Nowadays, more and more people choose to be self-employed and take on a freelancing career. There are various reasons why people do this. Some might do it because they enjoy working from home while others prefer to be their own boss and set their own pace.
Regardless of the reasons, no one can deny the fact that freelancing work provides quite a bit of flexibility and benefits that full-time employment simply lacks.
However, there are also downsides of freelancing that could’ve been avoided with full-time employment at some company.
The fact of the matter is that it comes down to personal preferences. People opt for freelance work because it suits them or their personal lifestyle. Any downsides can be remedied with a bit of planning and effort.
Speaking of downsides, financial security is one of the main concerns of freelancers, mainly because of the uncertainty that comes with freelance work in most cases. You may have an abundance of work today but may run into a dry period the next month. Still, that’s not an issue of freelancing but more of an issue of personal budgeting.
With that in mind, here are a few tips to help maintain your financial health if you are considering freelance work.
1) Self-employment taxes
One of the key elements of proper budgeting and maintaining financial health is understanding your expenses, as well as understanding the potential negative implications or consequences of neglecting your dues. Freelancers fall under the “self-employment” category, which means you have some extra expenses to worry about aside from paying your bills and buying groceries.
One of the main expenses is taxes. When employed in a company, your employer calculates the taxes and takes it out of your salary. However, once self-employed, you have to worry about those things yourself. Here are a few major differences for the self-employed:
- As self-employed, you work for yourself and your contract directly with your clients.
- As self-employed, you’re technically not an employee, which means you don’t receive any employee benefits or health plans.
- As self-employed, you’re not subject to tax withholdings, which means you’re responsible for paying your taxes.
Simply put, as a freelancer, you’ll have more responsibilities towards yourself, that is if you want to maintain your financial health, to begin with. Therefore, you’ll have to file your annual tax and pay your estimated quarterly tax. Aside from that, you’ll have to pay a self-employment tax.
Don’t forget that you’re taxed as both employer and employee, which means you pay both portions of the tax. There are also Medicare and Social Security taxes you have to worry about as well.
Understanding your expenses means knowing how much money you have to pay and how much you’ll have left once your obligations towards the government are taken care of. This will further help you with your budgeting efforts so that you can maintain financial health in the future.
2) Budgeting efforts
Many people roll their eyes somewhere deep at the back of their skull whenever they hear the word “budgeting”. People know they should do it and that it’s necessary but they mostly don’t want to bother with it. Unfortunately, bad spending habits and a lack of budgeting can lead to many financial issues, which are especially dangerous if you’re a freelancer.
You simply don’t want to or shouldn’t spend more money than you actually need to, and this goes for bills, credit cards, loans and any other expense that doesn’t involve personal enjoyment. As an example, late bill payments lead to excess fees. Also, minimum card payments lead to more debt and high-interest rates. In other words, you end up spending more even though you could simply avoid all of that.
With that in mind, consider improving your spending habits and make an effort to budget your money wisely. As an example, you should always try to maintain a good credit score. It will determine your creditworthiness among lenders. If not, you may end up in financial issues due to your bad credit rating.
Here are a few examples of how bad credit score can impact your life negatively.
- Denied for credit cards and loans or extra high-interest rates for both.
- Being denied for apartment approval.
- The requirement to pay security deposits on utilities.
- Being denied for a cell phone contract.
- High insurance premiums, etc.
Good financial habits allow you to avoid issues and to maintain financial health as well.
3) Get paid on time
One of the difficult aspects of freelance work is getting paid on time. As you work with clients directly, you have to negotiate how much you’ll get paid and when. As you may already know, if you don’t get paid on time or don’t get paid at all, your financial problems will start to pile up.
Handling clients may be challenging, but you have to be firm with them if you want to be financially stable while maintaining a good reputation as a freelancer.
That said, here are a few things you can do to ensure you actually get paid on time.
- Send invoices and invoice reminders to clients regularly.
- Always work under a contract.
- Charge upfront (100% for short projects, 50% for medium ones and 20-30% for long-term projects).
- Set up an automatic billing system.
- Research clients before you take work from them.
- Maintain a good relationship with clients.
The more you make an effort to protect yourself, the easier it will be to ensure you get paid on time and that you can maintain your financial health.
Freelancers rely on networking quite a bit so that they can find work at all times. You have to establish a network of contacts and attend a couple of networking events in order to make yourself available on the market as well as make yourself known.
Your contact network should include friends, family, other freelancers, potential clients, possible mentors and so on. You can even consider including potential outsourcing partners in your contact network, especially if you ever run into a particularly large project you can’t handle alone. Networking is sort of like marketing for freelancers.
The only difference is that you develop a network of contacts that may aid you in one way or another at one point instead of promoting yourself like businesses do all the time. After all, referrals and word-of-mouth recommendations can go a long way in the freelance world. It will help you find work and earn a living that will also help you stay financially healthy.
5) Save money for rainy days
One of the most important elements of financial health is knowing how and when to save money. You don’t have to spend everything you earn straight away. In fact, whatever you have leftover after you include all of the expenses you can invest in emergency savings account for rainy days.
That way, you’ll have money saved up for when you actually need it. However, that’s not the only way to save money. You can also consider investing in your future. As an example, you should consider opening a retirement fund. You can choose one of the individual retirement accounts (IRA) and save money for when you no longer can or want to work. For instance:
- Traditional IRA – contributions are tax-deductible but withdrawals are taxed at regular levels.
- Roth IRA – contributions are taxed at regular levels but withdrawals are tax-deductible.
- SEP IRA (Self-Employed) – Same rules as Traditional IRA with lower taxes.
- 401(k) plans – You can also engage in an employer-sponsored retirement plan.
Whichever way to save money you choose, it’s important to be willing to save in the first place and save regularly so that you can either have an emergency account or a sound retirement plan or perhaps even both.
Freelance work is nothing short of flexible and exciting. However, many people point out that it doesn’t pay well. This may cause some concerns regarding your financial health but it’s nothing that cannot be taken care of with a bit of proper budgeting and financial planning.