Most freelancers set a goal to save more money, but it’s tough to follow through when you survive on a variable income. Even so, it’s a critical part of building a successful financial foundation, as it provides the ability to choose the projects and clients you work with and helps you weather challenging times in your business.
As the number of freelancers increases — Upwork estimates that 35 percent of the U.S. workforce is made up of freelancers or independent contractors — there’s a significant opportunity for financial services companies to offer specialized products that help us reach our goals. Here’s a closer look at some of the top wish list items I’ve seen emerge through talking with other freelancers and how each type of product could help freelancers save more money.
1. Automatic Tax Servicing
As one freelancer said to me, taxes are the villain featured in every freelancer’s nightmare. You know they’re coming, but they’re hard to plan for, and despite planning, they can still break the budget. As an employee, an employer estimates and withholds your federal, state and other taxes based on the information you provide. However, as a freelancer, processing taxes proves more challenging. It’s important to make quarterly payments, keep track of changing income and anticipated expenses and account for the additional self-employment tax needed. An emerging class of services freelancers increasingly rely on is 1099 management services.
In theory, they work like this: A freelancer funnels the payments they receive through the service. Based on the money received, the service evaluates the freelancer’s tax responsibilities and withholds the right amount. In addition, the service makes the annual estimated payments and automatically makes adjustments if there’s any change in income that may impact the contractor’s taxes. With the remaining amount, they either write a check on a monthly basis to the freelancer or pay out a salary and put the rest into a business bank account. This type of service can save in three key ways:
- The first is eliminating tax concerns, an ever-present worry for freelancers. Withholding money for taxes ensures funds are there and paid, eliminating the risk of a short-fall at tax time.
- It’s adaptive and ensures changes in your circumstances — for example, a sharp drop in income or a spike in business — are accounted for, so you won’t run into any surprises due to miscalculations.
- With clear visibility into your tax liabilities, you can save money toward specific goals and avoid that vague sense of just saving money “in case you need it.” A clear tax plan makes it easier to save for everything, from vacations to new equipment.
2. Automated Savings
One of the strategies individuals use at large to save more money is automating their savings. When a direct deposit hits, for example, a person might immediately have a percentage of their payroll put into a savings account or money market fund. If your take-home pay is consistently $3,500 and you commit 10 percent to savings, $350 consistently goes into savings each and every month.
As a freelancer with a variable income, it’s harder to predict cash flow and consistently save a certain amount or percentage of your income. An automated savings program geared toward freelancers could use an algorithm to calculate and save a certain percentage of every payment, a percentage of what’s left at the end of the month or a set amount before or after taxes. It could also defer savings into different accounts, such as a specific vehicle, like a money market fund for higher interest rates, or an account with a dedicated purpose, like a new car fund.
3. A Bill Toward Savings
What happens when a bill comes? If you’re like most people, you make sure to check that it’s correct, and then, you pay it by the due date. Bills, like mortgage or rent, a car payment and utilities, are at the top of the list, along with insurance premiums and services you need to run your business. Yet, for many people, saving for the future — whether it’s building an emergency fund, contributing toward retirement or simply saving toward a goal — is treated as a secondary priority.
But what if savings was like a bill? For example, let’s assume a freelancer has two savings goals: putting aside money for a house and saving up for an annual vacation. With a bill system, instead of putting money into accounts as cash flow allows, each month you’d receive a bill (or bills) — one for $250 per month toward an annual trip and one for $500 per month toward your house fund. The actual amounts would change depending on your needs and your regular income, but as part of a set budget — managed alongside your health insurance and car payments or individual savings goals — it’s much easier to control.
Saving more money can help freelancers achieve their goals, whether it’s more creative freedom, attaining personal goals or simply knowing the freelance lifestyle has financial staying power. However, the variable nature of freelance compensation, combined with the increased tax liabilities contractors face, can make it hard to save money. Freelancers are definitely hopeful that more flexible banking products will hit the market and make it easier to achieve their financial goals.