Getting your first paycheck as a freelancer is exciting. You’ll be tempted to celebrate your accomplishment and spend it all at once. But you should really put some of that money into a savings account.
Why is that?
Saving for Emergencies
As a freelancer, you won’t have some of the protections that come with full-time employment at a corporate office. You won’t have an employer-sponsored healthcare plan or dental benefits. You won’t have an IT department to fix your tech or provide replacements free of charge. You’re on your own.
The moment that you get your first paycheck as a freelancer, you should start putting together an emergency fund. It will help you handle emergency expenses that could put your work — and by extension, your income — on hold. You can use it to cover urgent medical appointments, tech repairs, home repairs and car repairs right away. Then, you can get back to business.
Without an emergency fund on hand, your options are limited in these situations. You could charge the surprise expense to your credit card and then pay down the balance later. Or you could apply for an online loan. When searching for online loans, check for options in your state. So, if you live in Santa Fe, you should specifically search for online loans in New Mexico to help with your emergency. Skipping this step could lead you to loans that aren’t even available in New Mexico.
Saving for Droughts
Sometimes, your schedule will be jam-packed with projects. Work will be steady, and money will flow into your bank accounts. And sometimes, those opportunities will dry up, and you’ll find that you don’t have any big paychecks coming on.
You’ll want to have a significant amount of savings set aside so that you can cover your essentials like groceries and utility bills during these work droughts.
Saving for Cancellations
Sometimes projects get canceled. Clients will contact you to pull the rug from under your feet and tell you that they don’t want you to work for them anymore. This bad news won’t just be a blow to your ego — it will be a blow to your bank account, too. You’ll be missing out on a paycheck that you anticipated.
You can protect yourself by implementing a kill fee in your freelancer contract. This will guarantee that you get some compensation for the time and energy you have already poured into the work. But, a kill fee is not enough to cover all of your essentials.
Again, you’ll want to have a significant amount of savings set aside so that you can handle these disruptions in cash flow. You can still pay for your bills while you regroup and try to find a new project to work on.
Savings for Taxes
Every freelancer should try to set aside at least 25% to 30% of their income for tax season. This amount should help you cover payments for your income tax and your Federal Insurance Contributions Act (FICA) taxes. FICA taxes are federal payroll taxes meant to cover Social Security benefits and Medicare benefits.
You don’t want to forget to set aside savings for your tax payments. Missing out on a payment will result in a failure-to-pay penalty. That penalty will make your owed payment bigger with every month that you wait. You’ll already owe approximately a quarter of your annual earnings — you don’t want to add penalties on top of that.
Start filling up your savings account. You’re going to need those savings later.