Freelancing can be an exciting and rewarding path for many people. You get to call the shots — accept or decline assignments, enjoy greater degree of flexibility in your schedule, and develop diversified streams of income. But there are also many things that freelancers have to worry about: health insurance, invoicing, saving for retirement, etc. Here are 10 money moves you can make to ensure that your freelance career is well-positioned for success.
Have an emergency fund
Most personal finance experts recommend 3-6 months worth of living expenses stashed away, but for freelancers, it might be more prudent to aim for a bigger, 6-9 months emergency fund. Jamie Beckman, New York-based freelance writer and author of The Frisky 30-Day Breakup Guide, saved about seven months' worth of money in an emergency fund before she took the freelance leap. "In retrospect, I'd probably recommend saving more than that just in case," said Jamie, "I was able to get a good amount of work right off the bat, so I haven't been dependent on my savings (knock on wood!), but having a healthy financial cushion buys me peace of mind. I also have a few mutual funds that I can cash out in an emergency, but I'd rather not dip into those unless my situation is dire."
Read on for more tips for freelancers.
Pay off as much debt as you can
Before you take the leap into working for yourself, pay off as much debt — especially high interest credit card debt — as you can. Decreasing or eliminating credit card debt means that you will have more cash to play with each month, and you won't be working under the threat of missed payments and skyrocketing APRs over your head. Think of debt payoff as the gift of peace of mind that you are giving to yourself.
Figure out a bare bones budget
What is going to happen if work is slower than you had expected? How little can you live on if push comes to shove? What would your budget look like if you cut out cable, restaurants out, or downgrade to a cheaper apartment? A bare bones budget will show you what your bottom line is, and by cutting some expenses now, you will be able to get by with a smaller emergency fund and be able to save more money.
Look for health insurance
Health insurance is often the freelancer's biggest headache. "I think the high cost of health insurance is one pricey aspect of freelancing that I didn't really absorb until it was happening to me," Jamie said, "I've been talking to a lot of my friends about their desire to freelance, and the one thing that keeps some of them in their full-time jobs is health insurance costs." But skipping coverage can lead to financial ruin if something were to happen to your health. Check out Freelancer's Union for affordable insurance, especially if you have pre-existing conditions that make it difficult for you to get insurance on the private market. At the very least, get high-deductible catastrophic insurance. This coverage will pay your medical bills if you were, say, clipped by a bus while crossing the street. Or, you can sign up for COBRA, although coverage can be expensive.
Set up a fund for estimated taxes
Freelancers are responsible for paying both the employer and employee portion of employment taxes (12.6% normally, 10.6% for 2011). Depending on how much money you make, you may also need to pay estimated tax payments every quarter. If you don't set aside money for taxes, you will encounter a hefty tax bill — along with fines and penalties — come April. To be safe, stash 30% of every paycheck you get into a tax fund. That way you can earn a little bit of interest on your way to paying Uncle Sam.
Figure out what retirement fund fits your needs
No company-sponsored 401Ks? No problem. There are several retirement options available to freelancers. The SIMPLE IRA, SEP IRA, and solo 401K provide opportunities for you to stash your income in a tax-advantaged account. Of course, anyone with earned income (including freelancers) can contribute up to $5,000 into the Roth IRA. Also, don't forget to roll over your 401K from your previous job.
Set up a business checking account and business credit card
A business checking account and credit card helps you keep track of the money coming in and out of your freelance business, and helps you separate business expenditures with personal spending. Many banks and credit unions have special offers for small business checking, so take advantage of the rewards or perks that you might get. For example, Citibank offers small business checking products tailored to specific industries.
Keep track of your business expenses for tax deductions
Business expenses will qualify for tax deductions, so be sure to save receipts. For example, a freelance writer can deduct the cost of laptops, Internet connection, writing classes, and conferences. A wedding photographer will be able to deduct Photoshop and Canon DSLRs. A consultant who has an designated room for a home office can deduct that portion of mortgage. Talk to an accountant to understand what deductions are allowable and what documentation you would need to provide.
Set up an invoicing system or templates
Unlike a job where you are paid on a regular schedule, as a freelancer you have to go through the extra step of asking for the money to which you are owed. Setting up an organized and timely invoicing system means that you get your money as soon as possible, and you can easily keep track of which assignments have been paid and which haven't.