Your Go-To Guide To Managing Finances As A New Freelancer

From budgeting to retirement planning, here’s what you need to know about your finances as a freelancer.

Beginning your career as a freelancer is nothing short of exciting. As your own boss, you have so much flexibility over your schedule and how you want to approach your work. With that flexibility, though, comes some variation in how you are paid. Plus, working as a freelancer also means that you’re now responsible for paying taxes, getting insurance, and planning for retirement. 

As a new freelancer, the changes in your situation can feel a bit overwhelming. As you work to understand all of your new obligations, you will have a better handle on how to approach all elements of your finances. 


Keep your budget to help you navigate the ebb and flow of freelance income

Budgeting as a freelancer can be tricky, especially if you are just starting out. Freelancing gives you a great deal of freedom over your schedule, but with that freedom comes a bit of unpredictability of work. The ebbs and flows of freelance work can make it difficult to budget your money and add to your savings. 

As a freelancer, traditional budgets are sometimes hard to follow. But, there are ways to work around that so you can take better control of your finances. 

How to create a budget as a freelancer

When budgeting as a freelancer, you can begin to follow a traditional budgeting structure with a few tweaks. Because your income is expected to be varied from month to month, it’s not necessarily a perfect solution, but it can help you get a baseline understanding of how much you’re earning and spending. 

To start with your budget, you will first need to find your average monthly income. As mentioned above, your income is expected to change, but this can give you a good baseline on which to base the rest of your budget. The best way to do this is to look at how much you have earned over a year and simply divide it by 12. You can adjust that timeframe accordingly based on how long you have been freelancing. 

Before you get to any other part of your budget, make sure that you are factoring in taxes to your budget. The income you earn from freelancing is not automatically taxed, and you don’t want to be caught off guard when taxes are due.

Your tax bracket will vary depending on how much you make, so it’s always best to use online calculators or even talk to a financial advisor or tax expert to help steer you in the right direction. Once you figure out what percentage of your income you should be saving, factor that into your budget before you move on to your expenses. 

Now that you have a better idea of what you are earning and what you need to set aside for taxes, it’s time to calculate your expenses. You add up all of your fixed and variable expenses to understand how much money you typically spend monthly. This can help you get a better idea of how much money you may have left over to spend or save. 

Your fixed expenses may include:

  • Rent or mortgage payments
  • Car payments
  • Loan payments

Your variable expenses may include:

  • Utilities
  • Food and groceries
  • One-off expenses for work

For recurring variable expenses, like utilities or groceries, you can look at your average monthly cost to determine how much you typically spend. Add all of your expenses up to determine how much you need to make to pay for your expenses. You may want to take a look at your expenses to see if you can cut back on spending in any areas if you are struggling to afford your expenses. 

After looking at your expenses, factor in your savings and emergency funds. With a varied income, you will want to do the best you can to build your savings and emergency fund in case work slows down or anything happens that might prevent you from working at all. Plus, your income may not be enough for some months to cover all of your expenses, so you should have some type of safety net to fall back on. 

While it can be difficult to set money aside, factoring in your goals for your savings and emergency fund can help. You should make a plan to have at least 6 months' worth of living expenses set aside. You may plan to set aside more money in months that you make more to help you in months that you make less than you typically spend. 


Protect yourself from the unexpected with insurance

Working as a freelancer can make it a little confusing to understand what insurance you need and the avenues you need to take in order to get it. Because health insurance is typically tied to employment status, you need to figure out how to get coverage to avoid high medical bills. As your own employer, you will need some type of insurance to protect yourself and your business. It can all feel a bit overwhelming, but with a bit of guidance, you can get your insurance in order. 

Business insurance for freelancers

Many freelancers think that they don’t need insurance, but business insurance can actually be a very smart investment. Whereas traditional W-2 employees can rely on their employers for any legal or financial protection, freelancers must rely on themselves. 

Business insurance can protect freelancers from any risks associated with running their own businesses. Depending on the type of business insurance you get, it can protect you financially and legally in the face of unexpected situations. 

For freelancers, the most popular types of business insurance to have are:

  • General liability insurance - Protects against property damage or injuries caused in the workplace.
  • Professional liability insurance - Covers legal costs for lawsuits relating to your services

As a freelancer, having some type of business insurance can give you peace of mind. 

Health insurance for freelancers

Health insurance is commonly tied to employment, specifically full-time, W-2 employment. That puts freelancers in a tough position when it comes to getting health insurance. Luckily, there are still quite a few options for freelancers to make sure they are covered. 

If you are married and your spouse gets health insurance through their company, this may be an avenue worth exploring. For those who do not have this opportunity, the health insurance marketplace is your next best bet. 

The Affordable Care Act (ACA) created the health insurance marketplace so that people who don’t have insurance through work can still get coverage for themselves and their families. 

