Everything You Need to Know About Budgeting As a Freelancer

Could logging in to your computer from a deluxe treehouse off the coast of Belize be the future of work? Maybe. For many, the word freelance means flexibility, meaningful tasks and better work-life balance. Who doesn’t want to create their own hours, love what they do and work from wherever they want? Freelancing can provide all of that—but that freedom can vanish quickly if you don’t handle your expenses correctly.

“A lot of the time, you don’t know about these expenses until you are in the trenches,” says freelance copywriter Alyssa Goulet, “and that can wreak havoc on your financial situation.”

Nearly 57 million people in the U.S. freelanced, or were self-employed, in 2019, according to Upwork, a global freelancing platform. Freelancing is also increasingly becoming a long-term career choice, with the percentage of freelancers who freelance full-time increasing from 17 percent in 2014 to 28 percent in 2019, according to Upwork. But for all its virtues, the cost of being freelance can carry some serious sticker shock.

“There are many hats you have to wear and expenses you have to take on, but for that you’re gaining a lot of opportunity and flexibility in your life.”

– Alyssa Goulet, freelance copywriter

Most people who freelance for the first time don’t realize that everything—from taxes to office supplies to setting up retirement plans—is on them. So, before you can sustain yourself through self-employment, you need to answer a very important question: “Are you financially ready to freelance?”

What you’ll find is that budgeting as a freelancer can be entirely manageable if you plan for the following key costs. Let’s start with one of the most perplexing—taxes:

1. Taxes: New rules when working on your own

First things first: Don’t try to be a hero. When determining how to budget as a freelancer and how to manage your taxes as a freelancer, you’ll want to consult with a financial adviser or tax professional for guidance. A tax expert can help you figure out what makes sense for your personal and business situation.

For instance, just like a regular employee, you will owe federal income taxes, as well as Social Security and Medicare taxes. When you’re employed at a regular job, you and your employer each pay half of these taxes from your income, according to the IRS. But when you’re self-employed (earning more than $400 a year in net income), you’re expected to file and pay these expenses yourself, the IRS says. And if you think you will owe more than $1,000 in taxes for a given year, you may need to file estimated quarterly taxes, the IRS also says.

That can feel like a heavy hit when you’re not used to planning for these costs. “If you’ve been on a salary, you don’t think about taxes really. You think about the take-home pay. With freelance, everything is take-home pay,” says Susan Lee, CFP®, tax preparer and founder of FreelanceTaxation.com.

When learning how to budget as a freelancer it’s necessary to estimate your income and expenses before setting aside savings for tax payments.

When you’re starting to budget as a freelancer and determining how often you will need to file, Lee recommends doing a “dummy return,” which is an estimation of your self-employment income and expenses for the year. You can come up with this number by looking at past assignments, industry standards and future projections for your work, which freelancer Goulet finds valuable.

“Since I don’t have a salary or a fixed number of hours worked per month, I determine the tax bracket I’m most likely to fall into by taking my projected monthly income and multiplying it by 12,” Goulet says. “If I experience a big income jump because of a new contract, I redo that calculation.”

After you estimate your income, learning how to budget as a freelancer means working to determine how much to set aside for your tax payments. Lee, for example, recommends saving about 25 percent of your income for paying your income tax and self-employment tax (which funds your Medicare and Social Security). But once you subtract your business expenses from your freelance income, you may not have to pay that entire amount, according to Lee. Deductible expenses can include the mileage you use to get from one appointment to another, office supplies and maintenance and fees for a coworking space, according to Lee. The income left over will be your taxable income.

Pro Tip:

To set aside the taxes you will need to pay, adjust your estimates often and always round up. “Let’s say in one month a freelancer determines she would owe $1,400 in tax. I’d put away $1,500,” Goulet says.

