Freelancing offers an unparalleled amount of freedom. From going on impromptu vacations to hand-picking your clientele and projects, freelancing is a career choice that’s worth the gamble. A steady paycheck, retirement planning, and other wealth-building tools are another story. Unlike a typical employee, you’re responsible for every step of your financial goals and financial planning. Starting with what to charge to how you invest or save your earnings, you’re in the driver’s seat.
For the frugal freelancer, money management isn’t always an issue. But if you’re a person who doesn’t maintain a budget, must have the latest gadgets, or hasn’t thought about the future, financial management can become burdensome to the point of ignoring it altogether. Even freelancers with steady or high incomes can still struggle with this aspect of adulthood.
But don’t fret. All is not lost.
The first step toward becoming a financial success as a freelancer is to create short-term and long-term financial goals. With clearly devised objectives tailored specifically to your level of minimalism or sense of financial well-being, you can start contemplating where to put your hard-earned cash instead of worrying about paying your monthly bills.
How to Create Short-Term Financial Goals as a Freelancer
To accurately set and attain short-term financial goals as a freelancer, define “short-term” as any fiscal objective you can complete within one to two years. This idea is twofold. First, you can see achievement within a small period of time, which helps build confidence and actualize the method of building wealth. In addition, you can use these short-term goals to vault yourself into long-term goals you simultaneously set for yourself.
Focus on Your Actual Needs
One of the biggest drains on your bank account is differentiating between wants and needs. However, overexposure to advertising can seep into your subconscious, turning a materialistic item into a need rather than a want. Combat this as strongly as possible. As a general rule, bring a minimalistic approach to your life. Shelter, food, clothing (in moderation), and a computer/Wi-Fi connection are the only things you need to become a successful freelancer while saving money. While it’s alright to splurge on an item every once in a while, don’t make it a habit. Your savings account will thank you.
If you find the wants-versus-needs predicament particularly troublesome, use the 50/30/20 principle. This approach sets measurable amounts to your budget:
- 50% of your after-tax income goes to living expenses
- 30% goes to extraneous items and wants such as entertainment and gadgets
- However, you may want to tweak this on a downward slope to save even more in the short- and long-term
- 20% goes straight into your savings account
By using the 50/30/20 rubric, you can curtail unnecessary expenditures while reaching your short-term financial goals.
Define Your Short-Term Financial Goals
Unfortunately, there is no one-size-fits-all plan for defining your short-term financial goals as a freelancer. Maybe you want to pay down your student loans, or perhaps you want to travel while you freelance. Either way, you’ll need to have a clear idea of what you want to achieve. To come to a solid conclusion, analyze your lifestyle or where you want to be in a few short months. Dream it and actualize it. If you’re feeling stuck, some of the more common short-term goals for freelancers include:
- Saving for vacation or a digital nomad lifestyle
- Building an emergency fund
- Repaying debt
- Reinvesting in your freelance business or yourself such as upgrading your computer or getting an online certification
This isn’t an exhaustive list of short-term financial goals, but it should give you some direction when it comes to planning.
Set Realistic Short-Term Financial Goals
If the idea of short-term financial goals leaves you overwhelmed, chances are you’re not making your goals realistic. The idea of saving up $10,000 in three months is tantamount to losing 30 pounds in three weeks. You’re setting yourself up for failure.
As an alternative, use SMART goals to implement your short-term financial objectives. SMART stands for:
In a short-term sense, this means that you come up with a feasible course of action based on your income. Instead of saying something such as, “I’ll save $3,000 in the next few months,” create a more measurable and specific plan. Say “I’ll save $3,000 in the next three months by cutting back miscellaneous expenses and not eating out.” Not only is this a measurable goal, but it sets out a clear-cut route for you to save money. Combined with the 50/30/20 principle, this one-two punch should help you carve a path toward your short-term goals.
Expand Your Client Base
Expanding your client base hits the underlying problem of solving both your short-term and long-term goals. But in the short run, it can help you hit your objectives while building your income. Use the same SMART goals outlined above to help you find new clients. For example, say “I’m going to find two to three clients within a month by cold-pitching two prospective companies a day” instead of “I’m going to find a few clients in the near future.” Once again, setting attainable and measurable goals will make a world of difference.
How to Create Long-Term Financial Goals as a Freelancer
Creating long-term financial goals as a freelancer is a bit trickier than the short-term, especially if you’re part of the digital nomad horde. You aren’t guaranteed a steady paycheck, nor are you sure where you might end up in a year’s time. To exacerbate problems, you’re also without pension programs, retirement plans, or other investment options typically provided by an employer. Nevertheless, you can craft long-term goals that fit your earnings and plans three or more years into the future.
