No matter who you are, it’s important to understand how to manage your finances and plan for the future. But, people who don’t work for a traditional employer might find the process of achieving financial wellness a little trickier. If you’re a member of the gig economy or interested in going freelance, read on to learn more about financial wellness for freelances when it comes to the “big three”: budgeting, taxes, and retirement.
Budgeting
Budgeting is important for everyone, but especially freelancers whose income may vary widely from month to month. If you’re a freelancer who operates without a budget, now is the time to develop one. Start by calculating your personal and business expenses, then determine a minimum income to give you a number to shoot for when it comes to seeking out work. You might also analyze years past, to get an idea of what months tend to be more or less profitable, and design your annual schedule accordingly.
When planning out your expenses, be sure to budget for emergencies. It’s generally recommended to keep three to six months’ worth of income in an emergency fund. Having a robust emergency fund is even more important when you’re a freelancer and may face periods of less income than normal.
Looking for more budgeting advice, including budgeting tips, budgeting basics and budgeting app recommendations? Check out the HUECU blog!
Taxes
There’s a lot to consider, which is why many people hire an accountant. Getting a professional involved is never a bad idea, but if you prefer to save money, it’s completely possible to handle tax obligations on your own. The first thing to know is that freelancers pay a higher Social Security tax than traditional employees, as they must cover both the employee and employer portions of the tax—so plan ahead for this expense. The good news is that all taxes paid into Social Security count toward the eventual calculation of what benefits you will receive.
Self-employed people also need to fill out a 1099 form for each income-paying client. Many clients will automatically issue their freelance employees a 1099-NEC form describing what income was earned during the year, but if your client doesn’t do this, be prepared to report your income on the 1040 Schedule C form, which applies to earnings of less than $600.
A number of tax deductions apply to self-employed people. As a freelancer, you may be eligible to write off common work expenses including the costs of maintaining a home office, necessary business equipment purchases, travel, and even further education if it applies to your professional development or client servicing.
Retirement Planning
The common advice for traditional employees is to save 10-15% of a monthly paycheck for the future. Freelancers tend to have a less consistent monthly flow of income, but it’s still important to be saving for retirement. Instead of trying to save a certain amount every month, aim to save 10-15% of your income on an annual basis.
Once you’re generating savings, it’s time to consider where to put your money. Many freelancers choose to invest their savings an Individual Retirement Account (IRA), which offers tax advantages and the opportunity for savings to grow. Once your money is in an IRA, you can choose how to invest it—mutual funds and bonds are popular options, depending on your age, retirement goals, and overall financial situation. If you’d like to learn more about investing for retirement, check out free resources for HUECU members through GreenPath Financial Wellness.
Many freelancers have previously worked for an employer. If this applies to you, be sure to keep track of your former 401(k) account, which is a workplace retirement account. While you can’t continue to add money to your 401(k) once you’ve left the job, you can simply keep your savings where it is until you’re ready to withdraw, or you can roll over that money into an IRA. Rolling over your 401(k) into another retirement savings account won’t incur any penalties—but if you withdraw the money in your 401(k) before reaching age 59 and a half, you will likely pay a 10% penalty on top of tax. Of course there’s nothing wrong with leaving your money where it is and maintaining multiple retirement accounts, as long as you’re aware of where your money is and how it’s being invested.
Remember that it's always best to talk to a financial advisor for advice regarding your personal financial situation.
