More than 56 million Americans are freelancers, according to a 2018 study from Upwork and the Freelancers Union. If you're a part of this growing portion of America's workforce, it's essential to have above-average financial skills because you have to take care of everything yourself.
5 Top Tips For Freelancers to Handle Personal Saving and Investing
If you didn't get Personal Finance 101 in high school or Adulting Your Money as a college elective, you're far from alone. But you shouldn't sit idle and let your money worries go unchecked. Follow these five essential tips for freelancers to level up your savings and investments.
1. Keep your personal and business money separate
Your first step after setting up your freelance business should be to open a dedicated checking account for your freelance business. There are a number of great banks just for freelancers, like Lili and Novo. If you haven't done this already, you should get your business account set up right away! Ideally, your business should have its own checking and savings, as well as a credit card for business expenses.
Keeping your money separated allows you to put away a dedicated business savings account to help you stay afloat during a dry spell. It also helps you better take advantage of business tax deductions. And it makes it easier to deal with the various 1099 forms for your business.
2. Double the typical emergency fund
Everyone should have an emergency fund. You should save a minimum of three to six months of expenses if you have a stable full-time job. When you are self-employed or freelance, you should double that emergency savings to at least six to 12 months.
Keep your emergency fund in a high-yield savings account. Some of the best rates come from online banks like Capital One and Ally Bank. Some accounts offer bonuses and high yields of over 2%. That is much better than you get from traditional brick-and-mortar banks. Also, online banks often don't charge any fees or have any minimums once opened.
You can keep your emergency fund at the same bank you use for your checking, but you don't have to. With free online transfers, you can get the money into your account within a few days. You can also keep a credit card available as a backup while the money is transferring. That way you can pay it off right away without any interest.
3. You can still automate savings and investments
While you don't have an employer's 401(k) with matching funds, you can still automate savings and investments. This is even easier if you pay yourself a paycheck from your business. More on that below.
There are a handful of apps and tools that can help you automate savings and investments. Apps like Betterment, Acorns, and Digit can automate saving and investing goals. You can also use the recurring transfer tool in your online banking or brokerage management to move funds weekly, monthly or on any other schedule you choose.
And right now when you sign up with Acorns, you can get $75 when you sign up for direct deposit.
4. Always max your IRA (and HSA)
For 2019 and 2020, the IRA contribution limit was $6,000. It's not too late to contribute for last year. You can fund your account until the tax due date in April.
If you want to automate that, you should save $500 per month in the IRA of your choice. Generally, people in their 40s or younger are best off with a Roth IRA. If you're in your 60s, a traditional IRA makes more sense. In your 50s, the type of IRA you want depends on your savings and investment strategy and expectations for your tax rate in retirement.
In either case, an IRA is an excellent opportunity to save on taxes while putting money away for your own retirement. When personal finance experts say things like “Pay yourself first,” this is what they're talking about.
As a business owner, you also have access to a SEP IRA and a Solo 401(k). These are investment accounts you can use in place of a 401(k).
And for insurance, consider a health savings account (HSA). This can save on tax and also help build your retirement fund.
5. Consider paying yourself a regular paycheck
If you make more than what a typical employee would make for the work you do, you should consider paying yourself a regular paycheck and electing for taxation as an S Corp. Doing so can save you big on your taxes.
If you pay yourself a paycheck as a company employee of an S Corp, the taxes total the same as being merely self-employed. So no difference there. But — and here are the big savings — anything above that paycheck amount is taxed as pass-through income. You'll pay your regular income tax rate but without having to pay the Social Security tax. You save more than 15% on that pass-through amount.
Also, starting in 2018, that pass-through income may receive a 20% deduction due to a major tax overhaul, called the “Tax Cuts and Jobs Act of 2017.” This typically starts to work for people making at least $30,000 per year as a freelancer. If you want to learn more about how this would apply to your own situation, consider contacting a professional tax advisor.
You can send your paycheck through a payroll service like Square Payroll or Gusto. Those services also give you the ability to add employee benefits like insurance and other types of retirement savings accounts.
Handle Your Money Like a Boss
When you freelance, you're the CEO of your own business. Treat your money as a business, and you should see better long-term results. That means keeping finances separate, keeping track of your finances with monthly bookkeeping and accounting, and putting money away in both business and personal savings accounts for times when business is scarce.
You're the boss of your business… and now you can be the boss of your money. Get started with these tips and you will be on track to years of personal finance success. That will make your life as a freelancer much more enjoyable.