As a freelancer or gig worker, you know that a stable income is never guaranteed. Budgeting and planning for the future when your cash flow fluctuates can be a challenge. But having a solid financial plan tailored to the ebbs and flows of contract work is essential. In this article, you’ll get tips to build a financial plan that evolves with your career. With the right strategies, you can weather income instability and still meet your financial goals.
We’ll cover how to budget based on projected earnings, build up emergency savings, invest for the future, and more. These best practices will help you gain control of your finances so you can thrive in the gig economy long-term. Equipped with the guidance here, you can create a financial plan that sustains and grows with your business.
Assess Your Current Financial Situation
A financial plan is only as good as the information you put into it. Take stock of your income and expenses to understand your current cash flow and financial responsibilities. Gather income statements, tax returns, bank statements, bills, and any records of your income and spending over the past year.
Income
List all sources of income, including your salary, freelance work, interest, dividends, rental income, and any other earnings. Calculate your total annual income to determine how much you have to allocate in your budget.
Expenses
Likewise, gather records of your spending and list all of your current expenses. Include essentials like rent, food, insurance, loan payments, utilities, and discretionary items. Look for any expenses you can reduce or eliminate. Total your annual expenses to ensure your income can cover all of your responsibilities.
Assets and Liabilities
Next, determine your assets like savings accounts, retirement funds, investments, and valuables. Then, list your liabilities such as mortgage debt, auto loans, credit cards, and any other debts you owe. Your assets minus your liabilities determine your current net worth and financial stability.
With a clear picture of your income, expenses, assets, and liabilities, you have the necessary information to build a financial plan tailored to your needs as a freelancer or gig worker. Continually track your income and spending to make adjustments, take advantage of new opportunities, and maintain financial security regardless of the ups and downs in your industry.
Build an Emergency Fund
As a freelancer, having an emergency fund is crucial to safeguarding your financial security. This fund should cover essential expenses for 3 to 6 months in case of loss of income from lack of work or clients.
Calculate Your Monthly Expenses
To determine how much you need in your emergency fund, calculate your average monthly expenses. This includes costs for housing, food, transportation, loan payments, insurance, and any other recurring bills. Be sure to also factor in expenses related to your business like software subscriptions or coworking space fees.
Set a Savings Goal and Contribute Regularly
Based on your monthly expenses, establish a target emergency fund amount. Then, set up an automatic transfer to move money from your checking to your savings account each month. Even small, consistent contributions will help you reach your goal over time. A good rule of thumb is to save enough each month to have a fully funded emergency fund within 6-12 months.
Keep the Fund in a Separate Account
Have a dedicated high-yield savings account for your emergency fund. Keep this account separate from the one you use for your business or personal spending. That way, the money will be out of sight but readily available when you need it. Only withdraw from the emergency fund in the event of a real financial crisis.
Building an emergency fund may require discipline, but it provides security and stability for your freelance career. Knowing you have a financial cushion in case of unexpected events allows you to focus on growing your business with confidence. Review and replenish your emergency fund annually to ensure it remains adequate for your needs. With diligent saving and prudent financial planning, you can thrive as an independent professional.
Track Your Income and Expenses
Income
To create a comprehensive financial plan, you must determine your income sources and amounts. As a freelancer or gig worker, your income likely comes from various clients, projects, or jobs. Track your income from each source to understand your earning potential and ensure you are charging rates that allow you to meet your financial goals. You may find it helpful to use accounting software to categorize income by source.
Expenses
Next, analyze your business and personal expenses. Your business expenses may include items such as office supplies, transportation, insurance, and technology. Be sure to track expenses related to each income source to determine your profitability. On the personal side, track essential expenses like housing, food, and debt payments. Also account for discretionary spending on entertainment, hobbies, and subscriptions. By categorizing all income and expenses over the past year, you will gain valuable insight into your cash flow and spending habits.
Budget
With your income and expense information in hand, you can develop a budget that maximizes your earning potential while meeting essential costs of living. Aim to allocate 60-70% of your income to essential expenses, leaving the remainder for discretionary items and financial goals like saving for retirement, paying off debt, or funding your child’s education. Regularly review and revise your budget to account for changes in income or expenses over time.
Developing a comprehensive financial plan requires an ongoing commitment to recording your income, expenses, and budget. However, the insight gained into your freelance business’s profitability and ability to meet both short-term and long-term financial goals makes the effort worthwhile. Staying on top of your income, expenses, and budget will provide you stability even as your gig career evolves.
Create a Budget
Set Spending Priorities
As a gig worker, you need to determine essential costs to prioritize in your budget. Focus spending on necessities like housing, food, and transportation. Allocate funds for business expenses such as supplies, software, and professional development. Save for taxes by putting aside at least 30% of each payment. Keep discretionary costs low until your income stabilizes.