To get covered through the ACA, you must get health insurance during the open enrollment period, which is from November 1-December 15. After you select a plan, your coverage will start on January 1. 

Major life events can open up special enrollment periods, but for the most part, you will only be able to get health insurance through the ACA during this time. 

Life insurance for freelancers

Life insurance is often overlooked when people consider what insurance they need. But, life insurance is a smart investment, especially for freelancers who provide for their families. 

Life insurance is a type of policy that pays out a death benefit to a policyholder’s beneficiary. That death benefit can then be used to cover costs of childcare, funeral costs, and anything else that may be needed. If you carry large amounts of debt or would leave behind young children if you were to pass away, you may want to consider a life insurance policy. 

There are a few different types of life insurance that you may look into. Of all the types of life insurance, term and whole are typically the top options. 

Term life insurance is a fairly basic policy. It only covers the policyholder for a certain period of time, which can be anywhere from 10 years to 30 years. If the policyholder were to die during that time, their beneficiaries would receive a death benefit payout. If the policy expires before the policyholder passes away, the policy can potentially be renewed depending on the insurance company. 

Term life insurance, though basic, can still be flexible. It also is generally the most affordable type of life insurance, making it a very appealing option for people who want some type of coverage but don’t want to pay an outrageous amount.

Whole life insurance is a bit extensive of a policy in comparison to term life insurance. Whole life insurance is a policy that covers the policyholder for their entire life. So, as long as the policyholder maintains payments, their death benefit payout is guaranteed—no matter when they pass away. 

Whole life insurance also carries something called a cash value. As the policyholder makes payments and the policy ages, it accumulates this cash value. Down the line, if the policyholder needs to take out a loan, they can borrow money from their whole life policy. It’s important to note that not paying back that amount can impact how much of a payout the policy would give, so it’s best to make strides to pay back that amount. 

As you can see, the coverage of a whole life insurance policy is a bit more comprehensive than its term life insurance counterpart. Because it does cover the policyholder for longer and has more benefits than just a payout, that drives the price up significantly. This may be a good option for you if this type of coverage is important, but more often than not, people find that a term life insurance policy has a good balance between price and coverage.

When getting life insurance, it’s a pretty standard practice to undergo a medical exam so that the insurance company can better gauge your health to determine how much you will pay for life insurance. As a freelancer, it can be difficult to find the time to take a medical exam. In more recent years, something called accelerated term life insurance has popped up. 

Accelerated term life insurance is a type of life insurance policy with no required medical exam. The structure of the policy is almost exactly the same as a traditional term life insurance policy—the main differences being that you don’t have to take a medical exam and the underwriting process is expedited. 

When applying for an accelerated term life insurance policy, you give detailed information about your health, your lifestyle, and a few other factors. Companies then use predictive models to understand your risk factors and almost immediately know if you have been approved for a policy. In comparison to a traditional approach to life insurance, an accelerated policy may be best for freelancers with busy schedules. 

Retirement Planning

Don’t forget about saving money for retirement when working as a freelancer

As a freelancer, you still want to be sure that you are planning for retirement. Much like health insurance, though, retirement planning benefits are normally tied to that full-time employment status. Because you don’t have access to employer-sponsored retirement plans as a freelancer, you need to take retirement planning into your own hands. 

How to plan for retirement as a freelancer

You will have a few different options when starting your retirement plans as a freelancer. Of the most popular options are solo 401(k)s or IRAs. 

A solo 401(k) is a variation of a traditional 401(k). Because you are self-employed, you can act as both an employee and an employer. As an employee, you are able to invest a portion of your earnings into the account. As an employer, you can contribute a certain percentage of your earnings after your self-employment taxes and employee contributions are made to your account. 

Because you can contribute to your account as both an employer and an employee, you can really maximize your savings with this approach. A lot of freelancers like to use this because of that benefit and because they have a higher savings limit in comparison to an IRA. 

The other more popular option as a freelancer is an IRA. You have the choice to contribute to a traditional or Roth IRA, but keep in mind that both carry different benefits. 

You can contribute to a traditional IRA tax-free. When you withdraw money down the line, you will have to pay taxes on the money you take out of the account. On the other hand, a Roth IRA makes you pay taxes on your contributions upfront. But, when you take money out of the account, you don’t have to pay taxes. 

With both types of IRAs, there is a certain contribution limit. This limit is not as bad if you are just starting out with your freelancing and maybe aren’t making a lot of money. As you grow your income, though, and have more available funds to contribute, you may want to consider other options. In this scenario, an IRA is a great backup account to have to maximize your contributions even further. 

Starting a career as a freelancer can be both an exciting and challenging time. One of the biggest challenges freelancers face is how to adjust to their new financial responsibilities. As you adjust to your new situation, know that it will get easier and easier to manage your finances and you’ll be a pro in no time. 

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