Financial Planning
There are far more opportunities for people to make a living as a freelancer in the modern era than ever before. This form of being an independent contractor can be incredibly freeing and provide an independence that traditional employment cannot. However, this freedom can also come with great responsibility, particularly when it comes to financial planning.
While each freelancer’s individual financial situation is unique, there are certain basic principles that should not be ignored. Most importantly, the importance of having a financial plan to help them stay on track, remain disciplined and make wise decisions with their income.
Planning for Tax Obligations
One of the key areas of financial planning that all freelancers should be aware of revolves around tax obligations. Freelancers are solely responsible for ensuring their own taxes are paid on time, and in the right amounts. They do not benefit from taxes being withheld from their paycheck as an employee might. As a result, they must be prepared to plan out payments and deposits throughout year and make payments ahead of the April 15th tax filing deadline.
Budgeting for Fluctuating Incomes
One of the other unique challenges that come with freelancing is that many people experience fluctuating income. This means that planning is more important than ever as it can be difficult to remember to pay for taxes, bills and other expenses amidst the inevitable periods of feast or famine. A well-crafted budget will help to plan for these times of lesser and greater income, so that the freelancer can still meet their obligations, save for retirement and ensure their future financial stability is taken care of.
Staying On Top of Insurance Obligations
Insurance is another key area that can be a major expense for freelancers. The most common type of insurance a freelancer needs to be aware of is health insurance. Health insurance is no longer a benefit provided as part of a job, so freelancers must plan for and cover their own health insurance costs.
Freelancers must also be aware of other types of insurance, such as general liability and business insurance. General liability insurance is especially important if they have clients who they come into close contact with, while business insurance can provide protection against property and business-related losses.
Investing for the Future
Another major component of financial planning for freelancers is planning for retirement and other long-term goals. While traditional employment often offers a 401(K) plan that employees can participate in, such as with a matching program, there are other retirement investing options available for freelancers.
One of the most popular options for freelancers is to open an IRA (Individual Retirement Account). IRA accounts are tax-advantaged investment accounts that allow freelancers to save and invest for retirement purposes. Other investing options that might be available include private equity, stocks, mutual funds and other investments that can help to grow their money over time.
Understanding and Managing Business Expenses
One of the primary benefits of freelancing as a self-employed independent contractor is the ability to write off certain business expenses on taxes. Keeping track of these expenses is critical, and good financial planning should include organizing and tracking business expenses throughout the year to maximize the tax benefits they have available.
Common deductible business expenses for freelancers include office supplies, laptops, advertising costs, workspace rental, travel expenses and more. Keeping a well-organized record of these expenses can help to make tax time significantly less stressful and also save a significant amount of money.
Managing Financial Risks of Freelancing
No matter how well-prepared a freelancer is, financial risks are always part of the equation. A well-crafted financial plan can help to mitigate those risks somewhat. One of the ways a freelancer can prepare for financial risks is to save up a financial cushion of funds to help them weather any setbacks.
This “rainy day” fund should be kept separate from any other business or personal savings accounts and should be seen as there to cover any potential losses or future gaps in income. Another financial risk is unfortunately beyond a freelancer’s control: the economy itself. Keeping an eye on business cycles and being prepared to manage income during slower or less predictable times is also important to maintain a positive financial position.
Utilizing Technology for Financial Planning
There are countless financial software programs available that freelancers can use to help them take control of their financial situation and plan for the future. These programs provide advice, insights and insights into income, taxes, investments and other areas that are important for financial planning.
The best programs provide the ability to synchronize bank accounts, credit card statements and other accounts in a single platform, allowing the user to view their financial situation holistically and plan better. For those who prefer a more in-depth approach, many types of financial planning software are available that provide a more rigorous analysis of a user’s financial position.
Choosing The Right Financial Professional
Financial planning can seem like an intimidating process, and at times it can be helpful to work with a financial professional to help with the process. It’s important to select a financial professional that is experienced with the unique nuances of freelancing, as the income and expense structures can vary for independent contractors.
Financial planners and investment advisors can offer a range of services, from comprehensive financial plans to retirement planning. Working with a professional can ensure that the most suitable plan is put in place and decisions are made from a place of knowledge, not just what a person may read online or believe.
Financial planning for freelancers can be a challenging yet rewarding process. While each freelancer’s individual goals and financial situation are unique, each should strive to create a financial plan that is tailored to their own personal and business goals. A financial plan that takes into account taxes, budgeting, insurance, investments, business expenses and risk management can help them to stay on track and plan for the future. With the right plan in place, the financial potential of a freelancer’s career can be maximized.
