While working for yourself means having plenty of freedom to create your schedule or choosing your clients you want to use, it also means you're solely accountable for delivering your projects and managing your money.
From needing to track your income for taxes, to locating your own medical health insurance, you'll face a distinctive group of challenges financially when you are freelance. To assist overcome these challenges, we come up with 5 tips on financial management for freelancers.
#1 Open Another Bank Account For Business Transactions
When you're freelancing, you're basically running your personal business.
This means you are required to keep full and accurate records and accounts of the business transactions from the start, and the like records must be supported with invoices, receipts along with other relevant documents. Additionally, you will need to make a statement of accounts consisting of profit and loss, in addition to a balance sheet.
With this in mind, you should open another bank account to trace your earnings and business expenses aside from your personal expenses.
A separate banking account can help don't get your company expenses filled with your own personal expenses. In this way, you can effectively track your business expenses to see if you are investing enough or spending too much, and taking advantage of these expenses for doing things for claims as deductions whenever you file your annual tax returns.
Plus, you will have a easier time to monitor closely your income and see if you are hitting your purpose.
#2 Putting aside A Portion Of Earnings Income For Taxes
When you are earning your keeps as an employee, your employer will usually automatically prepare and declare for you your earnings that you should file your taxes. But as a freelancer, you are now running your personal business, which means the responsibility of tracking and managing taxes falls in your responsibility.
Just as like running any businesses, a proper cash flow is essential, and thus is paying taxes on time. It is your duty to make sure you have adequate cash for taxes, and if you are to overspend your hard earned money and leaving insufficient funds to pay for your tax obligations, you'll probably run afoul with tax laws.
That is the reason why it's a good habit to prepare in advance by setting aside 20% to 30% of revenue for taxes. This enables you to prepare adequately when the time comes for you to pay your taxes.
Read Also: What To Do Before Your Freelance Job Disappears
#3 You will want Adequate Insurance
Life isn't a bed of roses; occasionally the unexpected happens.
Unlike working as a worker, freelancers do not get typical benefits for example paid medical leave and medical insurance. This is why having adequate insurance policies are important, as it will come in to prevent yourself from any unforeseen financial burden should any misfortune happens.
One insurance you may want to you will want is the income replacement insurance. This insurance can safeguard you in times of major sickness, which could potentially result in a loss in income due to adverse effect on your projects output. Currently, there are two insurance items that specifically suits freelancers for such coverage – Freelancer Income Protection (FLIP) (Gigacover), and Prolonged Health care insurance (PML) (NTUC Income).
Other insurance you can look at getting are disability insurance and professional indemnity insurance. The previous provides a monthly income if you're to suffer a disability that stops you against working, while the latter provides coverage for incidents such as negligent acts or omissions, loss of documents and infringement of intellectual property rights.
Before investing in buying insurance, it's good to understand your budget as well as your needs first. You may even desire to confer with your trusted financial advisor, who would have the ability to advise you on the policies that will suit you, based on your needs and budget.
#4 Devise A Budget That You Will Actually Stick To
As a freelancer, you are likely to run a fluctuating income. Hence, you should devise a financial budget and track your money flow. This will help you in managing your personal budget, along with your business expenditure and style goals for major spending.
There will vary ways and strategies in monitoring and managing budget, and you may try different ways to find out which one works for you.
For those people who are new to freelancing, you can try while using popular 50/30/20 budgeting approach, that involves spending 50% of the income on necessary expenses, 30% on discretionary expenses, and allocating the ultimate 20% on savings or taxes. Another approach is zero-based budgeting, meaning allocating every dollar you are making to some certain purpose until balance is zero.
In addition, you should also make sure to check in with your financial allowance regularly to make sure you are staying on top of your goals.
#5 Be Clear About Price, Deliverables, And Payment Terms
As a freelancer, it is advisable to possess a clear sense of what your services are worth. One way is to do your homework available on the market rates according to your skills and experience. For new entrants towards the freelancing world, you may want to begin with providing a lesser rate for your services to construct your portfolio, and begin charging more (or leave behind lowball rates) with more time and experience.
Also, delayed or non-payment of a task finished is every freelancer's nightmare. As a freelancer, you can prevent this occurrence by stating clear payment deadlines and conditions on your invoices and contracts. Have any correspondence in writing to ensure that you as well as your client are on exactly the same page, and set a reminder if the deadline is approaching and you've got not been compensated for your work.
No matter how demanding these financial challenges could be, you can be well equipped to handle them. Take time to design a system to trace your financial allowance and expenses, and be sure to enroll in adequate insurance policy.
As long when you are proactive in managing your finances, you can be positive of finding success and relish the freedom and perks that accompany being a freelancer.
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