2. Business expenses: Get a handle on two big areas

The truth is, the cost of being freelance varies from person to person. Some freelancers are happy to work from their kitchen tables, while others need a dedicated workspace. Your freelance costs also change as you add new tools to your business arsenal. Here are two categories you’ll always need to account for when budgeting as a freelancer:

Your workspace

Joining a coworking space gets you out of the house and allows you to establish the camaraderie you may miss when you work alone. When you’re calculating the cost of being freelance, note that coworking spaces may charge membership dues ranging from $20 for a day pass to hundreds of dollars a month for a dedicated desk or private office. While coworking spaces are all the rage, you can still rent a traditional office for several hundred dollars a month or more, but this fee usually doesn’t include community aspects or other membership perks.

If you want to avoid office rent or dues as costs of being freelance but don’t want the kitchen table to pull double-duty as your workspace, you might convert another room in your home into an office. But you’ll still need to outfit the space with all of your work essentials. Freelance copywriter and content strategist Amy Hardison retrofitted part of her house into a simple office. “I got a standing desk, a keyboard, one of those adjustable stands for my computer and a squishy mat to stand on so my feet don’t hurt,” Hardison says.

Pro Tip:

Start with the absolute necessities. When Hardison first launched her freelance career, she purchased a laptop for $299. She worked out of a coworking space and used its office supplies before creating her own workspace at home.

Digital tools

There are a range of digital tools, including business and accounting software, that can help with the majority of your business functions. A big benefit is the time they can save you that is better spent marketing to clients or producing great work.

The software can also help you avoid financial lapses as you’re managing the costs of being freelance. Hardison’s freelance business had ramped up to a point where a manual process was costing her money, so using an invoicing software became a no-brainer. “I was sending people attached document invoices for a while and keeping track of them in a spreadsheet,” Hardison says. “And then I lost a few of them and I just thought, ‘Oh, my God, I can’t be losing things. This is my income!’”

As you manage the cost of being freelance, consider digital tools and accounting services to keep track of invoices, payments and income.

Digital business and software tools can help manage scheduling, web hosting, accounting, audio/video conference and other functions. When you’re determining how to budget as a freelancer, note that the costs for these services depend largely on your needs. For instance, several invoicing platforms offer options for as low as $9 per month, though the cost increases the more clients you add to your account. Accounting services also scale up based on the features you want and how many clients you’re tracking, but you can find reputable platforms for as little as $5 a month.

Pro Tip:

When you sign up for a service, start with the “freemium” version, in which the first tier of service is always free, Hardison says. Once you have enough clients to warrant the expense, upgrade to the paid level with the lowest cost. Gradually adding services will keep your expenses proportionate to your income.

3. Health insurance: Harnessing an inevitable cost

Budgeting for healthcare costs can be one of the biggest hurdles to self-employment and successfully learning how to budget as a freelancer. In the first half of the 2020 open enrollment period, the average monthly premium under the Affordable Care Act (ACA) for those who do not receive federal subsidies—or a reduced premium based on income—was $456 for individuals and $1,134 for families, according to eHealth, a private online marketplace for health insurance.

“Buying insurance is really protecting against that catastrophic event that is not likely to happen. But if it does, it could throw everything else in your plan into a complete tailspin,” says Stephen Gunter, CFP®, at Bridgeworth Financial.

Budgeting as a freelancer allows you to select a healthcare plan that best suits your employment status, income and relationship status.

A good place to start when budgeting as a freelancer is knowing what healthcare costs you should budget for. Your premium—which is how much you pay each month to have your insurance—is a key cost. Note that the plans with the lowest premiums aren’t always the most affordable. For instance, if you choose a high-deductible policy you may pay less in premiums, but if you have a claim, you may pay more at the time you or your covered family member’s health situation arises.

When you are budgeting as a freelancer, the ACA healthcare marketplace is one place to look for a plan. Here are a few other options:

  • Spouse or domestic partner’s plan: If your spouse or domestic partner has health insurance through his/her employer, you may be able to get coverage under their plan.
  • COBRA: If you recently left your full-time job for self-employment, you may be able to convert your employer’s group plan into an individual COBRA plan. Note that this type of plan comes with a high expense and coverage limit of 18 months.
  • Organizations for freelancers: Search online for organizations that promote the interests of independent workers. Depending on your specific situation, you may find options for health insurance plans that fit your needs.

