By Fernando Berrocal
Though freelancers and entrepreneurs enjoy professional flexibility and independence, the spontaneous nature of such career styles requires the use of financial planning. 48% of new freelancers view freelancing as a long-term career option, thus necessitating long-term success strategies. In order to thrive and maintain stability, you'll need to cover expenses, save for an emergency, and budget for inconsistent revenue.
What is Financial Planning?
Financial planning is a long-term strategy for covering current and future expenses. It also aims to reduce the impact of unanticipated costs. It is crucial for both freelancers and entrepreneurs to develop spending and saving habits. The primacy drawbacks of these career styles, according to Fiverr's 2020 Annual Freelance Economic Impact Report, are unpredictable income, a lack of benefits, and having to supply their own tools and equipment. While full-time employees of a business are frequently provided with benefits and resources, freelancers and entrepreneurs must rely on financial planning to handle these charges.
This is especially true given the unpredictable nature of paychecks while performing contract employment. Financial planning allows you to spread out your current earnings to pay part of your future costs. Such preparation also helps in career development through easing anxieties regarding a secure future beyond costs. For example, 63% of freelancers had contracts postponed in recent years, while 53% have had at least one contract terminated. Financial planning can assist you in preparing for unforeseen changes that may affect you.
Creating Short-Term and Long-Term Financial Goals:
According to this report, 30% of freelancers are concerned about not having enough money to save. You can start saving every single month by setting short-term and long-term savings targets.
- Short-term goals are expected to take a month to a year to achieve. They may involve house upgrades, trips, and other costs.
- Long-term goals take five or more years to achieve. Growing a retirement fund and paying off big debts are examples of them.
10 Financial Planning Habits for Freelancers and Entrepreneurs:
Healthy financial planning habits are required for financial stability. Here are the top ten financial habits of successful entrepreneurs and freelancers.
- Recognize the difference between profit and revenue: Many freelancers and business owners are perplexed by the difference between revenue and profit. Before expenditures are deducted, your revenue is the whole amount earned by sales of goods or services.
REVENUE - EXPENSES = PROFIT
After expenses, business debts, operational costs, and taxes have been deducted, profit is the remaining amount. Your profit, not your revenue, should be the basis for all budgets, savings plans, and personal debt repayments.
- Maintain your budget: The main disadvantage of freelancing, according to 72% of freelancers, is having an unpredictable income. This is due to the difficulty of budgeting with unpredictable revenue. However, it's critical to have a strategy for spreading your income so that you can meet your obligations while also saving for the future. The 50/30/20 rule is one of the most effective budgeting strategies.
First, figure out fixed costs. Basic utilities, transportation, insurance, minimum loan repayments, and so on are all included. This should account for half of your earnings. Calculate your savings objectives, retirement fund, and debt repayments; these costs should account for 20% of your income. The rest of the 30% of your income to spend on things you want–without feeling guilty.
- Keep track of everything in a dedicated business account: Get a separate business bank account so you can keep track of all your revenue and spending. This prevents you from spending income that isn't profit (before you've paid your bills.) Professional accounts also help establish corporate credibility when billing clients, or if you need to borrow money from a bank. Without a separate business account, these tools will not be at your disposal.
- Pay your debts: Paying off your debts should be a priority–even if it is a long-term financial objective. Paying additional money to meet the interest on loans depletes your profit margins. Debt has an influence on your current income as well as your capacity to use other financial services in the future. If you have debt or a low credit score, it will be more difficult for you to get business loans or further lines of credit in the future.
- Allocate Money for Taxes: When calculating your profits, you must account for taxes. The amount you pay will vary depending on where you live, but failing to pay can result in severe penalties such as fines and criminal prosecution. Don't wait until the end of the year to file your taxes. Using a tax calculator, figure out how much annual tax you'll have to pay. Divide this amount by 12 months and set it aside as soon as you get paid.
- Give Yourself a Paycheck: It's much simpler to keep to a personal budget and pay all costs if you know how much money comes into your bank account each month. When your business is performing well, the additional cash collected over your predetermined pay amount is saved in your business account; and used to cover your compensation during months when revenue is lower.
- Invest in an Emergency Fund: Having a few months' worth of emergency funds in the bank is an excellent idea–just in case your circumstances change. Not only will you have a safety net, but you'll also be able to pick and choose which contracts you work on, ensuring that you're not forced to undertake work you don't want just to make ends meet.
- Consider Getting Insured: According to a Fiverr poll, 61% of freelancers acknowledge that a lack of benefits, such as no health insurance, is another significant disadvantage of working for yourself. If you don't have health insurance, you'll be forced to pay large amounts of money if you become ill. This is an unanticipated cost that may be devastating to freelancers and enterprises. To offset these unforeseen costs, consider purchasing public liability and health insurance.
- Save for Retirement: According to an Upwork survey, 68% of freelancers are concerned about saving for retirement. When you're self-employed, you're the one who is in charge of your destiny. This is why you should include retirement savings in your monthly budget. Consider a Roth IRA or a Traditional IRA. You may put in up to $6,000 every year, and withdrawals are tax-free in the future.
- Diversify your Sources of Revenue: If a single client provides all your revenue, you'll be in serious trouble if that client terminates your contract. To make your portfolio more resilient, try to develop various revenue streams from various sources. That way, if one customer falls through, you'll have others to fall back on. You can also expand your horizons: Skills training was taken by 59% of freelancers and 36% of non-freelancers in the past six months. If you're concerned about relying on one source of income, expanding your skillset can provide more security.
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