Making a career change and moving into the freelancing sector is an exciting prospect. Let’s face it: who doesn’t like the sound of being one’s boss? Yet, with great power comes great responsibility; especially so in the financial department.
Take a look at these five financial tips before you start your freelancing career and be prepared for anything.
1. Learn How to Budget
Just because your income is erratic doesn’t mean your expenses should follow suit. In fact, as a freelancer, keeping your expenses in check is the only thing you can do (most of the time).
Start by determining your break-even number — the number you need to shoot for to stay in the green each month. List all the essentials you need including food, utility bills, transportation fees, etc. and add them all up to get a total that you need to save up to (and surpass) every month.
Preparing for tax season is yet another thing freelancers should do more of. Too often people get fooled by the amount of money they make only to find out that almost a third of that doesn’t even belong to them. Separate your personal and business expenses (accounts) to get a better idea of what you’re up for and audit your taxes regularly. It pays to be prepared; quite literally.
2. Make Use of Contracts
The Internet — you will never find a more wretched hive of scum and villainy; except for Mos Eisley, perhaps. By now, probably everyone and their grandmothers were scammed at least once over the Internet; freelancers face this issue almost daily.
The solution: draft a contract for every new job you do to protect yourself from being ripped off by unscrupulous clients. Of course, this does not means you should make potential clients sign contracts for every small gig you do online; use common sense.
Overall, making use of contracts is not only good for your financial well-being but also for your reputation. By insisting on signing contracts before certain jobs, you’ll give off a sense of professionalism and clients will take you more seriously as a result; understand them, they too have been victims of scams in the past.
Protip: for some larger jobs, always include a deposit. That way you won’t have to live primarily off of air until the project’s end; 20% to 50% is the industry standard in most niches.
3. Know Your Limits
When you’re a freelancer, it’s easy to get carried away by present successes. Yet, the sporadic nature of the job can often leave you in great debt without any real source of income. What’s more, missing any outstanding payments can impact your credit history beyond repair. The moral of the story — known your limits!
To get a good idea of where you stand, be sure to check your credit score, regularly; especially so when you’re thinking of applying for a loan.
Keeping an eye on this will make it easier for you to apply for mortgage and car loans later in your life, so do try to stay on the safe side.
4. Set up an Emergency Stash
Flexibility means having the freedom to organize yourself, not being free to do whatever and whenever you want (all of the time); that’s called anarchy. Usually, the best way of protecting oneself (financially) is by setting some money aside in the form of an emergency fund. When you’re a freelancer, you learn the true meaning of a dry season on your skin (too many a time).
Apart from the obvious financial benefits, another thing a stashed cache does for you is — it provides you with an ease of mind. With some funds safely tucked away, you won’t feel as pressured as you would otherwise during these few dry months.
So, start chipping off some funds from each paycheck from now on and put them into a savings account, just to be on the safe side; use an automatic billing system if necessary to keep the payments flowing.
5. Save up for Retirement
The story of the ant and the grasshopper — my favorite. You might be enjoying your high-life now, but, in a few years, you’ll regret not putting away more money for your retirement fund. Of course, by that time it will already be too late… start today!
Since you’re self-employed, you need to sponsor your retirement plan. Depending on your country, there are a few options at your disposal, including:
- SEP IRA — lower taxes than the traditional IRA.
- Solo 401(k) — a simplified version of the regular 401(k) plan; made for the self-employed.
- SIMPLE IRA — employer contributions are tax-deductible in the form of business expenses.
- Self-managed super funds — a superannuation fund you manage on your own.
Whichever one of these you pick, remember to always contribute to your plan, and contribute often.