Pro Tip:

Speak with an insurance adviser who can help you figure out which plans are best for your health needs and your budget. An adviser may be willing to do a free consultation, allowing you to gather important information before making a financial commitment.

4. Retirement savings: Learn to “set it and forget it”

Part of learning how to budget as a freelancer is thinking long term, which includes saving for retirement. That may seem daunting when you’re wrangling new business expenses, but Gunter says saving for the future is a big part of budgeting as a freelancer.

“It’s kind of the miracle of compound interest. The sooner we can get it invested, the sooner we can get it saving,” Gunter says.

He suggests going into autopilot and setting aside whatever you would have contributed to an employer’s 401(k) plan. One way to do this might be setting up an automatic transfer to your savings or retirement account. “So, if you would have put in 3 percent [of your income] each month, commit to saving that 3 percent on your own,” Gunter says. The Discover IRA Certificate of Deposit (IRA CD) could be a good fit for helping you enjoy guaranteed returns in retirement by contributing after-tax (Roth IRA CD) or pre-tax (traditional IRA CD) dollars from your income now.

Pro Tip:

Prioritize retirement savings every month, not just when you feel flush. “Saying, ‘I’ll save whatever is left over’ isn’t a savings plan, because whatever is left over at the end of the month is usually zero,” Gunter says.

5. Continually update your rates

One of the best things you can do for yourself in learning how to budget as a freelancer is build your costs into what you charge. “As I’ve discovered more business expenses, I definitely take those into account as I’m determining what my rates are,” Goulet says. She notes that freelancers sometimes feel guilty for building business costs into their rates, especially when they’re worried about the fees they charge to begin with. But working the costs of being freelance into your rates is essential to building a thriving freelance career. You should annually evaluate the rates you charge.

Because your expenses will change over time, it’s wise to do quarterly and yearly check-ins to assess your income and costs and see if there are processes you can automate to save time and money.

“A lot of the time, you don’t know about these expenses until you are in the trenches, and that can wreak havoc on your financial situation.”

– Alyssa Goulet, freelance copywriter

Have confidence in your freelance career

Accounting for the various costs of being freelance makes for a more successful and sustainable freelance career. It also helps ensure that those who are self-employed achieve financial stability in their personal lives and their businesses.

“There are many hats you have to wear and expenses you have to take on,” Goulet says. “But for that, you’re gaining a lot of opportunity and flexibility in your life.”

The post Everything You Need to Know About Budgeting As a Freelancer appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com

The Magical Third Paycheck: 5 Budgeting Hacks If You’re Paid Biweekly

If you get paid every two weeks, you’ve probably noticed extra money coming your way certain months. Maybe you even thought your company’s payroll made a mistake! But it’s no mistake. You get two magical months like this a year: when you suddenly have a third paycheck and—the best part is—your monthly bills stay the same. Yes, it’s appropriate to jump for joy—provided you have a plan for that extra income.

Why does this happen in the first place? If you’re paid biweekly, you get 26 paychecks throughout the 52-week year. That means two months out of the year, you end up getting three paychecks instead of your regular two.

Those two extra paychecks can go a long way. But without a plan in mind, they can also disappear. Fast. The first budgeting trick to saving two paychecks is to find out when they will hit your account. Grab a calendar and write down your paydays for every month in a given year and highlight the two extras. Maybe even put calendar reminders in your phone so you can track when the additional funds will hit your account. The extra paychecks will fall on different days every year, so tracking them in advance is key.

Samuel Deane, a founding partner of New York City-based wealth management firm Deane Financial, says there isn’t one correct way to budget with an extra paycheck, but that it should depend on your personal situation and financial goals. You could decide to give yourself some extra room in your budget throughout the year, for example, or use the extra money for something specific.

There are a few different ways to budget with an extra paycheck.

