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5 Financial Questions to Ask Yourself Before Going Freelance

Personal or Business Banking

Profits from your freelancing career can't simply be added into your personal bank account for the following reasons:

  • Mixing personal and business finances can lead to an impossible task at tax season.
  • You can be personally liable for lawsuits against your business.
  • You'll fail to build business credit.

When you go freelance, open up a business checking account and get a business credit card.

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IDEA EXTRACTED FROM:

5 Financial Questions to Ask Yourself Before Going Freelance

5 Financial Questions to Ask Yourself Before Going Freelance

https://www.inc.com/jared-hecht/5-financial-questions-to-ask-yourself-before-going-freelance.html

inc.com

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Key Ideas

Where to live

As a freelancer today, you can work from anywhere.
New freelancers like to live in a city where it's easier to network or source new clients. They might like to choose somewhere where their money will go further, taking into account housing costs, tax rates, and freelancer ecosystems.

Personal or Business Banking

Profits from your freelancing career can't simply be added into your personal bank account for the following reasons:

  • Mixing personal and business finances can lead to an impossible task at tax season.
  • You can be personally liable for lawsuits against your business.
  • You'll fail to build business credit.

When you go freelance, open up a business checking account and get a business credit card.

Accounting help

Keeping track of contracts, invoices, overdue payments, and tax can become a burden.

There are several low-cost and free accounting and business management software options to help you stay on top of your finances. During tax season, it may be useful to make use of a professional accountant.

Retirement savings

As a freelancer, you are solely responsible for your retirement.

Ensure to budget for yourself in this regard. Opening up an IRA or Roth IRA seems to be the obvious step.

Consider insurance costs

... before going freelance. Health insurance costs will likely mean private, high-deductible insurance plans through the Affordable Care Act.

You may also need liability insurance, depending on your field or your clients.

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It is crucial to discuss financial goals and retirement plans with one's spouse, figuring out a strategy in advance, to avoid any confrontation later.

Saving up For Retirement, Together
  • Firstly, save up for the emergency fund, which is three to six months of expenses, and set it aside. After that, least 15% of your combined gross household income should go towards your retirement, once all debt is cleared.
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  • It is also a good idea to clear up the old 401(k) accounts which are hanging around from the old jobs and put one's investments in order.

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Financial planning

 ...is the process which provides you a framework for achieving your life goals in a systematic and planned way by avoiding shocks and surprises.

Try making a budget
  • Create a full inventory of expenses in front of you: Categorize them into fixed and variable; urgent and non-urgent; necessities and luxury; avoidable and unavoidable.
  • You can create a hierarchy of needs and decide which one’s to address first. It’s all about prioritizing. 
  • Accept that you have limited resources and unlimited wants. But you have to manage your resources. The sooner you accept this fact, the better you can control your impulses towards avoidable expenditures.
Maintain a personal balance sheet

It’s a statement wherein you can jot down your assets and liabilities.

  • Pull together your bank statements and other proofs of the liabilities
  • List down your assets like the bank balance, all investments, home value, and value of other assets.
  • Take a sum of all the assets to arrive at the total value of your assets.
  • List down your liabilities the (car loan, home loan, credit card balances etc.)
  • The sum of all the liabilities will show the value of the money you owe.
  • When you subtract the value of liabilities from assets, you get your Net Worth.

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Understanding personal finance

It is possible to make a budget work while still saving enough to retire. It starts with learning to change your habits so you can put money aside.

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Knowledge is power

When it comes to money, people will do whatever they can to get hold of your money, regardless of how it will affect you.

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Automate anything you can

Assuming you have enough to cover the bills and aren't pulling an overdraft fee, start by automating your retirement savings. You know you need an emergency fund, so automate. Do the same with increasing your 401(k) contributions each year, or paying off your credit card debt. 

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Using the right vocabulary
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A very important step when starting to work as a freelancer is to actually call your business as what is: a ‘freelance business’.

These kind of words encourage your clients to perceive you as being trustworthy while giving you a better feeling of ownership.

Avoid using ‘ I need..’

Whenever we hear the ‘I need…’ words, we all tend to get a bit irritated by this way of being requested to provide something that always seems of the most utter importance.

On the other hand, there are expressions which could easily replace the ‘ I need…’ while giving the other person the impression that everything is under control.

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Build a team

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Create an income safety net

Many singles don't have a strong enough backup plan to cover the costs of a major illness or other problems.

Ensure you have enough cash on hand to cover emergencies. For singles, the aim is between nine and twelve months of living expenses in a savings account. As you near retirement, consider bulking up to at least two years of living expenses.

Long-term disability policies

Group long-term disability policies offered by employers typically replace up to 60% of your income.

To ensure you have enough coverage, aim to bring your total coverage up to 80% o 90% of your take-home pay, including bonuses and commissions.

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How much you should save every month
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Why 20 percent is recommended

Assuming you're in your 20s or 30s and can earn an average investment return of five percent a year, you'll need to save about 20 percent of your income so you can reach financial independence when you're older.

Financial independence means that you can maintain your chosen lifestyle entirely from the interest of your investments and dividends.

The four percent rule

The four percent rule states that you could withdraw four percent of your principal balance every year and live on this indefinitely. That means you need to save 25 times your annual expenses to become financially independent.

The four percent rule is not perfect. There is no risk-free investment that yields that much today. Sudden inflation could also cause a problem.

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Unforeseen Medical Expenses

Old age typically brings medical problems and increased healthcare expenses.

Living out your retirement years in comfort while also covering your medical expenses may turn out to be a burden too large to bear.

Estate Planning

Without a well-planned retirement nest egg, you may be forced to liquidate your assets in order to cover your expenses during your retirement years.

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You don't have to use the same skill set in all the work you do. You can mix and match the different ways you want to work, how you want to spend your time, the clients you prefer, and the frequency in which you want to get paid.

Your business model
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How long you keep your home

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