Savings 101 for New Freelancers and Others
Many people live from paycheck to paycheck. That means that they spend each paycheck as soon as they receive it, with little to nothing left over.
While living paycheck to paycheck isn’t a good idea for anyone, it’s an especially bad idea for freelancers.
In this post, I’ll explain why you need to develop a savings plan as a freelancer. Then I’ll explain how you can start saving money.
Why Freelancers Need to Save Money
If you’re used to living from paycheck to paycheck, then you might have a bit of trouble adjusting to freelancing finances. Unlike in traditional employment, as a freelancer you won’t receive a set amount of income each month.
Many freelancers start out well, but quickly find themselves in a financial struggle. Some never recover.
Here are some of the unexpected financial expenses many freelancers face.
- Feast or Famine Cycle. Clients come and clients go. Even if you have a long-term client, that client may decide not to use your services. In fact, depending on the terms of your freelancing agreement, a client may discontinue your services with little or no notice.
- Overhead. As a freelancer, you are only paid for working on client projects. This is true even if you charge a flat rate. Freelancing has a lot of overhead costs: marketing, accounting, equipment, and so on. You need to hold enough earning in reserve to cover your overhead costs.
- Insurance Premiums. Insurance deserves a special mention because many employees are accustomed to getting their health and life insurance through an employer. It’s pretty convenient. When you become a freelancer all that changes. You now need to save enough to cover the premiums on your own.
- Taxes. While a traditional U.S. employer is likely to withhold money to cover income taxes, freelancers are responsible for paying their own taxes. In addition, freelancers must pay the employer’s portion of Social Security and Medicare taxes (known as the self-employment tax).
If you don’t save money each month, even one of those unexpected expenses could be enough to cause your freelancing business to go out of business.
Fortunately, there are some simple steps you can take to start saving money.
How Freelancers Can Save Money
Of course, the ideal situation is to save money before you begin freelancing so that you have a cushion available for any unexpected expenses.
However, if you’ve already started freelancing without building up your savings, don’t despair. It’s not too late. You can use the simple steps below to start saving money today:
- Use a Budget. Budgeting is a key concept for freelancers. Before you can save, you need to understand how you are currently spending your money. Take the time to analyze your expenses and develop a budget.
- Simplify. Most of us pay for services that we don’t really use. For example, how often do you really watch all of those premium channels on cable? And do you really read all those magazines that you subscribe to? If you haven’t used a service in six months, consider dropping that service and putting the money you would have spent into the bank instead.
- Use Discounts You Already Qualify For. You’re probably already eligible for discounts that you aren’t using. Many professional organizations offer discounts to their members. Store loyalty cards may qualify you for discounts. Even travel clubs like AAA offer discounts to members. Check your membership terms for the details and start to save. Take advantage of these discounts whenever possible to save the maximum amount on your purchases.
- Shop Around. The most convenient purchase may not provide the best value. Make it a policy to check the price at least three sources before making any major purchase. Be sure to put any money saved by shopping around back into the bank.
- Avoid Credit Cards. When you use a credit card to pay for a purchase, the high interest rates usually mean that you will pay several times the amount of the price of the item that you purchased to the credit card company. Remember, most consumers don’t pay off their credit balances each month. So be smart, avoid credit cards, and save.
How do you save money as a freelancer?
Share your best money-saving tips in the comments below.
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