How can I budget for an extra paycheck? Consider these 5 budgeting hacks if you’re paid biweekly:

1. Pay down (mainly) high-interest debt

Once you’re done jumping for joy at the realization of the third paycheck, consider how your budget with an extra paycheck could help you pay down debt. “The first thing I usually tell my clients is to get rid of high-rate debt, which is usually credit card debt,” Deane says.

Before paying off debt with your new budget with an extra paycheck, make a list of all of your debts organized by balance and annual percentage rate (APR). Paying off the debt with the highest APR could save you the most money because you’re paying the most to carry a balance. Paying down a few low-APR, low-balance debts can also help you gain momentum and bring other financial benefits. For instance, if you owe close to your credit limit on a credit card, the high credit utilization—or card balance to credit limit ratio—could negatively impact your credit score.

If your budget with an extra paycheck includes debt repayment, you’ll start to owe less and have less interest accruing each month, freeing up even more cash from subsequent paychecks.

“The first thing I usually tell my clients is to get rid of high-rate debt, which is usually credit card debt.”

– Samuel Deane, a founding partner of wealth management firm Deane Financial

2. Build an emergency fund

Paying down debt isn’t the only way to budget with an extra paycheck. “Taking a look at whether you have a sufficient emergency fund is pretty important,” says Dan Stous, director of financial planning at Flagstone Financial Management.

An emergency fund of three to six months of your regular expenses can help you weather financial setbacks, such as a lost job or medical emergency, without having to take on new debt. Keeping these funds separate from your regular checking and savings accounts can help you keep them earmarked for the unexpected (and reduce the temptation to dip into them for non-emergency expenses). Places to keep your emergency fund include a high-yield savings account, certificate of deposit or money market account.

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If creating an emergency fund or adding to an existing one is on your to-do list, a budgeting trick to save two paychecks is to automatically transfer your extra paychecks into your emergency fund account.

3. Save for a big goal

If you want to save for a goal like a new car or home, or contribute to tax-advantaged retirement accounts, contributing two full paychecks out of 26 can be a good start. “If a client is debt-free and doing well, they might be able to focus on other goals,” Deane says. If you’ve got a financial goal in mind, a budgeting hack if you’re paid biweekly is to transfer your two extra paychecks from your checking account to a savings or retirement account right away.

Using your extra paycheck to save for a goal, like a new home or new car, is a smart budgeting hack if you're paid biweekly.

If you have a 401(k) through an employer and already contribute enough to get your maximum annual match, Deane says you may want to consider a Roth IRA. A Roth IRA is for retirement, but it also allows first-time homebuyers who have held their account for at least five years to withdraw up to $10,000 to buy a home, Deane says. Your budget with an extra paycheck could then go to either major goal.

Even loftier, “you could put aside money to start a business,” Deane says. If you plan on starting a business someday you could put away the paychecks annually and let those savings build as start-up capital.

4. Get ahead on bills

If you already have an emergency fund, are currently debt-free and are making good progress on your savings goals, try this budgeting hack if you’re paid biweekly and get a third paycheck: Pay certain monthly bills ahead of time.

“If you have the ability to prepay some of your bills, it can ease anxiety in the coming months,” Deane says.

Before using this budgeting hack if you’re paid biweekly, check with your providers to confirm that you will not be met with a prepayment penalty, and get up to speed on any prepayment limitations. Some providers may even offer a discount or incentive if you pay something like a car insurance bill all at once. You could also explore whether or not prepaying your bills makes sense for utilities, your cellphone or rent.

5. Fund much-needed rewards

If you’re looking for budgeting hacks if you’re paid biweekly, consider that managing money isn’t only about dollars and cents. Emotions often play an important part in personal finance, and they’re often the root cause of people’s decisions. Accepting this fact could be an important part of successfully managing your money.

“From an emotional and behavioral standpoint, people should reward themselves for being responsible,” Stous says. “Basically, treat yourself.”

Perhaps you need a vacation from the daily grind, want to enrich or educate yourself or your family or simply want to get a date night at your favorite restaurant on the calendar. A budgeting trick to save two paychecks could be supplemented with some spending on yourself.

