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Your finances will look different when you’re a freelancer.
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Being a freelancer is much different from being an employee of a company. You have more control over your workload and schedule and may have unlimited income potential. When you work a traditional job, you don’t have as much say regarding your day-to-day affairs or how much money you make. If you’re considering stepping into a freelance role this year, ensure that you set yourself up for financial success. Here are a few money tips for brand-new freelancers.
1. Have an emergency fund
Before jumping into freelance life, having extra savings stashed in an emergency fund is a good idea. Building a successful freelance business takes time and effort, and you want to make sure you have plenty of money to continue paying your bills. It may take time to reach your income goals, especially if you’re working in a new field or using new skills.
Many people start freelancing without a plentiful savings account balance. That can be a recipe for disaster. The last thing you want to do is struggle with credit card debt because money is too tight to cover your living expenses. An emergency fund can help you get through difficult financial hurdles that may come your way.
2. Keep track of your earnings from the start
As soon as you begin freelancing, get into the habit of keeping a careful record of your earnings. You’ll need to report all freelance income when you file your taxes. Keeping track of your income from the start will make it easier to handle your tax affairs in April. You can use accounting software or compile your earnings in a simple spreadsheet. Knowing how much money you’re bringing in can also help you set and adjust your financial goals throughout the year.
3. Aim high when setting your rates
As a new freelancer, knowing how to price your work can be difficult. You may feel tempted to set lower rates as you grow your business, but you don’t want to set yourself up for failure. If you set your rates too low, you may regret the work that you take on and suffer from burnout because you have to work more to make enough money. Instead, aim high from the start. Remember that your work carries value, and you deserve to live a comfortable life.
4. Prepare for inconsistencies in income
One of the main differences that can take time to adjust to as a freelancer is inconsistencies in income. You typically get paid the same amount when you work a traditional job. You also usually get paid on a regular schedule. With this kind of job situation, it’s easier to budget.
Unfortunately, it’s not uncommon for freelance income to fluctuate. There may be periods when you have a hefty workload and a lot of money coming in, but then there may also be times when work is slower and your payments are less, or more sporadic. You can plan for these times.
To prepare for income inconsistencies, it’s best to set aside extra money throughout the year. When you’re busy and have more money, don’t be afraid to stash some of it in a high-yield savings account. It’ll be there if you need it to cover bills during slower work periods, and you can earn interest. Current rates are competitive, so your earnings can quickly accrue interest.
5. Make quarterly estimated tax payments
Tax time looks different for freelance workers. Employees have their taxes deducted from their paychecks — so there is little to worry about beyond filing an annual tax return. As a freelancer, you’re responsible for setting aside enough money to cover your taxes, and you also need to make the payments yourself. If you don’t, Uncle Sam will eventually come looking for you.
You’ll need to file an annual tax return, but you should also make quarterly tax payments. By making estimated tax payments throughout the year, you can avoid paying penalties. You may want to mark the due dates on your calendar, so you don’t forget to plan accordingly. Many freelancers set aside tax money regularly to avoid falling behind. If you need help filing your tax return, take a look at the best self-employment tax software.
Freelancing can be a win for your life and your wallet
The freelance lifestyle is becoming more popular, and for a good reason. You can get paid to work while being in charge of your schedule, workload, and income potential. Once you become your boss, you may have little desire to return to a traditional job setup. Trust me, I know.
Before making the switch to freelance, consider how your finances will change. The above tips will help you make the right money moves, so you set yourself up for success as you navigate your journey. For additional money management tips, check out our personal finance resources.
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