4 Things for Freelance Financial Planning
True to its name, freelancing comes with a lot of freedom to choose your clients, hours, projects and rates. But there’s a certain amount of financial security you may have to give up—like steady paychecks, automatic tax withholding, and employer-sponsored health and retirement plans.
So before you go full-freelance without knowing the basics and end up having to pay rent on your credit card, check out these four crucial steps you should take as a freelancer to manage your finances:
Have a budget—and a buffer account. Before you even sit down to start earning, make a budget based on what you think you’ll be spending and earning in the next six months. And it’s a MUST to always have an ‘emergency fund’ savings account to use in case of any dry spells between gigs. Most advice is to have 4-6 months of living expenses saved up; other freelancers suggest 9-12 or more, because you never know!
Start a retirement account—and pay it every month like a bill. With a salaried position, you can tell your employer to direct part of your paycheck money to a retirement plan like a tax-deferred 401K. But freelancers don’t have that option, so they need to save money for retirement themselves. Open a tax-advantaged retirement account as soon as you can and set it up so that it automatically deducts from your checking or savings account monthly or bi-monthly.
Take taxes out of every paycheck—and pay them quarterly. Oh, the 1099. What seems like a windfall payment from a client may turn into a small breeze once you figure in taxes. For freelancers, it’s recommended that you take 25-30% out of every paycheck for taxes. The good news is, as a freelancer you can deduct business-related expenses, like work-related use of your home, car, and cellphone. The bad news is, as a freelancer, you have to make estimated quarterly tax payments on your annual earnings.
Find a health care plan—and start an HSA. There are a few possibilities you can look into—what are the options in your state from the Affordable Care Act? (Here’s a list of the latest plans that are offered—pay attention to open enrollment dates.) Are you under 26? (In which case you can stay on your parents’ plans for now.) Do you have a spouse or domestic partner who works full-time, and can you get on their plan? Some professional associations in your field may offer group insurance options. The Freelancers Union has an excellent guide to choosing the right plan based on your specific freelancer needs. There’s also trade associations and maybe even your local chamber of commerce.