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Being self-employed is a dream that’s realized for many people out there. The freedom to pick the projects to work on, how much to charge, when to work, and being your own boss are some of the benefits it brings. Becoming a freelancer has become very popular in the past decade. Technology has enabled almost everyone to work from anywhere. The need for freelancers to do high skill work like digital marketing, programming, and web development has also made it very attractive for people to jump into freelance work.
There are some things from a financial standpoint that you should know when you work freelance. Being self-employed brings some unpredictability to your work. Budgeting for self-employed individuals is critical. It’s also important to learn how to save money every month since your money fluctuates. Read our saving money tricks to learn how you can plan.
Create a Budget That You Can Follow
Budgeting for self-employed workers is a little tricky because of inconsistent income, but you can do it. Take the guesswork out of estimating your monthly income. As a freelancer, it’s not likely you’ll have two months where you brought in the same amount. So use an average of your earnings to calculate your expected monthly income.
You must also create a good record-keeping system of all your business receipts and expenses. It’s not only an important part of saving and budgeting, but you’ll need them for taxes. Self-employed people should estimate their taxes each quarter.
Savings Starts with You
Familiar with the saying, “Pay yourself first.”? It’s one of the mantras that virtually every financial expert says about how to save money every month. Self-employed individuals tend to forget to do this, however. It can cause them to have problems down the road. A budget is much easier to follow if you do this first.
Try Sinking Funds
One of the simple money-saving tricks you can try is using this strategic method of the “save as you earn” mantra. A sinking fund works like this: You create a separate savings account or several accounts that are intended to cover a variety of different goals. The purpose can’t be to use as your emergency fund or regular savings. For each “purpose” the sinking fund is for, you decide how much you need to save and how long you expect it to take to reach that goal based on monthly savings. Some examples of sinking funds include:
- Home Repair
- Tuition payments
- Celebrations like holidays and birthdays
- Washing machine, fridge, other appliances
Invest and Build Your Savings
A monthly savings plan should contribute funds to specific savings goals. Paying off debt is also important, but if you focus solely on that, you could miss out on the time value of money through retirement investments.
Retirement Savings for Self-Employed
You don’t have a 401(k) option since you don’t work for an employer. But not investing in a retirement plan is not the answer. There’s still plenty of choices available for retirement savings for self-employed individuals.
Individual retirement accounts (IRA) are one such option. Traditional IRAs and Roth IRAs are the most common types of retirement accounts. You can choose which one is most suitable for you since they each have their own advantages. For example, with Traditional IRAs, you can invest pre-tax dollars into the fund. You only start paying taxes when you begin to take withdrawals in retirement. Both IRA plans have a maximum contribution amount for each year. The current maximum contribution is $6,000 for 2020.
Another option for self-employed individuals is the one-participant 401(k) plan. This plan is like a traditional 401(k) plan, except that it covers a business owner who doesn’t have employees. It covers that individual’s spouse as well. The one-participant 401(k) plan’s rules and requirements are the same as other 401(k) plans.
Especially with the unpredictable nature of being a freelancer, you should set aside money in an emergency fund. The purpose of an emergency fund is to cover those unexpected and sudden expenses that you didn’t plan for. Things will happen, which is one of those saving money tricks that you hopefully won’t find yourself in often. These are events like your car suddenly breaking down, or getting sick, which results in medical bills. Your emergency funds should cover at least six months of expenses. Make this a part of your monthly savings plan until you have reached this threshold.
Pay off Debt
Set debt repayment goals if you have accumulated some personal debt. It might seem like you have more pressing needs since your cash flow is unpredictable, but there’s plenty of benefits to doing this. Not only does it lower the amount of interest, you’ll end up paying, but it can help improve your credit score. Once you’ve paid off your debt, you’ll have more money to put towards saving for other things.
There are many strategies out there to help with paying off debt faster. We will explain two of the most popular strategies below. You can use it effectively to reach your goal of becoming debt-free.
The avalanche method is focused on eliminating the debt with the highest interest rates first. This method can help save time and interest costs through your road to becoming debt-free. If you are geared to be patient and analytical, this could be the more appealing of the two methods explained here.
Let’s look at an example of how this works in action. You have four sources of debt, a private student loan that you have $4,000 left to pay back with a 6% percent interest rate, $3,000 on a credit card at 18.9% interest, another credit card with a balance of $800 on 24.5% interest, and a medical bill that’s for $600 with no interest.
Your debt would be prioritized as follows: the $800 balance on the credit card, $3,000 balance on the other credit card, $4,000 student loan, and the $600 medical bill. You’d make the minimum payments on all these debt payments, but any extra money you have will go towards paying back that $800 credit card faster. Once that credit card’s balance has been paid in full, you’ll move on until you have paid all four debts off.
Staying motivated can be difficult when you’re paying off debt when you’re not making fast progress. The Avalanche method takes longer to see these results, even though it typically will save you more money. However, your habits are more important for personal finance. The snowball method allows you to see progress faster and keep you motivated until you reach your goal of becoming debt-free.
Using the snowball method, you start paying off your smallest debt balances, moving on to the next biggest balance after that. You’re basically building up momentum, which is why the term “snowball” is used.
If we used the same example above, your debt priorities like this: $600 medical bill, $800 balance on credit card, $3,000 credit card, and $4,000 student loan. You’re building your confidence through the progress you’re making on paying off the smaller balances first.
Keep Money for Taxes
A guide to save money for the self-employed isn’t complete without setting aside money for taxes. Paying taxes when you’re a freelancer is more complicated because you don’t have them automatically taken out as an employer. You need to save money on your income to handle paying out these taxes.
Save as you earn by setting up two different business savings accounts. You’ll put the money you earn each month into the first account. Estimate what your quarterly taxes are, then transfer that amount to the second account.
Make Sure You’re Covered
Having adequate insurance is something that we often don’t appreciate until we need it. Don’t think that you can go without it because all it takes is one event to put you and your family at financial and medical risk. Your guide to save money, in this case, is to take out adequate health, life, car, and business insurance that fits your needs. Protect your finances as tempting as it might be to forgo it because of costs.