The idea of working flexibly fascinates us. Currently, over 1.5 crore Indians are working as freelancers and the list is growing, as per the estimates from Morgan Stanley, Freelance workers are expected to account for more than half of the workforce by the year 2027.
However, everything is not shiny, as the amount credited to their bank account is not stable and they lack other employee benefits.
Freelancers may have the liberty to work according to their will, but they cannot escape monthly bills and taxes. It becomes necessary to remain at the top of your personal finance and expenses.
And yes, you have to manage all this by yourself. That is why financial planning is very important for freelancers and independent professionals.
Globally as the organization getting comfortable with remote working, they are equally getting comfortable in hiring freelancers and contractors, the global pandemic has further accelerated the demand for freelancers. Approximately 77 million freelancers are operating in India, US and Europe.
“Google’s workforce has more freelancers than permanent employees – as of march 2019, Google had 1,20,000 contractors against 1,02,000 permanent employees – as per Bloomberg”
Some are working as part-time freelancers while others call it a full-time job. But more than 50% of freelancers are struggling with managing their finances.
In this article, we will be talking about some lesser-known tips on Financial Planning for freelancers and independent professionals.
What is financial planning and why is it necessary?
Often, financial planning is misunderstood as saving money. Saving money is a part of this broader concept called financial planning. It refers to managing your finances and having a clear picture of your current position, financial goals and a complete strategy to achieve those goals.
A strong financial plan not only constitutes of managing your cash flows and investments but also managing risk through adequate insurance coverage and a daily routine on planning and managing your income and spends.
Taking the term investment from the previous sentence; we often get advised on ways to earn additional money through investments. There is enough information about how to invest in crypto, mutual fund, stock markets or other financial products but what is more important is to learn on how to save required money for meeting your current and future financial requirements.
Financial planning acts as a guide in managing our expenses and income which eventually helps in achieving our financial goals faster.
It also helps us being prepared and navigating through the difficult and unforeseen situations. People poor at managing their finances often end up struggling to pay bills and risk losing up their entire savings during unfortunate and unforeseen situations.
But as it is said, Stitch in time saves nine! Being a freelancer, you can always manage your finances like any other professionals or even better.
Tips for financial planning for freelancers
Create your financial Goals
The first step is to develop short-term and long-term financial goals and plan your financial strategy accordingly. Short term goals are to be achieved in near future i.e, in a month or in a year. For example, building a content studio, purchasing a car etc.
While long term goals are targets that are to be reached in the coming five or ten years. It may include starting a business, buying a house and much more.
This is how you can define your goals clearly:
- Understand your current position
- Take a piece of paper or open digital notes on your PC.
- Get an estimate of the amount required and write it in notes.
- Now define steps to save that amount by setting realistic goals.
Create a budget and follow it!
Creating a budget is not enough, implementing is important. Most of us create monthly or quarterly budgets but only a few manage to follow them.
The stepwise approach is:
- Track your monthly expenses and allocate amounts accordingly.
- Set a small amount for the emergency fund.
- Don’t create an unrealistic budget as it will leave you dejected on account of remaining unaccomplished.
- Avoid overspending, identify your spending triggers that can be environment, peers or even your mood that make your prone for impulse shopping. If you remove or avoid those triggers, you will remove temptation for overspending as well.
Create a budget after considering all above provisions and make sure you stick to it.
Segregate your personal and business expenses
Often, freelancers fail to segregate their professional and personal expenses. Freelancers invest in gadgets, tools and other products required for their work. They fail to maintain or create a budget for professional purposes and keep spending collectively.
By segregating personal and professional expenses it becomes easier to keep a track of both kinds of expenses. This could be done by having a business bank account for professional purposes. It makes it easier for you to get credits from banks and adds to the credibility of your business.
Set Aside money for taxes
Neither salaried employees nor freelancers are spared from paying taxes. You must make provisions for taxes based on your earnings. Make sure you get an estimate of the amount you may have to pay and keep it aside for tax purposes.
Most of your clients may deduct TDS before paying off your invoice, make sure you ask for a TDS certificate and check 26AS section to ensure the TDS has been deposited by your client.
Make provisions for upcoming expenses
Paying bills on time could be the best thing you can do for yourself. Freelancers either receive weekly or monthly payments based on the contract. It is not necessary that you get a specified amount at the beginning or end of the month.
You should always keep some amount aside from the previous month’s income to pay off your upcoming bills. Paying bills on time can prevent you from paying late fees.
Create an emergency fund
You never know when circumstances changes and you need some extra cash. It is necessary to put some amount in the emergency fund every month. This will provide you with financial security during hard times. Do not forget to have separate account for creating an emergency fund, else you may end up spending it as well.
Build multiple income streams
If you are a full-time freelancer, this pointer is the key takeaway for you. Build multiple income options to fatten your wallet. For example, if you are a graphic designer, start coaching others on graphic designing or start a blog on graphic designing.
Freelancers do not have a stable income, so if you fail to bag a contract for one service you can make money by providing other services. You can also enter other fields only if you know the knack for time management.
You don’t have to be jack of all trades. Instead, choose additional income source cautiously in a way that it doesn’t impact your existing gig.
Saving your money is not enough you should also learn about investing. But investing a big amount in product or scheme altogether is not prudent, diversify your investment across multiple products and asset classes such equity, debt, gold, etc.
Investing is not as easy as it looks. You can follow these tips before starting your investment journey:
- Research and read about investment products before investing, especially go through in detail on their pricing terms, lock-in period and underlying asset class they are investing in to understand the risk associated with product.
- Assess your current financial position.
- Diversify your investments, do not invest all your savings in one asset class.
Buy a health insurance
As a freelancer or independent professional, you are without an employer offered health coverage available to most of the employed professionals. The current pandemic has only reaffirmed the importance of one having a comprehensive health insurance coverage for himself and his family. The sooner you buy the insurance policy the better it is, the insurance premium are mostly cost less for a younger person than the older.
Set aside money for your retirement
Similar to health insurance, you may not access to any retirement or pension plan available to employed professionals offered by their employers. National Pension Scheme (NPS) is one of the best ways to set aside a small portion of your income every month towards your retirement corpus. Investing in NPS is easy and completely digital, platforms offered by financial institutions like HDFC Pensions Funds allows users to subscribe to NPS online with no paperwork.
Financial planning is necessary for everyone be it a freelancer or independent professional, salaried employee, CEO or students.
It is not hard to plan finances for every month. Once you will start planning your finances, you will start having track of your expenses and eventually more money at the end of the month