Freelancers have much more control over their finances compared to employees working in traditional roles. If you are a freelancer, you can dictate how much you charge for a specific job, how long you work each day, and how you invest the money you make.
While having more control over your financial situation is fantastic, it does present some challenges. One of the biggest challenges you will face is ensuring that your income is spent wisely and that you can save some money for a rainy day.
To help you overcome this challenge, this guide will share the best practices for saving money as a freelancer.
Follow a budget
When you’re working as an employee, managing your money is fairly simple. You receive a paycheck every week or fortnight, which you use to pay your expenses.
Because the amount of income you receive rarely fluctuates, you always know how much money is coming in — which makes staying on top of your finances fairly simple.
This all changes when you become a freelancer. Your income can fluctuate wildly, with thousands of dollars arriving one week and nothing arriving the next.
A freelancer’s outgoing expenses can also change dramatically.
If you experience a problem with one of your tools-of-trade, you may need to quickly find several thousand dollars to replace it.
This is why a freelancer must have a budget.
You will need to track how much is coming in and where it’s being spent.
It’s also important to put aside a significant proportion of your income for weeks where no work comes in or for when you need to make an unexpected purchase.
Having this kind of emergency fund is essential for your long-term success as a freelancer.
Keep a tight grip on expenses
When you are working as a freelancer, it often seems as if there are a constant stream of work-related bills landing on your desk.
It’s important to examine all of your outgoings to ensure that they are necessary for your job.
If you can identify unnecessary expenditure, you can save yourself thousands of dollars each year.
It’s also a good idea to cut down on personal expenditure if possible. Some areas where you can reduce your expenses include:
- Change to cheaper mobile/Internet/energy providers
- Start buying food in bulk and batch cooking (check out this useful guide)
- Cancel any unnecessary subscriptions to cable television, magazines, websites, and streaming services
- Cut down on optional luxuries like entertainment, alcohol, jewelry, tips away, eating out, regularly buying new clothes, etc.
- Cut down on transportation costs if possible
Pay yourself first
Once you have created a budget and reduced your expenses, you will have a clearer indication of how much excess income is available to each month.
It’s important to save a proportion of this additional income for yourself before you even consider purchasing additional equipment or spending it on luxuries.
Freelancers need to pay themselves in three ways:
Building an emergency fund
Your emergency fund will be used for sudden unexpected emergencies like a problem with your computer or your car.
It can also be used to help you get through very lean patches where you have no work for a few weeks.
Once your emergency fund has enough money to cover three to six months worth of expenses, you can begin diverting money into general savings.
A portion of your income needs to be immediately diverted into your 401k.
If possible, automate this process so a minimum of 20% of your excess income is sent to your retirement account.
If you are interested in going on a holiday, buying a home, or buying a car, you will need another savings account for that purpose.
Obtain all of the available tax deductions
One of the best parts of being a freelancer is that you can claim tax deductions on many items and activities associated with your work.
The key is to understand the available deductions. In the United States, some of the best tax deductions for freelancers include:
Home office expenses
If you work from home on a part-time or full-time basis, you will be able to claim tax deductions on certain home office expenses.
You may be eligible for tax deductions for paper, books, computer hardware, computer software, printer cartridges, computers, printers, notepads, office furniture, cleaning costs and much more.
Many expenses associated with business travel are tax-deductible including car rentals, flights, and accommodation.
Tools and equipment
If your job requires you to have certain kinds of equipment, you can claim it as a deduction.
Self-education is important for freelancers who need to stay up-to-date with the latest technologies.
You can obtain tax deductions for expenses relating to work-related learning including attending seminars, purchasing textbooks, and certifications.
Freelancers can claim tax deductions for money spent on worker’s compensation insurance, malpractice practice insurance, and liability insurance.
Membership dues and licenses
If you are forced to be a paid member of an association or must pay to hold a specific license, it is tax-deductible.
Any interest payments on loans taken out to set up the business are tax-deductible.
Freelancers who take payments via platforms like PayPal and Stripe can claim any payment fees.
When will I get my tax refund?
If you have claimed many work-related tax deductions, you may discover that you are due to receive a tax refund from the government.
Upon learning that, most freelancers will immediately want to know when will I get my tax refund? It will vary based upon which country you live in.
In the USA, most tax refunds are processed within 21 days of lodgment.
In the UK, it can take several months. Talk to an accountant to discover when your refund should arrive.
It can be very difficult to save money if you have a significant debt burden looming over your head. Debt repayments and interest costs will eat up a significant proportion of your income.
If you have debt, pay it down aggressively. One useful approach is the snowball technique, where you pay down your smallest debts first.
As you successfully pay off each debt, you eliminate interest payments and fees, gaining momentum towards being completely debt-free.
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