Track Your Income and Expenses
Tracking your income and expenses is key to gaining control of your finances. Some money tracking tools suited for freelancers:
- Spreadsheets: Create spreadsheets to manually log income and expenses. Add income, subtract expenses, and ensure your balance stays positive.
- Accounting Software: Use accounting software like QuickBooks Self-Employed or FreshBooks to automatically track income and expenses. Connect bank accounts and credit cards to import transactions. Sort and categorize them. These tools provide an overview of your cash flow and help calculate quarterly taxes.
- Budgeting Apps: Budgeting apps like Mint, You Need a Budget (YNAB), or EveryDollar can create budgets, track income/expenses, pay bills, and provide reports. Link accounts to import transactions automatically categorized by the app.
Make Projections and Adjust
Once you start tracking income and expenses, you can make projections to estimate future cash flow. Assess income from current and potential projects. Estimate expenses based on your spending history. Make adjustments as needed to avoid deficit spending:
- Reduce discretionary costs if income is lower than expected.
- Pay quarterly taxes to avoid underpayment penalties.
- Market your services to increase your project pipeline if income decreases.
- Revisit your rates and consider raising them in line with your experience and skills. Higher rates will increase your income over the long run.
A good budget provides visibility and control over your finances as a freelancer. Regularly monitoring income, expenses, and cash flow will help ensure your financial stability and success in your gig career. Make adjustments to your budget and rates as your business evolves.
Pay Down Debt
To establish financial security as a freelancer, reducing or eliminating debt should be a top priority in your financial plan. High-interest debts like credit cards can quickly accumulate and reduce your earnings.
Make a Budget and Track Spending
Creating a budget that accounts for your variable income and tracks all expenses is key. Look for any unnecessary spending you can reduce or eliminate. Even small changes can make a big difference in paying off debt over time.
Focus on High-Interest Debts First
Pay down high-interest debts like credit cards first before other loans like student loans or mortgages. Credit card debt can have interest rates of 15-30% annually, costing you hundreds each month. Make minimum payments on low-interest debts and put any extra money towards high-interest balances.
Make a Payoff Plan
Determine how much you can put towards your debt each month and make a plan to pay the balances in full. Start with small debts first to build momentum, then tackle larger ones. For high-interest debts, aim to pay at least the minimum plus any fees to avoid penalties. Then add any extra money from your budget to pay the balance faster.
Consider Debt Consolidation (If Needed)
If you have high-interest debts across multiple credit cards or accounts, consider consolidating through a lower-interest personal loan. Make sure any fees from the new loan do not outweigh the interest savings. Then close high-interest accounts to avoid accumulating new debt.
Establishing control over your debt is challenging but rewarding. Stay disciplined in your budget, focus on high-interest balances first, and celebrate milestones along the way. Reducing debt frees up more of your income to invest in your business, save for emergencies, and gain financial independence. With time and consistency, you can pay off debt and build wealth as a freelancer.
Save for Retirement
Saving for retirement is crucial for your financial stability, especially as a freelancer. Without an employer matching contributions, the onus is on you to fund your retirement. Establishing automatic transfers to an individual retirement account (IRA) or other investment account is ideal.
Contribute to an IRA
Open an IRA, such as a Roth or traditional IRA. For 2020, you can contribute up to $6,000 per year to an IRA, or $7,000 if you are 50 or older. Contributions to a traditional IRA may be tax deductible, depending on your income and whether you participate in an employer retirement plan. Contributions to a Roth IRA are not tax deductible, but distributions in retirement are tax-free.
Consider Other Options
A Solo 401(k) or SEP IRA allows self-employed individuals to contribute more than an IRA. For 2020, you can contribute up to $57,000 to a Solo 401(k) and up to $57,000 to a SEP IRA. Other options include variable annuities, fixed index annuities, and brokerage accounts. Meet with a financial advisor to determine which options match your financial goals.
Make Automatic Contributions
Set up automatic monthly transfers from your business bank account to fund your retirement accounts. Start with whatever amount you can, even if it is small, and increase it over time as your income increases. Automatic contributions make it easy to save for retirement without having to think about it each month.
Establishing a retirement fund is essential to your long term financial security as a freelancer. Be diligent and start saving for retirement as early as possible to take advantage of the power of compound interest and build wealth for your future. With the variety of retirement account options available, you can create a plan that provides tax benefits and flexibility to help you achieve your retirement goals.
Invest for the Future
As a freelancer, investing for retirement and other financial goals is entirely up to you. Without an employer match, you must contribute enough to your retirement accounts to secure your financial future. Make investing a priority in your budget.
