Learn how to plan your finances as an independent professional with 5 budgeting strategies that will help you prepare for your future. Increase your rates, run the numbers, establish an emergency fund, and more.
5 Budgeting Strategies for Independent Professionals.
Full-time freelancing is becoming a more and more common professional choice. By 2027, studies predict that half of the American workforce will be independent contractors. Wow. Of course, there are several crucial factors to take into account before making the career leap of faith. A good example is how you'll use your network and skill set to get job and make money. But you should also consider your future.
Freelancers have a tendency to focus on their immediate requirements. "When is my next important deadline?" How am I going to pay my rent? "Do I have any spare cash left over for that brand-new, expensive pair of shoes?" However, since independent contractors lack benefits like 401(k) plans and employer-provided health insurance, it's wise to plan out your finances over a number of years.
According to Abbey Woodcock, the creator of the educational websites Business of Copy and Freelance Co-Op, "There are often no unemployment, retirement, or paid time off benefits." This means that independent contractors must take responsibility for planning for crises, leave of absence, and retirement. " Overwhelmed? We've outlined five ways to prepare your finances for full-time freelancing, so don't worry.
1.Increase your rate.
Is it just us, or is one of the most challenging aspects of freelancing negotiating your rate? If you request too much money, you might not be hired. But is the price too low? It might not be worthwhile, therefore. Yes, there are several factors that go into determining your rate, and one of them ought to be your future. According to Woodcock, just because you make $20 per hour at your full-time work, doesn't imply you should charge the same amount for your service. "Components like software, taxes, and payment processing fees must be taken into account.
"She advises creating a list of all the overhead expenses you anticipate incurring in the future, as well as your savings objectives. From there, you may calculate how much money you'll need to save up for both immediate and future expenses.
2. Run the figures.
So how can you determine how much money to set up for future costs like taxes? You must perform the math. According to Woodcock, "just because a client pays you $1,000 doesn't mean you made $1,000." "On that $1,000, what is your profit margin?"
Asking yourself some important questions will help you get closer to the truth. What amount should you budget for taxes? 25 to 30 percent is a solid starting point. Do you have any retirement funds? How much time do you spend seeking clients? Because every freelancer is aware that working hard doesn't pay. Your optimum fee will be clearer to you after you have a better knowledge of your demands.
3. D.I.Y. 401(k) (k)
Everyone will, in fact, retire. Even you, super-freelancer, you. But if you don't start saving money now, you won't have any for your later years. According to Kevin Michels, CFP, EA, a fee-only financial advisor at Medicus Wealth Planning, "As a freelancer, investing for retirement rests totally on your own shoulders." "You don't have a full-time employment, therefore you don't even have access to a pre-made 401(k) plan. Nor does your employer match your 401(k) payments or offer profit-sharing.
"Don't worry; you still have choices. According to Michels, independent contractors can either use an IRA or create their own 401(k) plan. You may want to see your financial advisor or your money-smart uncle, but Michels lays out a few ground rules first:
• If you don't intend to save more than $5,500 for the year, you should start an IRA because it is easier to do so than to open a self-employed 401(k).
• If you can save more, you can form a self-employed 401(k) and make annual contributions of up to $18,500. Additionally, you are permitted to make a profit-sharing payment of up to 25% of your admissible earnings. You can contribute a total of $55,000 to a self-employed 401(k) plan with both contributions.
• Setting up a self-employed 401(k) is rather simple and should be done at one of the top discount brokerage companies, such as Fidelity or Vanguard. Some of these businesses let you set it up entirely online, while others ask you to complete a few short forms.
• A SIMPLE IRA or SEP IRA could be established in addition to a Traditional/Roth IRA and a self-employed 401(k).
4. Establish an emergency fund.
Dreaming about a two-month round-trip backpacking trip around Europe? Ready to launch your own website or business? Considering having a family? You'll need some cash, I guess. That's why having a rainy day fund is so excellent (also known as an emergency fund, F-U fund, etc.) — you can do whatever you want with the money you set aside.
If you have a family emergency or wish to hunt for new clients, you should have enough money saved up so you may refuse a client or issue a refund for any reason, advises Woodcock. You should never let money keep you in an undesirable circumstance. Woodcock advises having six months' worth of costs saved up, but you can't get there overnight. Start by designating $25 to $50 every week for savings. It might not seem like much, but believe us when we say it adds up.
5. Have a health evaluation.
Healthcare is one of the main concerns that most people have about freelancing, and for good reason. Having a good healthcare plan will provide you some much-needed piece of mind, even if you aren't scheduling a series of annual appointments or experiencing a medical emergency. Yes, freelancers can obtain their own healthcare, to put an end to the question.
Michels notes that even though there are numerous organisations like Oscar that demystify the process, you can also enrol in insurance through your state's or the federal exchange. You can also apply for a government subsidy, he says, depending on your salary and the size of your family. So how much should you put aside?
"When picking their plan, freelancers should make sure they have enough money to cover their deductible and out-of-pocket max if they ever face a medical emergency," Michels says.
5. Leverage free (and almost free) resources.
One price you don't have to negotiate: free! An easy way to save money is to tap into the abundant free resources available to freelancers online.
How do you budget for the future as a freelancer? Tell us in the comments below!