An article by Forbes notes that the US freelance workforce is expanding. It’s also playing a more significant role in the economy than ever before. Around 60 million Americans participated in freelance work in 2022. This represents 39 percent of the US workforce, which is also an all-time high. Safe to say, freelancing is becoming a popular mode of work in the US.
However, freelancing has one major drawback – it has no job security. When you’re a freelancer, you may or may not have work on certain days. On days you don’t have work or gigs, you don’t earn any money, which leads to financial troubles. Thus comes the need for financial planning.
From general wealth management to making retirement plans, here are a few financial planning tips for freelancers:
#1 Create and Stick to a Budget
The first and most important rule of any type of financial planning is to create and stick to a budget. The same applies to freelancers as well.
By tracking your income and expenses over five or six months, you can get a clear picture of your financial situation. You can then create a detailed budget to understand what your main and non-essential expenses are. Doing so will help you identify areas where you can cut back on your spending and save some money.
After you get a good overview of your cash flow and expenses, set up a monthly budget that aligns with your income. Allocate funds for your business or work expenses, taxes, savings, and personal spending. Be disciplined and stick to your budget to avoid overspending and ensure you have enough money to cover your essential needs and financial goals.
#2 Establish an Emergency Fund
According to Upwork, freelancers can make between $25 and $70 an hour. However, this income is not stable. As a freelancer, your income may fluctuate from month to month, making it crucial to have a safety net to rely on during lean periods. That’s why you must have an emergency fund that can provide financial security when you’re not making as much money as you previously did or planned on doing.
Set aside a portion of your earnings each month to slowly build your emergency fund. Once this money is set aside, forget that it exists. You should only use it during emergencies and avoid spending it on non-essential things.
#3 Plan Your Taxes and Post-Retirement Finances
Freelancers are responsible for paying their taxes, including income tax and self-employment tax. To pay taxes, you must, once again, set aside a portion of your income throughout the year. Consult with a tax professional to understand the tax laws applicable to your freelance work. Also, ensure that you are taking advantage of any deductions or credits available to you.
Apart from taxes, you must also have a solid retirement plan, at least in terms of finances. Without an employer-sponsored retirement plan, freelancers need to be proactive in saving for their future.
Consider opening a solo 401(k), which is a type of retirement account that’s designed specifically for freelancers or self-employed people. Contribute to this account regularly to build your retirement savings. Start early to benefit from the power of compounding and give yourself a comfortable financial cushion when you decide to retire.
According to Fischer Investment Strategies, a major advantage of being a freelancer is that you can create your own customized retirement plan tailored toward your personal retirement goals.
That means if you want, you can start a business when you retire with your retirement money. For that, however, you have to be very smart about your savings so that they can later work as investments for your retirement. If needed, consult with a retirement planning advisor regarding this.
#4 Diversify Your Income Streams
Don’t rely on a single client or a specific type of freelance work. Doing so can be risky. Building a diverse portfolio of income streams can help protect you from financial instability. Look for opportunities to expand your client base, diversify your services, or explore passive income streams.
Consider offering different types of freelance services or targeting different industries to broaden your client base. Explore passive income options such as creating and selling digital products, investing in stocks or real estate, or earning royalties from creative work.
You can also work on multiple freelancing marketplaces at the same time to bring in more income. According to Beebom, Upwork, Fiverr, and Freelancer are three of the most popular marketplaces at the moment. Working on these three platforms simultaneously will help you generate more income.
Whether it’s investment management or setting up a retirement account, life as a freelancer can get very difficult if you’re unable to manage your finances tactically. Although doing so might seem difficult at first, if you can stick to the tips we’ve discussed above, you won’t face too much trouble planning your finances. Most importantly, once you’ve ensured all that we’ve walked you through, your future will be financially secure.