Freelance Finances: Are You Financially Prepared to Be Self-Employed?

By Carrie S. Nicholson, Contributor, on May 14, 2018

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Fortune favors the well-prepared. As you transition from having a boss to being your own boss, ask yourself: Are you financially prepared to make this work? When it comes to freelance finances, the main thing to understand is that you’re on the hook for all the things your employer used to do. From business expenses to self-employed taxes and everything in between, here are six major questions to ask yourself before packing up and leaving your 9-to-5.

Do You Have Enough Savings?

The more money you have in your savings account when you become self-employed, the better chance you have to set yourself up for success. When you’re an employee working a 9-to-5 job, financial experts say it’s best to save three to six months’ worth of expenses in the bank.

But as a freelancer, your overall risk is a bit higher. As such, you’ll want to save enough to cover at least six months to a year worth of expenses. When you back yourself up with some solid savings, you won’t be overwhelmed by taking on too many clients to make ends meet. The more savings you have, the more risks you can take without becoming overworked or stressed out. Before you transition into the indy lifestyle, make sure you have the necessary savings in place.

What Will Your Pricing Structure Look Like?

Your pricing structure is one of the other major pieces of the freelance finance puzzle. If you don’t charge enough for your products and services, you may stop your freelance career in its tracks. Before you take the plunge into the indy lifestyle, create a prospective pricing model. Evaluate factors like your competitors’ prices and how much you would need to earn to make a profit. Of course, it’s important to determine that the necessary demand is out there so that you can earn the rates that will allow you to live the type of life you desire. As your experience and skills grow, you should continually evaluate how much your time is worth.

Can You Cover the Necessary Business Expenses?

It’s important to know what you need to earn to cover all of your business expenses. Before you take the plunge into the indy lifestyle, consider the various startup costs that will come into play. For instance, think about the equipment and software you’ll have to purchase when you’re just starting out, along with the expenses associated with any services you may need. These expenses, among others, will need to be set aside in your monthly budget.

That’s why it’s important to break down exactly what your self-employed business expenses will be, so you know where your money will be going. Doing so will give you an idea of how much you’ll need to earn each month to make a profit — allowing you to determine if you’re investing your resources in the right places.

Will You Be Able to Obtain the Necessary Insurance Coverage?

One of the most important things to consider when you’re going freelance is insurance. Do you know what kinds of insurance you will need to protect your health — and your business, too? Will you be able to afford the associated monthly premiums and other coverage costs when you start your new career as an indy?

As a freelancer, you no longer have the luxury of sharing the cost of life insurance or health coverage with an employer. The average individual premium — for individuals who weren’t receiving subsidies from Obamacare — was $393 per month over the course of the first two months of open enrollment last year.

When you’re considering your potential freelance finances, take this added cost into account. Overall, there are a variety of factors that go into the cost of your monthly premium. Explore different online resources to learn more about how to estimate your income and determine the associated coverage options.

What Will You Owe in Taxes?

If you’re not careful, your quarterly tax payments can really set you back as a freelancer. Do yourself — and your finances — a favor and use this simple calculator to estimate how much you’ll owe in taxes over the course of your first year as a freelancer. Once you determine this number, consider whether that tax hit will substantially affect your overall financial stability.

And be sure to set up quarterly estimated taxes payments. Submitting your payment every quarter can help you avoid a scenario in which you owe a large sum at the end of the year, and protect you from the penalties and late fees the IRS charges for underpaying or submitting late.

Are You Planning for Retirement?

Don’t forget about your future: Make sure you invest in your retirement savings, too. While you may not be able to participate in an employer-sponsored retirement program, there are actually many different retirement plans available for self-employed individuals. As an indy, you can open a Traditional or Roth IRA, which allows you to contribute as much as $5,500 per year. Self-employed business owners who don’t have any employees can open up a Solo 401(k) or even a SEP IRA and contribute between $55,000 and $61,000 per year, depending on their age.

Talk to your accountant or financial advisor to choose the best retirement program for your personal situation, and start saving for your future. Make sure you have a plan of action in place before you leave your 9-to-5.

If you’re wondering whether you’re financially ready for self-employment, take a moment to answer the questions outlined above. In order to build a successful freelance career, you must be financially prepared for the feast and famine cycles. Protect yourself and your future business by making sure you have the necessary funds, savings and coverage in place before you make this major career move.

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