5 Types of Savings Every Freelancer Should Have
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One of the best parts of being a freelancer is mentioned right in the name – being free. Freelancers can decide when, where, and how they want to work. But with this freedom comes a lot of responsibility!
When you work for someone else, your employer will usually make deductions from your pay to account for taxes, retirement, and sometimes even benefits, such as health insurance. When you’re working for yourself, you have to take care of all of that on your own. Doing so can easily become overwhelming, so it helps to have a clear plan of action when it comes to keeping track of your finances.
In this blog post, we’ll be talking about five types of savings that can help you achieve financial peace of mind:
- Personal
- Business
- Taxes
- Buffer or Emergency Fund
- Retirement
Read on to learn more about each type of saving and why it’s important.
1. Personal
Everyone’s life is filled with unavoidable expenses. You should use your personal savings for things such as:
- Housing/rent costs
- Groceries
- Transportation costs (e.g., gas, bicycle maintenance, public transit)
- All other regular bills
The first thing you should do is figure out how much you actually have to spend each month. The best way to do that is to create a budget. A good budget will remind you how much of your income is required to cover your basic costs of living. Then you will know how much you have left over to save and spend.
2. Business
As a freelancer, you need to cover all your own business expenses. You will need to keep track of everything you buy that is related to your business. Your business account is where you put money that will go back into sustaining and growing your business. After you have calculated your business expenses, a good rule of thumb is to have three months’ worth of that saved.
3. Taxes
Paying taxes is unavoidable for everyone, even freelancers. Unfortunately, because they have no employer, freelancers have to keep track of their taxes. A few steps you should take as soon as you start working for yourself are:
- Registering as self-employed
- Finding out about the self-employment tax laws in your area
- Keeping records of all business-related transactions (incoming and outgoing)
- Knowing what you can claim as business expenses
- Keeping track of when your tax return is due and how to file it
- Putting aside money for taxes each month
This last point is very important. Most guidelines suggest putting aside 20% to 35% of your earnings each month for taxes. Include that in your monthly budget and put the money into separate savings for the end of the year. If you don’t feel comfortable doing this on your own, plenty of options for accounting software are available to help you.
4. Buffer or Emergency Fund
While being a freelancer is a wonderful career option, sometimes it comes with a little uncertainty. Your hours, and therefore your income, will not always be consistent from month to month. Having a buffer or emergency fund can help you when unexpected costs arise or when you have less work.
Creating your buffer isn’t hard. Your budget will show your monthly expenses. Just multiply that by the number of months you want as your buffer. Decide on a reasonable amount of time to save that amount, and then deduct money every month as you would for any other bill and put the funds into your buffer savings.
While some people may believe one month’s or two months’ salary is enough, it is better to have three to six months’ worth put away as your buffer.
Remember, if you start earning more money, don’t just spend the surplus – recalculate your buffer and increase the total you have saved.
5. Retirement
Finally, even freelancers don’t want to work forever. So you need to learn how to set aside some savings for when you are ready to kick back and retire. After you have worked out your monthly budget, figure out a suitable percentage and put that into retirement savings every month. Then you have the option to put that money into something that will grow it.
Have a Plan
Working for yourself as a freelancer has many benefits. But without an employer, some people can find it difficult to know what to do with their money. Making a budget and then organizing your money into the five types of savings mentioned above can provide you with security and peace of mind for whatever lies ahead.
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