So, you’ve taken the plunge into the great freelancer’s abyss, where dreams and reality meet face to face and wage battle for the rights to your life. Or so it can feel, anyway. There are a lot of freedoms that come from being self-employed: You can set your own schedule, make things the way you think they should be, and divide your efforts and energy however you please.
On the other hand, you have no one to blame but yourself when things go awry. Many a freelancer has unintentionally fallen on his own sword for lack of attention to his financials, so you’ll want to learn from his mistakes if you hope for any degree of longevity in your new career. Here are some ways that you can financially prepare yourself and increase productivity for your self-employed lifestyle.
Insurance. This must be the number one reason a freelancer fails, and this is due to the catastrophic and expensive nature of the things you buy insurance for. Accidents happen, and there is very little you can do to prevent them, so a car accident or sudden illness can put you out of commission and out of work in the same instant. You work hard for your savings, and you wouldn’t want to see it all drained away from a weekend stay at the hospital.
If you can’t afford to replace your car should it get totaled, get full coverage. If you can’t afford your co-pay without tipping the scale of your monthly budget, then spring for a better health plan. If you live in fire, flood or earthquake-prone environments, then get the proper insurance. Otherwise, you’ll feel foolish if something happens and have peace of mind if nothing does.
Taxes. Uncle Sam needs his cut, and neglecting your taxes will only make your financial life more difficult. You’ll want to set aside 30 percent of all your income to cover your Federal and State taxes along with your Social Security and Medicare taxes. It will be more of your income than it would if you were an employee because the company usually pays a portion of some things. You’re on your own now, and the responsibility is yours. An app like GoDaddy Accounting (formerly Outright) can help you funnel your annual expenses and income into tax documents when it’s time to file.
The Internal Revenue Service (IRS) requires quarterly payments, so keep track of the dates and make sure to pay on time or you could incur some extra fees.
Savings. Life, whether it be family, friends or career, is notoriously unpredictable. Expenses pop up, work stops coming in, and things happen. Ideally, you’ll want enough of a savings to survive six to nine months with no income. If you decide that freelancing is harder than you thought and you want to get a regular job, it can take time to find the right one. If your clients pay late or can’t pay at all, you’ll want an ample cushion to work something out with them. As Carly Miller states in her blog for Gryffin Media, repetition and consistent evaluation will teach you what to say yes to and what to say no to, as saying no to certain offers can be just as valuable when it comes to analyzing your time spent versus income.
Budget. When your income is irregular, you’ll need to take extra care of how you spend your money. It’s important to keep track of all your expenses so that there are no surprises if money stops coming in. Consider an accounting software like QuickBooks. It’s simple enough to use and it organizes both your personal and business expenses, including payroll if you have an employee.
Retirement. You probably aren’t planning on working until you drop, so you’ll want to start planning now for those twilight years, no matter how distant they presently seem. Do your homework into the various Individual Retirement Accounts (IRAs) and 401(k) plans available to you. Simplified Employee Plan IRAs allow larger annual contributions and are great if you have no employees, where the Savings Incentive Match Plan IRA requires you to match employee contributions up to a certain percentage, it is better to start with if you plan to hire employees down the line, as it can be messy to switch over.
There are freedoms that come with freelancing, but there are also an increased amount of responsibilities. It’s important for your sake, and the sake of your business, that you stay informed and up-to-date. Your success depends on it.
Dave Landry Jr. is a small business owner and financial adviser. He is honored to be a monthly contributor for Manilla.com.
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