9 Essential Financial Planning Habits for Freelancers

A study by Freelancers Union and Upwork estimates that 57 million Americans are now freelancing, which represents about 35% of the U.S. workforce.

There’s a lot to like about freelancing — you have more flexibility in your schedule, and you can choose the clients you work with. Even if you’re already working a full-time job, freelancing is a great way to earn extra income on the side and build your skills.

But freelancing has its own set of challenges. As your own boss, you need to manage your finances and set aside enough for taxes. Poor financial planning habits can result in cash flow problems.

So what changes can you adopt to better manage your finances? How can you ensure you have enough set aside for rainy days and taxes?

Essential Financial Planning Habits for Freelancers

Keep reading to learn essential financial planning habits that every freelancer should know. 

1. Establish a Separate Business Account

Whether you’re freelancing or starting a new venture, it’s important to keep your personal and business expenses separate.

Open a business checking account, separately, to pay for expenses related to your business and receive payments. Then you can pay yourself a “salary” by transferring to your personal bank account on a biweekly or monthly basis.

Keeping separate accounts might sound tedious, but it’ll make things easier when you file taxes. A business account lets you keep track of your deductions without sifting through each line on your personal statements.

Maintaining a separate account also lets you see exactly how much you’re spending in your business. This can highlight areas of waste and identify where you can save. If you’re paying for a phone line you rarely use, you can consider canceling it and allocating those funds elsewhere.

2. Take Advantage of Business Resources

Freelancing or starting a new business is certainly exciting. But there’s also a steep learning curve in the beginning.

Working as a freelancer means you’re learning new things along the way. This can cause you to feel overwhelmed or make bad financial decisions because you lack the right information. 

That’s why it’s important to take advantage of reliable resources for first-time founders to make the best financial decisions.

For example, you might wish to form an LLC (Limited Liability Company) to protect your personal assets and limit your liabilities. But how do you form one, and what are your tax obligations? Should you even form one? 

Using reliable resources can save you valuable time and help you make crucial decisions. They also help eliminate a ton of guesswork, as you can quickly find the answers you need.

3. Build an Emergency Fund

“Feast or famine” is something that every freelancer is familiar with. It means that you’ll have either tons of client work or not enough to do.

This varied income makes building an emergency fund all the more important. It allows you to weather financial storms and cover any sudden expenses, like medical emergencies or home repairs. 

How much should you save? Most experts suggest having enough in your emergency fund to cover three to six months of living expenses. 

If you want to be really secure, aim to save for a year’s worth of expenses. This will give you a healthy financial cushion if you’re between projects or have an unexpected expense.

Many banks offer linked savings accounts you can use to put aside money. There are also a number of low-risk places you can put your emergency account in and earn interest.

4. Set Aside Money for Taxes

Another essential financial planning habit is to set aside money for taxes.

Many employers withhold taxes from employees’ paychecks and send them to the IRS. Instead of having to pay one lump sum in taxes, you’ll pay what you owe over time. 

But if you’re self-employed, clients typically won’t withhold taxes from your pay. This means it’s your responsibility to keep track of what you owe and pay on time.

The self-employment tax is 15.3%. Get in the habit of setting aside at least that much of your paycheck, plus any state taxes that you might also need to file. 

If you expect to owe $1,000 or more in federal income tax, you might need to pay quarterly taxes. You can use Form 1040 ES to estimate how much taxes you’ll owe.

5. Don’t Forget About Life Insurance

Freelancers often overlook life insurance. But it’s a factor you must consider to secure the future of your family should anything happen.

You can choose between term or whole life insurance, depending on whether you want to be covered for a specific period or permanently. 

The insurance you choose and the amount you purchase depends on factors like age, gender, income, lifestyle, and your family situation.

For example, if you’re still young and not married with any children, your life insurance needs will be different compared to someone who is older and raising a family. 

Not sure how much life insurance you need? Experts suggest multiplying your income by three to 15 times to estimate how much life insurance you should buy. 

If you’re a 30-year-old woman making $40,000 a year, then you might consider getting a policy that’s worth anywhere from $120,000 to $600,000. 

This is just a quick rule of thumb, so it’s important you speak with a life insurance agent.

6. Remember to Save For Retirement

Striking out on your own means that you’ll need to think about retirement. Even if you love what you do, you won’t be able to do it forever. 

Just as you’re setting aside money to build your emergency fund and pay your taxes when you need to file, you should also get in the habit of saving for retirement.

A Roth IRA (Individual Retirement Account) is a good option for self-employed people. You can contribute up to $6,000 per year, plus an extra $1,000 if you’re over 50 years old.

With a Roth IRA, you can make contributions with after-tax dollars. This offers tax-free growth, and you can withdraw from your account at any time without incurring any penalty.

Consider setting up automatic biweekly or monthly transfers to your Roth IRA to make this a habit. 

7. Only Use Credit Cards for Emergencies

It’s easy to become saddled with credit card debt if you’re not careful. Before you know it, you could find yourself owing thousands of dollars on a card with a high interest rate.

One of the biggest mistakes you can make when working as a freelancer is using your credit card as financial security. This can result in maxing out credit cards whenever unforeseen circumstances or emergencies come up. 

A bad credit score will affect your ability to get approved for loans in the future, whether it’s to grow your business or improve your home. Using the services of a credit repair company can help you get your credit score back on track.

If you use credit cards to earn points or get cashback, make sure to pay your statement balance in full to avoid paying interest.

8. Leverage Technology to Streamline Your Work

The life of a freelancer is often weighed down by cumbersome tasks. These include scheduling meetings, creating invoices, managing new projects, and keeping track of notes.

Using notebooks or even spreadsheets may work for a time. But as you start bringing in clients and working on new projects, you’ll find these tools extremely limiting. They also take away valuable time from other meaningful work.

Fortunately, technology allows you to streamline and centralize your work, so you can spend more time on the things that contribute to your bottom line.

With CRM software or Customer Relationship Management, you can manage interactions with your clients in one place and nurture leads that come your way. This allows you to personalize each interaction and make more of a lasting impression with your clients.

Of course, technology is only as useful as you make it. If you’re using CRM software, get in the habit of recording client interactions and tracking metrics like revenue. This will allow you to identify your most valuable clients.

9. Consider Investing Extra Income

So you have a well-funded emergency fund and set aside enough to cover your taxes. You’re already off to a great start. 

If you have extra income, don’t just let it sit in your checking account where it won’t earn you much. Consider investing in other vehicles to grow your net worth.

Here are different types of investments you can consider:

• Stocks
• Mutual funds
• Bonds
• High-yield savings accounts
• Certificates of deposit
• Exchange-Traded Fund (ETF) 
• Real estate

And if you have children, you might also look into investment accounts for kids and give them a head start on their future.

Final Thoughts

Freelancing gives you the flexibility to choose your clients and work your own hours. But you also need to be more disciplined with your money. It’s vital that you set aside enough for an emergency fund and your taxes.

By adopting healthy financial habits, you can position yourself for long-term success and meet all your obligations.