Being a successful freelancer is dependent on a variety of elements.
One of the influencing factors that can be disastrous for freelancers to overlook is taking financially responsible actions.
This isn’t just about bringing in as much money from your client base as possible.
Rather, the key is how you treat the capital you bring in.
By taking a measured and strategic approach to your finances in a range of areas — budgeting, taxes, and retirement planning among them — you may even build a successful business. You can also gain peace of mind and a more stable future.
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It’s important to remember that freelancing isn’t the same as simply being employed by a company.
Rather, your responsibilities tend to be closer to that of a business owner.
To be practical and successful as a freelance entrepreneur, you must budget effectively.
This should include:
1. Understanding Your Income and Expenses
The first step to budgeting is to make your income and expenses visible.
As your income as a freelancer is likely to fluctuate, this should be something you perform regularly, perhaps even bi-weekly.
Outline your expected income for the coming period based on the projects you have arranged and the likely timescale on which those invoices should be paid.
Understanding your likely expenses should be more straightforward, as elements such as utilities, food costs, and debt payments may well be relatively consistent.
From here, you can deduct your expected expenses from your expected income.
This gives you better clarity on the remaining funding you have to put toward other areas.
2. Allocating Funds
An important part of setting a budget is to pragmatically allocate the funds.
Avoid treating the remaining money after all the essentials have been accounted for as free to spend. Certainly, allocate a certain proportion to recreation.
However, as with any business, it’s sensible to also take steps to help safeguard your enterprise.
Remember, freelancing can be susceptible to tough periods and clients may be more cautious about their spending during downturns.
You can make your business more resilient to economic uncertainty by making strategic decisions.
This could involve investing money into an alternative space to work if your home office or coworking space becomes inaccessible.
Many businesses diversify their supply chains, but as a freelancer, you can allocate funds to marketing aimed at diversifying your client base. It’s also wise to set money aside as a bridging amount for leaner months.
Taxes can be some of the more frustrating parts of being a freelancer.
As an independent contractor, the responsibilities, benefits, and penalties related to tax are squarely on your shoulders. It’s important to take this seriously and set aside sufficient funds for taxes accordingly.
Your consideration should include:
freelancers have slightly different tax obligations to regular workers.
You’re liable to pay the federal and state income taxes that are relevant to the area of the country you operate from. However, there are additional tax requirements to bear in mind.
You’ll need to pay the federal self-employment tax, which currently sits at 15.3% of your net earnings.
This accounts for both the social security and Medicare payments that would usually be paid jointly by your employer and you.
It’s important to have an understanding of your obligations, alongside relevant percentage changes that occur as you move to different income brackets.
While the obligations may be frustrating, you also have the benefit of being able to claim certain deductions as a freelancer.
Understanding which of these apply to your work can make a significant difference to your tax obligations at the end of the financial year.
Some things you may be able to deduct include office and work supplies (including your laptop), vehicle costs related to work, education expenses related to your profession, and health insurance premiums in some cases.
Remember to keep full and accurate records of every expense related to your business and, if in doubt, consult an accountant.
While you may well enjoy your freelance career, you might not want to work for the rest of your life.
Unfortunately, you’re not likely to have access to the retirement benefits that many full-time workers today have, with employers making contributions.
As a result, you need to start making plans now so you can enjoy financial stability in later life.
5. Set Retirement Goals
Everyone should establish retirement goals, but freelancers, especially, should take a pre-emptive approach to these goals by asking these questions: What age do you ideally want to retire by?
How much money do you think you’ll need each month to maintain the lifestyle quality you want? What proportion of your income can you afford to put aside for your retirement?
Answering these can help you make more informed decisions about the types of resources you can invest in to achieve the retirement you want.
7. Arrange a Solid Plan
There are various types of retirement plans that are either aimed at freelancers or suitable for you. Some companies offer Solo 401(k) to self-employed business owners with no employees.
These contributions are deducted pre-tax, which tends to reduce your yearly tax burden, too.
You could also set up a Simplified Employee Pension IRA (SEP IRA) where your contributions are tax-deductible. It’s important to discuss your options with retirement plan brokers specializing in the self-employed.
They’ll be able to discuss your goals and income with you, before directing you to the most appropriate plans to meet your needs.
Financial success as a freelancer requires some focus on a few key areas.
Take time frequently to create a well-informed budget. Gain clarity on your tax obligations and keep good records of relevant deductions. Be mindful of your future, too, and start a retirement plan that is based on a solid set of goals.
Times are likely to change and the financial advantages or challenges you face as a freelancer may well develop with them.
Try to stay informed of these so you can make good decisions in advance. Nevertheless, starting to create solid financial foundations now can enable you to be more agile when these elements arise.