting money for needs that may arise will be easier.
Maintaining a good rating is not difficult, the main thing is to be careful. First, always pay your bills on time. Every delay can reduce your rating, and you must pay high interest. Second, watch how much you spend on credit cards. It is better not to spend more than 30% of the limit - this will help you maintain a good rating. And, of course, if you have debts, try to pay them off faster. The less debt, the better for your credit health.
Conclusion
Being a successful freelancer is about more than just having creative freedom. Don’t think that not having a boss is a blessing. Many people choose freelancing for the opportunity to live and work on their terms, but with freedom comes responsibility.
Everything from being mindful and motivated to managing your income and expenses is up to you. In addition to being confident in your professional skills, you must also be competent in finance, marketing, and time management. And the simple but effective steps above will help you confidently handle any financial challenges, even when your income is unstable.
