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When you are self-employed, managing your finances and bills the right way is crucial. As an independent contractor, you have the freedom to choose when and how you work, but this also comes with enormous responsibility. You may not have a consistent paycheck coming in every couple of weeks, so planning how you use your money is necessary.
The budget is your foundation for handling your finances successfully. You should create a monthly
Your budget should include all of your income, expenses, and savings. Not only should you add all the bills, but you should also make sure monthly subscriptions are on the list. You want an accurate picture of your earnings and spending habits.
As a freelancer or independent contractor, being self-employed means your income will fluctuate, so your
Track Business Expenses
You also want to track expenses carefully since they could qualify as business deductions. For instance, some self-employed individuals can deduct their car insurance from their taxes if they use their vehicle for business purposes. Some other common business expenses include office supplies, business travel, and separate work phone lines.
Some freelancers prefer to collect and send all of their expenses to an accountant without sorting them first. Others prefer to have a more hands-on approach and sort their own expenses. Although you can keep track of business expenses on your own, you should at least consult an accountant or tax specialist to make sure you are doing it accurately.
Create Separate Business and Personal Accounts
When you are self-employed, having separate business and personal accounts can make it easier to manage your money. You will be able to see your income stream by looking at the right accounts. This also makes it simpler to see business expenses since they will not be mixed in with personal spending.
Although it is not a requirement to separate personal and business accounts, it can be beneficial. One advantage is that you can set up a savings account just for your work. Then, you can use this account to pay for business purchases and investments.
Keep an Emergency Fund
When things are going well, it may be tempting to either stop contributing to an emergency fund or dip into it and take money out. However, self-employment means that you should always have a fully-funded emergency fund and avoid using it unless there is an actual need.
In general, you want to keep three to six months of expenses in an emergency fund. If you are struggling to come up with these amounts, aim for at least one month of expenses. The goal is to have enough in the fund to pay all of your bills in case your income streams dry up.
One option is to keep the money in an online savings account for easier access. Look for accounts with no monthly maintenance fees and competitive rates. Some banks allow you to organize a savings account into categories, which is similar to having virtual envelopes for different expenses. You can create a separate category for an emergency fund.
Prepare for Taxes
In addition to setting money aside for an emergency fund, you should prepare for taxes. Self-employment taxes may be higher for some people than regular employment taxes, so you have to plan ahead. Taxes can be complicated even for single individuals, and it is important to seek guidance from professionals such as accountants.
Many self-employed workers have to pay quarterly taxes every year. This means they make four payments throughout the year to avoid owing a large amount at the end of the year and paying penalties. Since you are not paying taxes with every paycheck, quarterly payments can help you stay ahead of what you owe.
Some freelancers prefer to set money aside for taxes with every payment they receive, while others do it every month. There is no right or wrong way to save for taxes. The goal is to make sure you do it enough, so you are not caught off guard at the end of the year and have to scramble to come up with a huge amount of money.
Change Your Money Mindset
Although following specific tips for setting up a budget and saving for emergencies is important, you also have to consider your entire money mindset. How you think about money affects every aspect of managing it. Do you approach your finances with fear and scarcity? Or do you embrace abundance and flow?
Many people, including the self-employed, have deep-set ideas about money buried in their subconscious. They may think that earning money should be hard or that they do not deserve it. They may create their own income ceilings based on what they think their work should pay rather than what others are willing to give them.
If you approach your finances and bills from a place of fear, it will show up negatively. When you are afraid of money, you cannot manage it well. You will avoid looking at your income and expenses. You will ignore problems until it is too late or deflect them.
Being self-employed can be difficult at times, but remembering that money is abundant can help. There are always more income sources and clients for you to have. There is always a need for the products and services you offer. Money is an endless source that people have created.
As a self-employed individual, you have to stay on top of your finances since you are in charge of all of your money. Keep in mind that the freedom of freelancing comes with enormous responsibility.
This clear and simple guide provides tons of practical advice for keeping track of your finances. With useful tips on setting financial goals, reducing debt, finding ways to save money, and creating and following a budget plan, you’ll have your dollars and cents under control in no time.
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