“If you have an extra paycheck and a debt reduction goal, then maybe you apply the whole thing toward that goal. On the other hand, maybe you have a goal to retire in 10 years and you’re off track. Then, it’d be wise to put that money, or at least a portion of it, toward that goal.”

– Dan Stous, director of financial planning at Flagstone Financial Management

There’s no one-size-fits-all budgeting trick to save two paychecks

When you’re deciding how to budget with an extra paycheck, you might find yourself going back and forth between options.

“If you have an extra paycheck and a debt-reduction goal, then maybe you apply the whole thing toward that goal,” Stous says. “On the other hand, maybe you have a goal to retire in 10 years and you’re off track. Then, it’d be wise to put that money, or at least a portion of it, toward that goal.”

Even though budgeting solutions are not the same for everyone, being disciplined and proactive about the savings opportunity of a third paycheck can help you form a strong foundation for your financial future.

The post The Magical Third Paycheck: 5 Budgeting Hacks If You’re Paid Biweekly appeared first on Discover Bank – Banking Topics Blog.

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Your Guide to Budgeting for Healthcare Costs

Adults often feel the pressure to act responsibly with everything related to their well-being and their wallets. And nothing says “adulting” quite like budgeting for medical expenses. It’s easy to think that health insurance will cover the majority of medical-related costs and thus can be overlooked in your budget—a copay here, a deductible there… all can be handled without much ado, right?

Not so fast. Medical expenses should be a top budgeting priority, with out-of-pocket costs on the rise and the always-present risk that an unexpected medical expense could put a ding in your spending plans. Consider this: On average, healthcare costs account for about 8 percent of annual household spending, or nearly 7 percent of pretax income, according to the Bureau of Labor Statistics. Even if your health insurance kicks in to cover an expense, your budget for healthcare costs still needs to include your premiums (AKA the amount you pay for your health plan).

How do I budget for healthcare costs, you ask? Fair question. This can sound like a lot. To better plan for healthcare costs, consider these five steps:

1. Determine your total healthcare budget

When budgeting for medical expenses, it may be helpful to bucket your healthcare costs into three categories:

  • Fixed Premium: This is the set amount you pay for your health insurance. If you get health insurance through work, this expense may be deducted automatically from your paycheck.
  • Routine: These are your anticipated healthcare costs, even if they fluctuate. Think your copay for your annual checkup or the cost of a regular prescription.
  • Unexpected: These costs can be difficult to predict, like an unplanned trip to the emergency room or an urgent medical procedure.

The easiest way to plan for healthcare costs is to review how much you spent on medical expenses last year.

When it comes to planning for healthcare costs, your medical and spending history is key. “The best place to start in determining how much to budget for healthcare costs is to look at how much you actually spent on healthcare previously,” suggests CPA and personal finance blogger Logan Allec.

You can start by reviewing all of your receipts from your insurance company and healthcare providers and going through your bank and credit card statements to flag any healthcare costs you paid out of pocket over the past year, Allec says. (If you didn’t save all of last year’s receipts, don’t stress. You can contact your insurance and healthcare providers for documentation.) The final number you come up with is a good start for determining your annual fixed and routine healthcare expenses. (Those unexpected curveballs mentioned earlier? See tip 3.)

When budgeting for healthcare costs, Allec also says to anticipate if you’ll have any extra costs this year that you didn’t encounter last year. For example, are you scheduling a surgical procedure or expecting a child? Make sure you understand how much you will have to pay out of pocket by reviewing exactly what your insurance covers annually, and factor that into your plan for healthcare costs.

Make sure your budget for healthcare costs includes any extra expenses you may not have encountered last year.

2. Put your health at the top of your priority list

Once you’ve estimated your annual healthcare costs, consider how you prioritize them against your other essential expenses, says Todd Christensen, blogger and financial educator from Money Fit.

