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Personal Finance for Freelancers: 7 Tips You Should Really Know

Building a freelance career requires multiple skills. One that’s often overlooked is how to manage your personal finances as a freelancer. Working for yourself has huge advantages, but it also means irregular income, complicated budgeting, taking care of accounting, taxes, health insurance, and retirement planning yourself. You’ll need to plan carefully and stay aware of your personal finances at all times if you want to keep up.

To make that a little easier, we’ve prepared seven personal finance tips that every freelancer should know. This is personal finance for freelancers!

Useful personal finance tips for freelancers

Now that we’ve considered the unique challenges of managing personal finance for freelancers, let’s investigate seven excellent solutions.

  1. Start with a budget
  2. Separate business and personal expenses
  3. Build a well-stocked emergency fund
  4. Diversify your income sources
  5. Find affordable health insurance
  6. Build your own retirement fund
  7. Don’t forget Uncle Sam!

1. Start with a budget

“Budget” can be a scary word if you’ve never had one before. If you’re a freelancer, a budget will have to become a regular part of your life. That’s because unpredictable cash flow is one of the basic realities of freelancing. You’re not going to be getting the same paycheck every two weeks, and you’ll need to learn to even out the highs and the lows. A budget will help you do that.

At the core, budgeting is simply a matter of making sure your expenses fit neatly within your income. That’s a simple concept but it’s not always easy to pull off. Learning the basics of budgeting is one of the first steps towards secure personal finance for freelancers.

It can help if you get a budgeting app that will make the process easier. There are free solutions, like Mint, that are pretty basic, but will help you set up and better manage your finances. If you’re looking for a budgeting app that’s more comprehensive, check out YNAB (“You Need A Budget”). It will cost $11.99 per month, or $84 on an annual basis, but it may be some of the best money you’ll spend. YNAB claims the typical user saves $6,000 per year!

There are many other budgeting tools that you can use to help you build and follow a budget. Choose the one that fits your needs and style!

2. Separate business and personal expenses

Keeping track of business-related expenses can be a real nightmare if they’re mixed in with your personal expenses. Using either a dedicated business credit card or bank account will help you keep expenses separate.

A business bank account has the added advantage that it can also be the account where you deposit business-related income. Having both income and expenses running through a single bank account can make tax preparation much easier.

If you need more help managing your income and expenses, you can take advantage of one of the many accounting software programs for small businesses. Popular programs like QuickBooks and FreshBooks can provide professional-level accounting capabilities.

3. Build a well-stocked emergency fund

Personal finance for freelancers can be like a rollercoaster. No matter how carefully you budget your income and expenses, there will be times when funds will be running low. You’ll face times when income is high, and others when it may not come in at all. Think of it as an occupational hazard, or simply an occupational reality.

The best way to prepare for this inevitable outcome is by creating a dedicated emergency fund. It may be difficult to do this when you’re first starting out, so you’ll need to be realistic. A good initial goal may be to have living expenses equal to 30 days in your emergency fund. Eventually, you’ll want to build that up to the recommended 90 to 180 days.

The best way to do that is to stay on budget even when your income is high, so you can put the extra income into your emergency fund. That will make sure it’s there during the lean periods when you’ll need to make withdrawals.

Your emergency fund should be held in a safe and easily accessible account, even if it doesn’t pay much interest. A savings or money market account with a local or online bank is a good choice.

4. Diversify your income sources

One of the most fundamental differences between an employee and a freelancer is that the employee usually relies on a single source of predictable income, while a freelancer relies on many.

The more income sources you have, the more stable your cash flow will be. That will help to avoid the ups and downs that create the need to tap your emergency fund when income dips. You’ll know your business is a success when the money coming into your account exceeds the money going out on a regular basis.

Finding new sources of income is a core element of self-employment. You’ll need to be searching for new sources on a regular basis.

For example, if you’re a freelance writer, there are multiple ways you can acquire new clients. Two of the most popular are participating in referral networks and sending out pitch letters to prospective clients. As a freelance writer myself, I can tell you this needs to be your standard operating procedure.

5. Find affordable health insurance

Finding affordable health insurance is not just a personal finance problem for freelancers, it’s a problem for just about everyone, but it’s a particular headache for the self-employed. As a freelancer, that’s exactly what you are.

Unfortunately, there aren’t a lot of options. The most cost-effective way to get insured is if your spouse has coverage through his or her employer that can cover you both. If you’re not married or if your spouse doesn’t have coverage either, you’ll need to get your own health insurance plan.

In the US, you can check prices for plans available through healthcare.gov. I ran a sample scenario of a 30-year-old single female living in the Atlanta metropolitan area, with an annual income of $40,000.

The plan below – a “Silver” plan offered by Kaiser Permanente – carries a premium of about $330 per month. Now you can get plans with lower premiums, but the deductibles are in the $6,500 to $7,000 range. The plan shown below has a maximum deductible of $3,500.

Admittedly, a deductible of $3,500 isn’t exactly pocket change, especially when you’re freelancing. But plans with lower deductibles will result in a premium increase of hundreds of dollars per month. Also, note the “out-of-pocket maximum” figure of $6,500. A serious illness or injury could leave you on the hook for that amount.

