Freelancing is growing in popularity because of the amount of freedom it offers.
As a freelancer, you are also a business owner and you need to take care of every facet of business and personal finance, taxes, sustainable operation, and creative parts.
Whether you’ve been making money as a freelancer for a long time or are just getting started, personal finance is an essential strategy.
Here are a few steps to manage your money as a freelancer!5 Personal Finance Tips Every Freelancer Should Know Click To Tweet
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Find Out Your Monthly Income
Unlike traditional 9-5 jobs, freelancers don’t have a set salary and employer-paid benefits.
Freelancers earn different amounts from month to month depending on the number of projects they’ve worked on.
So, let’s find out the average monthly income!
How much did you make last year? Divide that by 12 and you have your average monthly earnings.
Do you have 5 years of freelance experience? Then, divide that by 60 and you have your average monthly earnings.
It is not always your earnings is growing from year to year, so use the past few years’ data to get a better sense of what you truly earned.
- Find out total income for over 6 years and added up them all
- Total income divided by 6 is the average yearly income
- Average yearly income divided by 12 is the average monthly income
Once you have a solid number as your average monthly income, use that number as a baseline for the next step of budgeting.
Before starting budgeting, you still need to estimate some numbers such as monthly taxes, fixed expenses, and savings.
How much do you pay for rent each month? Do you have health insurance? List all of the expenses.
Set up a budget based on your average monthly income, create a 1st priority list & 2nd priority list.
Example of 1st priority List:
- Living expenses – your fixed expenses plus everything else that keeps you alive. Rent, phone, Wi-Fi, health insurance, food, water bills, etc.
- Taxes – Americans spend 29.2 percent of our income in taxes each year. There are many different kinds of taxes like federal, state, city, income, etc. Save 20% of your monthly income just in case. Depending on your tax bracket at the end of the year, you may need to pay a little more or you may get a little refund.
Example of 2nd priority List:
- Emergency – this is for when your car breaks down, you break your leg, heater break in the winter, etc. To prepare for emergencies.
- Retirement – If you are 20’s then this doesn’t seem important but when you get older, you’ll regret not having your retirement savings. Even if you can only save a little, start earlier is better.
- Save/Spend – this is savings for spending like a vacation, Christmas, down payment on a car, new phone, etc.
After you make a deposit into 1st priority, then deposit the rest into 2nd priority.
Use High-Interest Savings Account for Retirement
I know the interest rate of the high-yield savings account is keep decreasing these days. But cash is strong.
A high-yield savings account offers protection of your principal, the safety of federal insurance, and a yield that’s higher than a regular savings account.
Your savings won’t grow like investing stock market, but your principal will be guaranteed. (plus, yield)
Prepare for Taxes
There are many tax deductions for freelancers, contractors, and other self-employed people who work for themselves.
Deductions are a great way to reduce your taxes, minimize cost, and increase profit. Track your business expenses.
According to FreshBooks, these are itemized tax deductions:
- Home Office – if you work from home, the percentage of your mortgage and property taxes or rent can be tax-deductible.
- Utilities – if your work requires electricity, internet, heating, ventilation, and air conditioning, phone service then part of those costs can be tax-deductible.
- Equipment, Supplies & Software – if you purchase office supplies and software/programs that you use at work, it can be tax-deductible.
- Training & Development – tuition, seminars, eBooks, online courses, or professional industry organizations to develop job-related skills and further your career, it can be tax-deductible.
- Marketing – websites (domain & web hosting), business cards, flyers, and other kinds of advertising/marketing efforts for your business are all tax-deductible.
- Travel – most costs associated with business travel like flights, hotels, and meals during the travel can be tax-deductible.
- Meals – if you pay for lunch during a meeting with a client or supplier, or if you spend on food during your business trips, the part of those costs can be tax-deductible.
- Health insurance – if you pay for your own insurance (and meet specific criteria), it can be tax-deductible.
- Shipping Supply – if you are a reseller, envelopes, bubble wraps, gas fees driving to post office, it can be tax-deductible.
Checklist: Tax Preparation for Freelancers Click To Tweet
Tips: Tax deduction refers to a deduction off your taxable income. Do not estimate business expenses, keep track of actual numbers. Once, I had a letter from the IRS. They asked me to submit the evidence of some business expenses. I had a hard time finding the evidence because it was 5 years ago. Luckily, I had the evidence (because I track everything) so it was ok.
For more details, please check IRS Self-Employed Individuals Tax Center here.
Create Multiple Income Streams
Creating additional sources of income is one of the best financial safety nets for anyone, not only freelancers. Taking small steps to create financial safety nets will give you more choices during unexpected hardship.
If you have multiple choices, you can make smarter decisions. If you can make smarter decisions, you take control of your life more.
Knowledge is power. Work for the best, prepare for the worst.
Control of finances is one of the most powerful strategies to maintain the best work performance and motivation.
Now, it’s your turn. How do you manage your finances?