Independent contractors, also known as freelancers and 1099 workers, have more financial responsibilities than hourly and salary employees. Hiring an accountant or financial advisor (or both) is wise if you’re self-employed. A financially savvy professional can help you manage finances appropriately. With their guidance, you can prevent budget, overhead, revenue, tax, and retirement problems. Even better, you don’t have to handle everything on your own.
It doesn’t matter whether you’re a freelance content creator, an online seller of professional services, or you make money with Doordash as a driver. This guide of essential tips can help you maintain a stable financial state.
With the right action plan, you’ll be able to meet all your financial obligations. Better yet, you’ll be prepared for the day when you no longer need to work.
1. Separate Business from Personal
Independent contractors should always separate their work from their personal lives. A business bank account can make tracking expenses and determining your tax obligation effortless. A business account is beneficial if you must pay estimated quarterly taxes.
Additionally, you will likely submit long-form taxes and deduct business expenses. Examples of costs you may keep track of include equipment and mileage. Maintaining a business account separate from your personal ensures everything stays simplified at tax time.
When you separate accounts, long-term and short-term goal plans, debit and credit cards, purchases, and even lists of errands, you make every part of your life easier. Keeping your finances in order also ensures you manage your mental health and sleep better. Your financial decisions impact your mental health; sleep is another aspect to consider.
One of the biggest problems freelancers who work from home experience is separating their work and personal time. Make a point to separate business and personal time successfully. Then, you can experience the same health benefits and peace of mind that traditional employees enjoy.
2. Demand Everything in Writing
Unless you have a personal team of lawyers, you must cover your legal bases as best as possible. When working with clients, they must agree in writing to anything promised or stated. By having a written agreement, you and they have legal protections if you no longer work together.
You can reduce miscommunication and confusion with clear terms. So, clearly communicate when discussing products and services, related rates, payment arrangements, and associated fees.
It’s natural to fear times of famine that result from clients who delay payment for a wide range of legitimate and invalid reasons. That’s why a signed contract and precise terms are vital. You have more ground to stand on if you need legal assistance. In the worst case, you may need to acquire the money a client owes you quickly and without hassles. Having everything in writing ensures you get the money owed to you.
3. Always Confirm Claim Options
Many self-employed contractors who work from home experience severe financial losses. You may lose money because you allow your clients to dictate your steps in specific legal claim scenarios. For example, you might have agreed in writing to handle any dispute through arbitration rather than a court trial. Or, you may have forgotten to check your legal rights when the client lives or works in another region.
You are often responsible for pursuing any losses legally in the geographic location of your client or the headquarters of a corporate client. Unfortunately, this may be on the other side of the country or world. Before signing any contracts, always learn how to fight back legally and the personal and financial costs at home or elsewhere.
4. Set Up Multiple Budgets and Safety Nets
You need several business and personal budgets to manage your income and expenses. You should also have a fund for emergencies set aside. Having enough money to cover the costs of business and living is essential.
Have Enough Savings Set Aside
Also, you should have enough savings to cover one to six months of your expenses. Having money put aside is helpful in the event of receiving less work from a client, local competition, and market trends. All situations may cause slowdowns and related income losses. You might suddenly need money for emergencies. For example, you may have to deal with a busted water heater, a severe health problem, or even a lawsuit.
Seek Income From More Than One Source
For this reason, you should always seek income from more than one source. A diverse group of clients and several cash flow options can help prevent any one client loss or industry downturn. Having income from various clients also reduces the stress related to expensive emergencies.
Broaden Your Skill Set
It’s also equally important to diversify your knowledge base with continuous education. By improving your knowledge, you can make the best safety net against sudden work losses. Learn more about your industry and others to broaden your skill set. Your expanded experience and related skills can help you attract higher-quality, better-paying clients.
5. Pursue Your Own Benefits
As an independent worker, you don’t receive the same loyalty and retirement opportunities as a standard employee. So, you don’t have access to special wellness programs or dollar-for-dollar healthcare and retirement plan matching. As a result, you need to pursue third-party options as quickly as possible. That way, when you start your business as a freelancer, you will gain the most savings and the highest returns over time. It’s not too late to seek third-party options if you’re already a seasoned freelancer.
For example, check if a local industry or career-related member organization or union offers healthcare and retirement plans. Set up your bank account to automatically transfer money from every client payment into a savings account. Doing so guarantees you enough coverage and money when faced with illness and retirement.
You can also invest your money and set up a Roth IRA. That way, you have a nice nest egg set aside for your retirement one day.
An Important Reminder
Many independent contractors try to do everything on their own. With only so many hours in a day, they eventually burn out and need help to make enough money and manage their finances.
As soon as an opportunity presents itself financially, you should contact one or more experts to help you. An accountant, a tax preparer, a financial consultant, an investment advisor, and a retirement planner are just a few professionals who can help. The cost of hiring and working with one or more professionals is far less than the estimated potential losses in the long run.