Until your cash flow situation becomes more generous and predictable, you may need to compromise with a lower cost/higher deductible plan in the meantime.

It may seem as if health insurance is an unnecessary expense early in your business career, but a single mid-level medical event can easily land you in bankruptcy court. You can prevent that by finding insurance. However, even with insurance, out-of-pocket expenses can hammer your finances. It pays to supplement your insurance with a solid emergency fund or a tax-advantaged Health Savings Account.

6. Build your own retirement plan

Freelancers won’t have an employer-sponsored 401(k) or pension plan. You’ll still want to retire someday, and that will only happen if you prepare for it. The time to begin preparing is now.

Retirement plan contributions, like health insurance premiums, will represent another draw on your cash flow. Fortunately, retirement plans come with much greater flexibility than health insurance.

The most basic choice is a traditional or Roth IRA. There are some important differences:

Traditional IRAs

Your contributions to the plan are tax-deductible when made, and withdrawals are taxable when received. If you withdraw funds prior to age 59 ½, you’ll be subject to ordinary income tax on the amount withdrawn, plus a 10% early withdrawal penalty. You will have to start taking disbursements from your IRA at age 72.

Roth IRAs

Contributions to a Roth IRA are not tax-deductible when made. You’ll pay tax in the year you earn the money. Because you’ve already paid tax, you can withdraw your contributions (but not your investment earnings) without tax or penalty at any time, as long as you have held your Roth IRA for at least five years.

Roth IRAs also don’t have mandatory disbursements at any age. You can save them for later in your retirement or even pass them on to your heirs tax-free.

Similarities between traditional and Roth IRAs

Whether you choose a traditional or Roth IRA, the maximum contribution is the same at $6,000 per year, or $7,000 if you are 50 or older.

You don’t have to make the full IRA contribution each year. Start with $1,000 in the first year, then increase it by $1,000 each year thereafter, until you reach the maximum contribution level.

The advantage to starting small is that you will begin building momentum. Meanwhile, your contributions to a traditional IRA will be tax-deductible, helping you on the tax front.

And with either plan, you’re free to hold the account with the investment broker of your choice, choosing your own investments, and getting the benefit of tax-deferred investment income.

Social security for freelancers

If you have a regular job, your employer will deduct Social Security contributions from your paycheck. Employers also match those contributions, up to $3,825 a year. If you’re a freelancer, you’re both employer and employee, so you’ll have to make both contributions yourself. You’ll pay these contributions when you make your annual income tax payment.

If you pay social security taxes for a minimum of ten years, you will be eligible for Social Security and Medicare benefits when you retire. The more you pay in over the course of your working life, the larger your benefits will be. The payments may seem like a burden, but the benefits can be very useful down the line. Check here (PDF) for more information on Social Security for self-employed people.

7. Don’t forget Uncle Sam!

Taxes are inevitable, but if you have a conventional job, much of the work will be done for you. Your employer will withhold payments and send you a W-2 form with much of the information you’ll need to file. Taxes are a little more complicated for freelancers.

There’s a lot to cover here, so let’s break it down into two smaller chunks:

Be aware of deductible business expenses

Self-employed freelancers can deduct most expenses incurred in the production of their income.

Examples include:

  • Marketing and advertising.
  • Internet and cell phone.
  • Home office, if you run your business out of your home.
  • Business supplies and equipment.
  • Transportation expenses incurred in connection with your business.
  • Business-related travel expenses.
  • Business-related education.

Expenses like health insurance and half the Social Security tax you pay are also tax-deductible.

Set up income tax estimates

Taxes can be a big surprise for freelancers, especially in the first year of business. You don’t have an employer, so you’ll need to make regular estimated tax payments in anticipation of your tax liability for the full year. You’ll need to be conscientious about this since the penalties for non-payment of tax can be high.

In the US, the IRS requires you to make tax estimate payments at (roughly) quarterly intervals. The payments are due on the following dates:

  • April 15
  • June 15 (yes, this one is only two months from the previous estimate)
  • September 15
  • January 15 of the following year

The best way to determine what your quarterly payments should be is to take last year’s income tax liability and divide it by four. That works as long as your income has not significantly increased or decreased since last year. If you’re having an unusually good year or an unusually bad one, you may have to adjust your estimates.

If this is your first year freelancing, that method won’t work. Instead, you may need to spend some time with a tax preparer crunching the estimated numbers based on anticipated income and expenses. Keeping good records of your income and expenses will help! If you receive your income through online payment platforms like PayPal or TransferWise, you can download transaction records that will help you track your income.

The IRS provides additional information for self-employed taxpayers, and it’s a good idea to review it regularly.

Bottom line on personal finance for freelancers

Personal finance for freelancers is more than creating ways to generate a steady income. It is just as important to manage that income effectively. Follow the tips above, and you’ll be taking big steps toward freelance success!

Have any financial tips we missed? Share them comments section!

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Written by Kevin Mercadante.

Layout and presentation by Chris Fitzgerald and Karol K.

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