Even when you feel as though your steady-income, employed friends are living the good life with financial security, your success isn’t far off if you make the right financial moves. You made it this far on your own, right? Take these suggestions to heart and prepare for the next chapter of your life without having a meltdown about working until you’re 75.
Put Your Money in the Right Investments
Let’s face it. In the freelancer/digital nomad realm, you’ll run into plenty of people that got rich off cryptocurrency. But it’s not always a great investment. Sure, blockchain and cryptocurrency may have its place in the global market, but you need a secure investment to move forward financially, not a money pit or a get-rich-quick scheme.
Enter the world of sound investing. To get started, you’ll need about $2,500. Some companies such as Acorn or a similar investment website/app will let you start for $1 to $100. Regardless of which one you choose, investing this amount will pay dividends—literally and figuratively—down the road. A balanced portfolio of small-cap stocks and large-cap stocks will get you rolling. Or if you aren’t the financially minded individual, a mutual fund will take care of the work. Mutual funds blend a number of stocks into a fund that’s balanced by professionals, typically for a decent return.
For the more frugal investor, American T-Bonds or certificates of deposit will pay between 1 and 3%—far more than the 0.1% you get in most U.S. banks.
No matter what you choose to invest in, keep a watchful eye on the markets, but don’t freak out if they fall a bit. That’s all part of building long-term wealth.
Don’t Let Taxes Become a Burden
One could argue that paying quarterly estimated taxes falls under the umbrella of short-term financial goals or at least avoiding penalties and an audit from the IRS. Yet it’s paying these taxes that could keep you from a massive debt in the future.
In some cases, the IRS could take years to catch up with an underpayment of taxes. Then, bam. You’re hit with the balance plus interest and penalties. When in doubt, pay every cent of your estimated taxes on time at each required period (April 15, June 15, September 15, and January 15) to avoid a situation that can curb your long-term earnings. If you’re not used to paying taxes, figure out the basics and how much you’ll need to pay to successfully navigate your payments to Uncle Sam.
Figure Out What You Want Out of Life
Figuring out what you want out of life—especially in a financial facet—is excruciatingly difficult. Do you want to buy a home? A rental property? Start a family? These are questions only you can answer. Whatever you decide, you need a plan. You can’t readily save for any of these situations in a few months or even a year.
If you want to start a family or buy a home, begin by researching the statistics. According to the U.S. Department of Agriculture, raising a child to the age of 18 in a middle-income household costs $233,610—without college. Okay, you probably choked a bit on that one. But realistically, you’ll need to save money for your child on top of your own nest egg. That’s quite a strain on your finances.
If you want to buy a home, you may qualify for an FHA loan, which means you’ll only have to put down 3.5% of the total purchasing price. But add in private mortgage insurance (PMI), property taxes, and the mortgage payment, and you’re in for a pretty penny.
Therefore, your long-term financial goals as a freelancer will require an adjustment to the 50/30/20 principle. Take away from your entertainment expenses and wants and try to see the end goal. A prize exists at the end of the road, and you’ll take satisfaction from knowing you may have had to limit the conveniences in order to reach what you want out of life.
Think About Retirement
If you haven’t started planning for retirement already, you aren’t alone. According to a Bankrate.com survey, a shocking 41% of Americans have zero to 5% of their income socked away for retirement. Freelancing doesn’t make it any easier to save for your elderly years. But it doesn’t prohibit it either.
Fortunately, you have numerous resources to help you create a nest egg for the future. Take full advantage of Individual Retirement Accounts (IRA) or solo 401(k) plans. If you’re under 50, you can contribute an annual tax-deductible amount of $6,000 to a traditional IRA. A solo 401(k) plan provides contributions of up to $56,000 per year, which is also tax-deductible.
The sweet spot is that you can invest this money yourself or put it into a mutual fund that’s managed by a proven company. Either way, you’ll reap the benefits and watch your savings grow.
A Roth IRA is another financial tool that lets your money grow tax-free. It isn’t tax-deductible, but you can withdraw the funds after you’re 59 ½ without paying any income tax. Conversely, a traditional IRA gives you the tax breaks now, but you’ll have to pay taxes when you withdraw the money in the future.
Melding your short-term and long-term financial goals isn’t easy for anyone, but being a freelancer doesn’t make the situation any simpler. But if you analyze your goals, put together an actionable plan, and execute that plan, you just may find the stress melt right off your shoulders.
iStock image: anyaberkut
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