As a guide, Christensen says that healthcare expenses should fall between necessities like your mortgage or rent, taxes, food, transportation and phone. “If you have a hard time paying for prescriptions but make monthly payments to your cell phone provider, then you have prioritized your personal communications over your health,” he adds.

From budgeting for your insurance premiums to preparing for doctor visits and ordering prescriptions, think of paying for healthcare expenses as a “need” instead of a “want,” Christensen says. By adjusting your mindset to give your health the significance it deserves, budgeting for medical expenses will become second nature.

3. Set up an emergency fund

Remember those unexpected healthcare costs that are tricky to plan for? When creating a budget for healthcare costs, Christensen suggests creating an emergency fund. An emergency fund is an account that is set aside to help cover an unexpected financial or medical emergency, such as a procedure or medication that is not fully covered by your insurance plan.

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Experts typically recommend saving at least three to six months of living expenses in your emergency fund so you can pay for unexpected expenses without having to take on debt or dip into savings earmarked for other financial goals. But, according to Christensen, if you’re starting an emergency fund from scratch, it’s best to start small and focus on a goal that’s attainable for you.

“Initially, the amount is less important than the commitment to just do it,” Christensen says. Managing the account, however, does require some discipline. For example, going on a 10-day wellness retreat, however therapeutic the massage sessions may seem, probably does not qualify as an emergency.

On average, healthcare costs account for about 8 percent of annual household spending, or nearly 7 percent of pretax income.

– The Bureau of Labor Statistics

4. Take advantage of health savings accounts

In addition to your emergency fund, there are also special health savings accounts—funded by you or your employer—that can help you cover your health expenses and plan for healthcare costs. Here are three common health savings tools to consider:

  • A Health Savings Account (HSA) can be for you if you’re enrolled in a high-deductible health insurance plan (HDHP), which is a plan that offers lower premiums in exchange for a higher deductible. An HSA lets you put money away on a pre-tax basis for eligible healthcare expenses, including certain dental work, eyeglasses and prescriptions. Contributions can come from you, your employer, a relative—anyone who wants to fund the account. Also, the funds roll over from year to year with an HSA, which makes it a great long-term tool for budgeting for medical expenses. Note there is an annual limit for how much you can contribute.
  • Whereas an HSA can be funded by you and your employer, a Health Reimbursement Arrangement or a Health Reimbursement Account (HRA), is funded solely by your employer, and funds can be spent on predetermined medical expenses. What’s left over in the account can be rolled over to the next year. If you leave the company, however, you can’t take the funds with you.
  • With a Flexible Spending Account (FSA), you can have a certain amount of money taken from your paycheck, pre-taxed, and deposited into an account that’s used for qualified healthcare expenses. Both you and your employer may contribute to this plan, with a maximum contribution allowed by law. Unlike the accounts above, FSAs don’t generally roll over at the end of each year. Check with your employer for your plan’s specifics.

5. Evaluate health insurance choices carefully

To budget for healthcare costs effectively, consumer finance leader Trae Bodge suggests you take the time to evaluate your health insurance options to find the best plan for you and your family. For each plan, you’ll want to carefully consider the type of plan (are your preferred doctors, hospitals and pharmacies covered?), as well as the cost of premiums, deductibles, copays and prescriptions. Your health history may also be an important factor when considering different coverage options.

“If family members go to the doctor frequently or have multiple prescriptions, it may be better for your budget to opt for a more expensive plan, given the coverage provided,” Bodge says.

If you’re an entrepreneur or self-employed, you can shop the Health Insurance Marketplace at healthcare.gov. But also look at comparable plans directly through insurance providers to better budget for healthcare costs, Bodge says. You might be able to save by choosing a smaller insurance company over a larger one or by signing up directly with the provider, Bodge adds.

Plan for healthcare costs today

When it comes to budgeting for medical expenses, a little planning today can go a long way toward providing for a more financially secure tomorrow. With a healthcare budget firmly in place, you’ll be better empowered to make decisions that are good for your health—and your wallet.

The post Your Guide to Budgeting for Healthcare Costs appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com