Going Freelance? A 5-Step Financial Guide To Get You There

Posted on: 5 June 2016

In the so-called "gig economy," more and more people are turning to nontraditional freelance work instead of employee wages. While this has some great upsides – including the ability to control your hours and the type of work you take on – it's also harder to maintain a stable plan financially.

If you're planning to join the freelance world, here are 5 ways you can create a financial plan for yourself.

Make a Budget. "Budget" may be a four letter word in many people's view, but it's a necessity for anyone working freelance. It's doubly so for those new at working for themselves because income can often be low for a while. Since you may not be able to fully control your income sources yet, you will need to control your expenses. Think beyond the month-to-month mentality that many wage workers have and focus on a rolling 12-month projection of cash flow. 

Plan for Emergencies. Almost as important as a spending plan, a savings plan is key to surviving the freelance world. Income for independent contractors can fluctuate wildly and you should plan for that cycle -- periods of lower and higher earnings -- as well as emergencies that happen to everyone. You will be able to focus on building your small business better if you know that your expenses are going to be covered. Aim for a 3- to 6-month emergency fund covering your basic expenses as a minimum. 

Prepare for Taxes. Employees' taxes are largely handled by the employer, so they're taken care of automatically. But as an independent worker, you must plan for your own payroll and income taxes. It's a good idea to set aside money from each job or contract to cover things like estimated taxes and self-employment taxes (currently 15.3%). A qualified accounting service can help you determine how much to set aside and when to pay these taxes.

Save for Retirement. Retirement contributions can be made by a freelance worker in several ways. These include a traditional IRA, a Roth IRA, a SEP IRA or a Simple IRA. You can also set up an independent 401(k). These plans can be more tailor-made to your investment personality than most employees' 401(k) options. Opt for automatic transfer into your retirement account(s) to ensure regular contributions.

Ask for Help. While much of your time and energy as a freelancer is put toward making ends meet right now, it's vital to plan for future goals as well. Figuring out which longer-term goals you want to work toward and how to do so can be daunting, so don't try to go it alone if you're unsure. Working with a professional accountant can go a long way toward meeting goals like buying a home, building your business and planning for college.

Going independent in your work life can be the start of a fantastic new chapter in your life, but it requires some planning and regular maintenance. By following these 5 steps, you can make a successful transition.