Money Management 101 for Independent Workers
How to be your own accountant as an independent worker
Link to the Original Article
Remote work affords workers greater independence and freedom; however, this autonomy also requires you to be more proactive about your finances.
It is essential to regularly take stock of your financial outlook so that your debts and creditworthiness remain in good condition.
Unlike employees who work full-time for a company, remote workers need to be more vigilant about tax obligations, retirement savings, and investments.
Remote work and freelancing are modes of working that give workers a greater sense of autonomy and flexibility. In fact, these work modalities are attractive precisely because they can lend their workers much more personal freedom.
The Great Resignation is resulting in a record number of workers leaving the traditional workforce and forming their own businesses. Many of these new business owners are remote, independent, self-employed, creatives, and freelancers.
Intuit QuickBooks predicts that three out of five U.S. workers want to start a business.
“A recent survey of 8,000 U.S. employees, commissioned by QuickBooks in November 2021, reveals that almost three out of five (57%) want to start a business and of these, one in five (20%) will make the leap in 2022 — equivalent to around 17 million people.”
However, contrary to what headlines may allude to, such personal freedom requires great effort and discipline and specifically on matters related to personal finance. If you are an independent worker, for instance, managing your taxes will largely be up to you and an accountant.
Likewise, being an independent worker means that you will be solely responsible for business expenses. This can be intimidating, but if done strategically, you can help yourself live up to the flexible ideal we so often hear about with remote work.
Taking stock of your finances
Before embarking upon your journey of money management, you should take stock of your personal finances. This means understanding whether or not you owe any debts, and if you do, making it clear how much you owe. This is an important step because doing so will help you avoid spending money you do not have.
Another aspect of taking stock of your finances runs in conjunction with determining your debt load. This is to determine your credit score. As an independent worker –especially if you are a self-starter, like someone straight out of college– you may need to take out loans to fund your work. Your credit score will determine whether or not you are eligible for such a loan.
Pay down debts and improve your credit score
Reduce debts as quickly as possible to avoid unnecessary interest and a tarnished credit score
Avoid the vicious cycle of living beyond your means and high credit card balances.
Budgeting
To determine how to live within your means, you must set yourself a personal budget. This personal budget, however, is a bit more complicated than the personal budget of a traditional worker. This is because, if you are an independent worker, your personal budget will entail business expenses.
There is no one-size-fits-all approach to budgeting for personal finances. Every remote and independent worker will have a unique financial situation.
Nonetheless, there are some obvious factors to consider first and foremost when budgeting, such as basic needs like food, rent, and utilities. If these cannot be paid for, something has gone quite awry. Prioritize your basic health and well-being before anything else when it comes to financial budgeting.
Also, consider what your business expenditures might be. If you are a freelancer or an independent remote worker of any caliber, for instance, you’ll need a website in order to operate with success.
Likewise, you’ll need to consider your place of work –whether or not you opt to stay home, rent coworking space, or work from a cafe or bar, each of these scenarios, finically, bear out very differently.
If you’re working from home and you purchase office supplies, such as a desk or a chair, these need to be tracked. These fall under the category of business expenses and can be written off on your taxes. And by doing so, you will save yourself a lot of money.
Finally, when considering a budget, this should not merely be a strategy of what you expect to spend on an average month. We are too complex to have an “average month” of finances. For instance, during the holidays, you will be spending more than you do during the non-holiday season. And you will be doing so every year.
Therefore, your budgeting strategy should consider things in the long term.
What’s the solution?
Have savings and invest
The best way to ensure that you can prepare for the long-term is by having savings. Specifically, savings which can be used as an “emergency fund.” An emergency fund is a buffer for you on the occasion that you no longer have an income.
Many experts agree that your emergency fund should ideally be equivalent to 3-6 months of your income. Since this is not always possible, especially for those just starting out, try to have an emergency fund that is slightly more than what you’d spend on an average month on necessities, like food, rent, and utilities.
Next, in order to continue in the spirit of long-term financial security, making investments will be necessary. There are plenty of beginner guides on how to start investing, and there are also auto-investors you can use if you simply do not understand how to invest.
Doing so is important because savings do not accrue much positive interest over time, whereas investments do. And by doing so, you can keep up with inflation, rather than allow your hard-earned savings to dwindle in value over the long run.
Taxes and other financial obligations
Remember: if you are a freelancer or an independent worker, on paper, you are a business. Therefore, you need to treat your finances in a manner that mirrors that of a business owner.
What does this mean?
One place to start is by understanding that you will be responsible for your taxes. You should determine how much you need to pay in taxes quarterly or yearly, and set money aside to ensure that you pay them.
To do this, you must meticulously track your income. Sometimes banking apps, like Chase, do this for you, but other times you will have to do this manually. Failing to do so could land you in an audit with the IRS, which to be frank, is often portrayed as being worse than death.
You will also be solely responsible for any medical costs. You will have to pay for your own medical insurance and if you opt to not have health insurance, this means you will have to pay out-of-pocket for all of your medical costs. Visit healthcare.gov to see what type of plans you qualify for and can afford.
Take advantage of independence: that means hustle!
All of this might seem rather daunting. Speaking for myself, when I began freelancing, it was peculiarly daunting because of just how little I felt I was making.
The more money you make, the less daunting this will feel. Luckily, as a freelancer or independent worker, there isn’t any technical upper limit to your salary. You can take on as little or as much work as you desire.
If you diversify the workload you take on by working with various companies, there are a few things you can ensure: (1) That you will be making more money, (2) That if you lose a client you will not lose your whole income, (3) Keeping track of your money and managing your budget will make life easier.
Budgeting, living within your means, and working hard will take you a long way as an independent remote worker. As long as you stick with the principles above, managing money will become second nature to you. In the long run, this will reduce stress rather than create it.
