Being self-employed comes with its perks. You have control over your job and work schedule, and essentially — you work for yourself. Data from the Global Entrepreneurship Monitor found that while the number of self-employed people before and after the pandemic stayed the same, about 3.6% of workers switched from employed to self-employed during the pandemic. However, pursuing the freelancer life can be lonely and may cost you valuable mentorship, guidance, and financial advice you could otherwise get from colleagues and leaders at more conventional jobs. In today's post, we'll discuss four critical financial tips for the self-employed:
Build an emergency fund
This isn't advice exclusively for freelancers, but it's imperative in our line of work because, as freelancers, we don't have a steady income, so having a financial cushion in case things go wrong is always safe. Experts in an article entitled "Why an Emergency Fund is So Crucial for Freelancers" suggest keeping at least three to six months' worth of expenses set aside in case of emergencies. A good rule of thumb is to build your fund when you're doing well and rely on the said fund when things aren't so good.
Understand your taxes
Being self-employed may seem like you're free from the usual responsibilities and formalities that come with more traditional work, but that doesn't mean you're exempt from paying taxes. In "How to Budget for Taxes as a Freelancer" from USNews, taxes are divided into self-employment tax — if you make at least $400 in net earnings — as well as income tax — based on your net adjusted gross income. Like the emergency fund mentioned earlier, experts suggest setting aside your estimated weekly, monthly, or quarterly taxes in a separate tax savings account.
Explore sources of funding
Borrowing from friends and family, or depending on where you live, maybe even government agencies can come in handy when facing challenges you can't cover with your emergency fund. However, having an inconsistent source of income can make lenders reluctant to provide the funding you need. There are several choices to consider. An article called Sound Dollar’s post "Line of Credit vs. Personal Loan" discusses how a personal line of credit and a personal loan are two of the more popular options among the self-employed. A personal line of credit works like a credit card — a set amount of money that you can borrow to a limit for a certain timespan — and payments you make toward your balance will replenish your available credit. Personal loans let you borrow money to use however you like, but with monthly principal and interest payments. These two funding sources are best used for emergencies as they often have fewer requirements.
Trade services with other freelancers
In our previous post on “Mujeres in Entrepreneurship!” podcast episode on Victoria Garcia, we discussed the importance of knowing how and with whom you can trade your services (or products) with other freelancers. Working on and building your brand can be a struggle, but you never know when others can help you, even if they come from a different area of expertise. This is valuable financial advice because you might be able to exchange services with other freelancers like yourself, so you can get things done at a much lower cost. Not only do you skip out on unnecessarily spending lots of money on your business — although investing to make your processes more productive and efficient will undoubtedly be helpful in the long run — partnering with another self-employed freelancer can be something like free marketing for you as well.