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7 finance tips for freelancers
Legal Disclosure: Tony Robbins is a board member and Chief of Investor Psychology at Creative Planning, Inc., an SEC Registered Investment Advisor (RIA) with wealth managers serving all 50 states. Mr. Robbins receives compensation for serving in this capacity and based on increased business derived by Creative Planning from his services.
Independent contractors tend to be a zealous group on the whole – the kind of people who prefer to make the rules rather than play by someone else’s. For these freelancers there is something greater than stability; maybe the integrity of their craft, or even just the freedom of setting their own hours.
Whether out of necessity during an economic downturn or a rise in entrepreneurial spirit, freelancing is growing quickly in the United States. Three out of every ten workers in the U.S. are now ‘free agents.’ And although many of these individuals are brilliant in their work, unfortunately they often don’t have a good grasp on the essentials of their business.
In order to save these nonconformists from a trial by fire, we’ve complied a checklist to ensure that their finances are in order.
1. Create an emergency fund
Ideally you would put this together before you become entirely independent of an employer, but even if you’ve already made the transition, this should become your top priority. Although it is depends on your personal situation, most financial planners recommend saving enough for at least six months – in both your personal and business expenses. This will set you up for the times when work is harder to come by and will protect you from being in a situation where you take a job you don’t feel good about just because you are desperate for the work.
2. Open a separate business account
Life is messy enough; you do not want to have to sort through business and personal expenses at every turn. Use a separate business account for the aforementioned business emergency fund, your salary, taxes, your retirement fund and business expenditures.
Keep track of all business expenditures and their receipts in order to be able to ‘write off’ every legitimate expense without question. (More on taxes in a minute.)
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3. It’s more than just a budget
When independent contractors are first starting out, they often charge too little because they fail to take into account all of the things their former employer used to cover. Now that you are the owner, you have to set your rate high enough and get enough work to pay for the benefits you must provide yourself.
Here are some costs to consider as you set your rates:
Health Insurance (and life insurance and disability insurance)
Health insurance is now mandatory by law, and you must take it into account when you’re establishing your budget. And even if you are young, it would be foolish to disregard disability insurance. As a free agent, if you don’t work the money doesn’t come in, and if some tragedy were to strike (or you broke your hand, making typing an arduous process) you need to have that insurance.
Whether you hope to never stop working or you dream of retiring at age 35, you need to prepare for the day that you are no longer bringing in income. Harness the power of compounding, allowing your nest egg to snowball in a tax-deferred account and financially age with grace.
Finally, make sure that you’re budgeting in such a way that you can set aside some money for the purchases you’ll want to make in the future.
Taxes can differ widely depending on your state and city, but as a general rule of thumb, set aside at least 25% of every initial payment for taxes to make certain you’re not blindsided by a hefty bill from Uncle Sam. Determine what kind of independent contractor the IRS says you are early on, so you can properly ascertain what your tax obligations are. You will likely have to pay what is called self-employment tax and you will likely want to pay the taxes on your earnings every quarter. This is where your record-keeping practices are essential.
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4. Account for accounting
Whether you use a certified public accountant (CPA) or accounting software, this is one aspect of freelancing that will cripple your business if you ignore it. There are a few popular software packages that allow will drastically simplify your billing and invoicing, keeping everything tidy for the taxman. If this is an area that scares you, though, and you can afford it, you may want to get the help of a professional.
5. Pay yourself regularly
Although contracting can be a roller coaster ride of peaks and valleys in your income, give yourself the gift of a consistent paycheck. This will reduce your stress and make monthly budgeting much easier. In order to provide the consistency, take your average income over the last year and divide by twelve, giving you a monthly amount. If you’re just starting to freelance, measure your expenses over the last year instead and divide by twelve. Once you factor in the costs in #3, this will help you determine what you need to make.
Avoid the temptation to pour everything back into the business; you deserve a paycheck. For your own peace of mind and an accurate account of how your business is really doing, continue to pay yourself as if you were an employee.
Image© Africa Studio
6. Diversify your projects
Although consistent work from one client provides welcome stability, it can also make you overly dependent on one job. Diversify yourself across clients, continuing to build a client base and reputation. Then, if anything happens to your ‘big fish,’ you don’t have to scramble to replace the lost income.
7. Get professional advice
Finally, just because you are an independent contractor does not mean you have to face everything alone. Get a coach. Find a mentor. Hire a CPA. Benefit from the power of a community through a Freelancers Union. The world feels a little less cold when you have support and you never know what you may learn or who you may meet through the community you cultivate.
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