Contribute to an IRA
Open an individual retirement account (IRA) to start saving for retirement. For 2024, you can contribute up to $6,000 per year ($7,000 if 50 or older). A traditional IRA may be tax deductible now but withdrawals in retirement are taxed. A Roth IRA is not tax deductible now but withdrawals are tax-free in retirement. Choose the IRA that matches your financial needs.
Increase Contributions Over Time
If possible, increase your IRA contributions by at least the cost of living increase each year. For example, if there is a 3% cost of living increase, increase your IRA contribution by 3%. Over time, small, regular increases will significantly boost your retirement savings.
Consider Other Investment Options
In addition to an IRA, consider investing in the stock market, bonds, real estate or other opportunities. A financial advisor can help determine investments well suited to your financial goals and risk tolerance. Diversify investments to balance risk and optimize returns.
As your freelance income increases over the years, allocate a percentage to investing for both short and long term goals. An ideal rule of thumb is to contribute at least 10-15% of your income to retirement and investing. Disciplined, regular investing over time is key to achieving financial security and independence. Stay dedicated to your financial plan and make adjustments as needed to keep your money working for you.
Protect Yourself With Insurance
As an independent freelancer, you lack the financial protections and benefits that traditional employees receive. To safeguard yourself and your livelihood, investing in insurance policies tailored for self-employed individuals is essential.
Disability insurance replaces a portion of your income if in the event, injury or illness prevents you from working. Since freelancers do not receive paid time off, disability insurance provides financial security during periods you cannot generate revenue.
Health insurance is vital for any individual, and the self-employed have options for purchasing affordable plans. Research health insurance marketplaces in your area to compare plans and determine what level of coverage you need based on your financial situation and health needs.
Professional liability insurance, also known as errors and omissions (E&O) insurance, protects you financially if a client sues you for negligence or poor work quality. E&O insurance gives freelancers peace of mind and may be required by some clients.
Life insurance helps provide for your dependents if something were to happen to you. Term life insurance for a set period of time is typically sufficient and affordable for most freelancers.
An umbrella insurance policy provides additional liability coverage above and beyond what your other policies provide. Umbrella insurance is relatively inexpensive and can protect against catastrophic events.
Creating a comprehensive insurance plan may seem complicated, but with some research you can find policies tailored to your needs and budget. Meet with insurance agents to determine appropriate coverage levels and find discounts you may be eligible for. Review and adjust your policies annually to ensure you have the proper protections in place as your freelance business grows. With the right insurance coverage, you can pursue your freelance career with confidence knowing you have safeguarded yourself and your financial future.
Financial Plan FAQs for Freelancers: Your Top Questions Answered
As an independent contractor, creating and maintaining a practical financial plan is crucial to securing your financial well-being. A comprehensive plan accounts for irregular income and expenses unique to gig work. Here are answers to some of the most frequently asked questions about financial planning for freelancers:
What should my financial plan include? An effective freelance financial plan should incorporate both short- and long-term goals, including:
• An emergency fund with 3-6 months of essential expenses
• Retirement planning with tax-advantaged accounts like an IRA
• Health insurance to protect against unforeseen medical costs
• Life insurance if you have dependents
• Disability insurance in case you cannot work for an extended period
• Strategies to pay quarterly taxes and account for income fluctuations
How often should I review and revise my plan? You should review your financial plan at least annually and revise as needed based on changes in your income, expenses, financial goals, risk tolerance, or other life events. Make adjustments to account for shifts in the freelance landscape or economy as well.
What tools or resources would help in creating a financial plan? Some useful resources for crafting your financial plan include:
• Budgeting software like Mint, You Need a Budget or EveryDollar to track irregular income and spending.
• Tax tools like Quickbooks Self-Employed or TurboTax Self-Employed to estimate quarterly tax payments.
• Retirement calculators to determine if you’re saving enough for long-term goals.
• Your financial statements and tax returns from the previous year to determine your current financial position.
• A financial advisor with experience helping freelancers and self-employed individuals. They can provide guidance on planning for the unique challenges of gig work.
Developing a comprehensive financial plan gives freelancers confidence in their ability to achieve both short-term and long-term financial goals. With the right strategies and tools in place, you can build a stable financial future as an independent contractor or gig worker. Staying proactive by reviewing and revising your plan annually is key to continued financial security and success.
Conclusion
As a freelancer or gig worker, your financial plan is a living document that evolves as your career grows. Revisit your budget often, and make adjustments to reflect changing income streams. Continue networking to discover new opportunities. Seek mentorship from experienced freelancers to gain wisdom. Most importantly, stay adaptable. This career path requires resilience and agility to thrive in an ever-changing environment. With strategic planning and dedication to your craft, you can build the financial freedom to work on your own terms.