Becoming a freelancer seems like a dream for a lot of people: you make your own hours, choose your own clients, and most importantly, you do what you love. But in this gig economy, there’s a lot to think about before striking out on your own. While it’s true that you can start freelancing tomorrow, we often skip over planning for the financial part of the job and then stumble because of it. 

Why is Financial Planning for the Gig Economy/ Freelancer Important?

Think about it this way: would you go on a big trip without bringing your wallet or purse, paying for the plane ticket, or buying travel insurance? In an ideal world (where we never forget anything), you’d always do these things to ensure a smoother trip! The same rules apply to being a freelancer. After you’ve set up yourself as a legal entity, you must prepare your financial support systems before taking off. Below are three areas to set up as a freelancer:

Design A Cash Flow System

Whether you’re a freelancer that’s been on your own for years or you’re just getting started, there are some common and important things to do to keep your financial house in order.  First is designing a system for your cash flow and savings. I know, “system” can be an intimidating word, but all it means is mapping out how much money will come in and out of your account each month. 

When designing a system for cash flow, ask yourself:

• How much of each month’s cash flow is living expenses, savings, and tax payments?
• How much money are you budgeting for time-off (re: some kind of weekend)?
• How much of your income do you put into a savings account each month?

Being a freelancer means that your income is less predictable than if you had a salary job. Freelancers often call it a “feast or famine” field. Creating a cash flow system that tracks your money will help you ride out those times of famine, and capitalize on the times you feast. 

Read More: Creating a Cash Flow System that Works for You!

Get Your Taxes In Order

Another critical aspect of freelance work is doing your taxes. Yes, everyone has to do their taxes, but the rules for freelance taxes can be tricky. Before you know it, you could own a huge amount of money if you’re not careful! First and foremost, find a tax advisor you like and work with them on your taxes. 

Together you can figure out:

• How much money you should set aside from each paycheck to pay your taxes. Put that money in a separate account until you have to pay the bill, and set reminders to pay quarterly taxes to avoid penalties.
• How much your taxes vary based on your income level and expenses. In all likelihood, they won’t be the same year in and year out, so you’ll need to check on them periodically. Your tax advisor should keep you informed about any changes.
• What your deductibles are. Tally and keep track of all your deductible work expenses. Hint: include health insurance and any costs from your home office.

Note that as a freelancer, you will be paying Federal, State, and Self-employment taxes. 

Design A Benefits Package For Yourself

Lastly, just because you’re a freelancer doesn’t mean you shouldn’t have benefits! You just have to create your own package. This also helps you protect yourself when the unexpected happens.

Some questions to consider are:

• Where do you get your health insurance? Research all the options available (include insurance that’s available through some freelance unions!) to make sure you’re getting the best deal.
• Do you have long-term disability and life insurance? This is the “protect yourself” part of freelancing. Having disability and life insurance can give you peace of mind in a more volatile profession. 
• How are you saving for retirement? You won’t have a tax-deferred vehicle set up for you like at an employer (e.g. a 401k), so investigate what vehicle is best for you: a Solo-401k a SEP-IRA. The good news is you can save just as much or even more than an employee. It helps you save on taxes too! 

As a freelancer, you can set yourself up for greater success by paying attention to your financial health. Taking a look at your cash flow, taxes and benefits is imperative to running a thriving business. Don’t sell yourself short just because you work solo.