How to Prioritize Your Finances When You’re Self-Employed
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Freelancing is growing in popularity, largely in part to the amount of freedom it offers. Being self-employed, you have the flexibility to pick and choose which projects to work on, when to work, what to charge, and of course, the convenience of working from home.
While working for yourself certainly has its pros, finances can often prove a challenge for new and seasoned freelancers. Unlike a traditional 9-5 job, freelancers do not receive a steady paycheck or employer-paid benefits. The somewhat unpredictable nature of being self-employed requires you to manage your money very attentively.
Whether you are a new or veteran freelancer in 2018, here are a few tips on how to manage your finances.
Separate Personal and Business Finances
Separating your freelancing finances from your personal finances is key. By having separate accounts, you can more easily track your income and expenses. You’ll also have cleaner records to clearly showcase what business expenses you can deduct on your tax return.
Since you likely don’t have a regular stream of income and don’t pay taxes in the traditional sense, it is imperative to keep detailed records of your finances. Separating your business finances from your personal finances is the first step to ensuring that you are keeping as good of records as possible.
Create and Follow a Budget
Due to inconsistencies in income, creating and following a budget can be a challenge, but it is not impossible.
Since no two months result in the same income for a freelancer, you will have to base your idea of earnings on an average. Keep in mind, one bad month doesn’t define your business, but either does one successful month.
When you calculate your average income, you can then have a better idea of what to budget. Remember when budgeting to keep a record of all business receipts and to track all business expenses.
Because it’s up to you as a self-employed person to estimate your taxes every quarter, it’s essential to diligently track your income and expenses throughout the year.
Pay Yourself First
This advice seems to be the consensus among financial experts – pay yourself first. Making sure you get a cut of your earnings might seem logical, but many freelancers find paying themselves to be particularly challenging.
As a business owner, paying everyone before you pay yourself may seem like the most responsible thing to do. But refusing to prioritize payment to yourself can also bring serious personal financial consequences. In addition, paying yourself first will help to simplify your budget and reduce stress related to your finances.
Have Money Set Aside in an Emergency Fund
As a freelancer, your income is subject to regular ebbs and flows. That makes an emergency fund even more of a priority.
An emergency fund can be used for any sudden, unexpected expenses, such as medical bills or car repairs. Because your income as a freelancer is not completely predictable, an emergency fund can protect you and your finances. Ideally, you should have enough saved to cover six months of expenses.
Save for Retirement
Since freelancers work for themselves, it can be tempting to forgo enrolling in a retirement plan. But saving for retirement is necessary for everyone, and luckily, there are plenty of options. For instance, you can still contribute to an individual retirement account (IRA) or solo 401(k).
Continue to Pay Off Debt
In a way, those who are self-employed face more uncertainty about their future income. Because they do not always know what the next month’s cash flow income will look like, some hesitate to use their income to pay off debt. Instead, they like to save their money where it is easily accessible in the event that their business hits a rough financial patch.
If you have personal debt, do not forget to set debt repayment goals. Though you may feel like you have more pressing priorities, it is vital to continue paying down your debt. Paying off debt will decrease your interest payments, help raise your credit score, and allow you to then put the money you were paying to debt toward your business.
Don’t Forget About Insurance
Freelancers do not typically have individual access to employer-sponsored insurance plans, so it is their responsibility to make sure they are insured. Failure to obtain insurance can put you and your family at medical and financial risk. That’s why it is crucial to have proper coverage.
This includes health, life, car, and any business insurance you may need. While it may be tempting to forgo insurance due to the cost, it’s important to remember that insurance is one of the best things you can do to protect your finances.
Set Money Aside for Taxes
Taxes can be stressful for anyone, and unfortunately, taxes tied to your self-employment income can be even more complex. Because freelancers don’t have taxes withheld automatically from their paycheck like traditional employees, they have to make quarterly estimated tax payments.
That makes it necessary to set aside some of your earnings to make those tax payments.
One easy way to ensure you have enough money set aside is to create two separate business savings accounts. One account is where you can deposit money received for your freelancing services. Then, you can take a percentage of your earnings out and move it to the second account to act as an estimated quarterly tax account.
Plan for Ups and Downs
As a freelancer, you likely earn drastically different amounts from month to month. Even freelancers who earn a high income every year can attest that there are slower months in their business.
To be a successful business owner, it is integral to accept that not-so-good months will happen. You simply need to plan accordingly by creating a budget, building an emergency fund, and planning for taxes.
Have Confidence in Your Finances
When you are a freelancer and business owner, your finances will likely never be predictable or steady. Despite the inconsistencies, it is possible to take charge of your finances and build wealth. With wise money moves, prioritization of saving money, and responsible business practices, you can master your money as a freelancer. It is then that you can truly enjoy all the benefits of being self-employed.
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