Financial Planning for Freelancers and Workers in the Gig Economy
By Joseph Peters
Working as a freelancer brings a lot of flexibility to work that many people would never give up. The ability to say "no" to tasks that aren't worth the time, the rewards of building relationships with new and existing clients, and the different opportunities that mean no two days are the same are some reasons that keep people working without the security that comes from fulltime employment as a salaried worker.
Freelance work involves its own kind of culture and lifestyle to be a success. While the upsides are often very alluring, especially for those with unconventional schedules, it's essential to consider and plan for the challenges of freelancing. In particular, financial planning tends to be an area that new freelancers and gig workers struggle with, especially in their first years in the gig economy.
Self-Employment Financial Planning and Its Unique Challenges
Money management is always a challenge for professionals, whether self-employed or with a static salary. Nevertheless, freelancers and gig workers face a few extra challenges throughout the year while managing their work. We know how difficult it can be to set aside the right amount of money for taxes or to account for the possibility of sudden expenses. There are several ways for freelancers to stay ahead of the curve when it comes to money management.
Track Expenses and Budget Accordingly
As a freelancer, income is rarely guaranteed and will often fluctuate according to the season. Tracking expenses helps you establish a baseline for what you'll need to spend at any given point, which allows you to create a strict budget for the future. As you receive revenue, distribute it to the appropriate accounts, then ensure that your expenses fall in line with the forecasted budget. Make sure to include a buffer to allow for sudden expenses.
Tax Management
Salaried and hourly workers have the benefit of having taxes deducted as they go, often resulting in a tax refund at the end of the year. Freelancers don't have a corporate financial department to manage this for them, meaning you're left to your own devices when it comes to taxes. Gig workers that ignore taxes until it's time to settle up for the previous year are often surprised by the large amount of money the IRS expects. Quarterly tax payments, setting aside money from each contract or gig, and working with a professional can eliminate that struggle and make tax season much less stressful.
Funding the Future
There's no such thing as PTO for a freelancer. Time spent not working, whether for a vacation or due to illness, is time without generating an income. These times are often unplanned, which means freelancers may be forced to dip into savings that were intended for other things, such as that quarterly tax fund. The best way to avoid an unplanned expense from breaking your budget is to build it into the budget and don't touch it when it's not needed. You'll also manage retirement on your own terms, as there's no corporate 401k deduction coming out of a paycheck. Don't rely on the future; take something from every paycheck and deliberately set it into a special account for retirement.
Health Insurance
Freelancers are largely on their own when it comes to health insurance. While company plans can often leverage the number of employees to secure better rates, freelancers can still find a good balance between appropriate coverage and manageable premiums. Ultimately, this will take some research or professional assistance to find the best policy for your needs.
Each freelancer's situation is unique, so your income, expenses, and budget will be unique to your niche and clientele. Unfortunately, the skills needed to succeed in your specialty rarely overlap with those needed to be a successful financial planner. Therefore, many freelancers turn to professional assistance to better manage their money. Investing in this help can pay dividends when it comes to building financial security in the gig economy.
How Professional Financial Planning for Consultants Makes a Difference
Despite the challenges that come with working in the gig economy, there are ways to manage your resources well. Knowing what to spend and where can alleviate many of the headaches that come with financial planning for freelancers and consultants. By finding the right professionals to help with financial planning, you can focus on developing the skills most relevant to your business rather than splitting your attention in too many directions at once.