5 Ways Freelancers Can Become Financially Confident This Year
Scarlett McCarthy / WNW Member
It was two years ago that, coffee in hand, I sat at my laptop, opened Google Sheets, and listed out my debts, one-by-one. What I learned stunned me: at twenty-five years of age, with a bachelor’s degree in playwriting, I was $35,284 in debt and with a mere $1,150 to my name.
My story is the same as a growing portion of Americans: I overspent with credit cards to maintain the lifestyle I thought I needed. When it came time to foot the bill each month, I paid the bare minimum on my credit cards and student loans. I felt like shit, but I didn’t see a way out.
Like most self-imposed prisons, however, the only way out was through. I became obsessed with personal finance and have increased my net worth by $28,580 over the past two years, all while living in NYC on a modest salary.
The string of side hustles I developed while paying off debt also allowed me to transition into full-time freelancing earlier this year and found Literally Broke, a personal finance platform for artists and creatives.
Freelancing, however, presented its own unique set of challenges. I fell victim to classic freelance faux pas, like excusing purchases because they’re “for my business” and failing to account for taxes when doing mental math to determine which wine I can afford.
If you’re a freelancer struggling to understand your finances, you’re not alone. 72% of Americans report that their money stresses them out, yet talking about money remains taboo. Let’s make 2021 the year we change that.
Here are five simple steps you can take to improve your finances this year.
1. Open a High-Yield Savings Account
Opening up a high-yield savings account is one of the easiest steps you can take to improve your financial picture. A high-yield savings account is just a savings account that pays up to 100x more in interest than a traditional savings account. That’s literally it.
Many HYSAs are online-only banks, meaning they don’t have the same overhead as brick and mortar banks and can offer you a high-interest rate. HYSAs are also FDIC-insured, making them an equally safe option for storing your money.
Most personal finance enthusiasts (myself included) recommend creating high-yield savings accounts for each of your short-term financial goals. Short-term financial savings should consist of any money you need in the next five to ten years, like an emergency fund or savings for a down payment or wedding.
Experts typically recommended keeping three to six months of expenses in a high-yield savings account. As a freelancer, you may want to save twelve months of living expenses eventually. The important thing is that you set small goals for yourself until you reach your ideal number and celebrate your progress along the way.
2. Give Yourself a Raise
While in-house creatives typically benefit from review processes, freelancers are often responsible for raising their own rates. Because the ball is in our court, many freelancers, myself included, procrastinate on sending the dreaded rate increase email.
Salary increases are essential, especially when we’re living in a time when many of us face high health insurance costs, crippling student loan debt, and already stagnant wages. The least we can do is ask for what we’re worth.
But how do we know what we’re worth? HR professionals recommend having candid conversations with friends in the industry (especially white men, who typically make more for the same work), checking sites like Glassdoor and Payscale, and calculating your hourly freelance rate.
Advocating for yourself is one of the easiest ways to build financial confidence. And if you believe freelancers deserve financial security (which I hope you do), then you probably already know it’s time to increase your rates.
“While in-house creatives typically benefit from review processes, freelancers are often responsible for raising their own rates. Because the ball is in our court, many freelancers, myself included, procrastinate on sending the dreaded rate increase email...But how do we know what we’re worth?”
3. Double-Check Your Retirement Planning
There’s a misconception in creative industries that retiring isn’t something we do. While you may love your work and want to continue doing it into your old age, having the option to retire is essential for several reasons.
The cost of healthcare and housing is rising, plus we’re living longer. The future of social security is also questionable, meaning you may not be able to depend on that income to support you. In all likelihood, we’ll need our money to last longer than previous generations did. To understand how much money you’ll need in retirement, I recommend using a retirement calculator.
As a general rule, experts recommend following the investment hierarchy to maximize returns. After saving an emergency fund, you’ll want to see if you’re eligible for a Roth IRA. Roth IRAs are after-tax investments, meaning you’ll pay taxes now. When you contribute to a Roth IRA, you’re contributing after-tax income, meaning your investments will grow tax-free and won’t be taxed when you withdraw them in retirement. Because of this tax benefit and the fact that they’re only eligible for people making under a certain threshold, most experts recommend that freelancers contribute and max out a Roth IRA first before moving onto other investment vehicles like traditional IRAs and SEP IRAs.
The critical distinction between a Roth IRA and a traditional IRA is that you will owe taxes in retirement when contributing to a traditional IRA. While that may seem like no big deal, taxes can quickly cut into your earnings and leave you with less than you anticipated. The future tax rate is also to be determined, and common sense tells us that taxes are likely to go up.
Because retirement planning is notoriously confusing, we recommend consulting with a Certified Financial Planner (CFP) about your specific situation, in addition to reading books like Broke Millennial Takes on Investing (it’s not just for millennials) and The Money Book For Freelancers.
“The new year is the time to reflect on our finances and our relationship with them. Use quarterly tax dates as tentative deadlines and check in on your progress. Money management is a form of self-care, and after 2020 we could all use a little bit more of that.”
4. Look Over Your Recent Bank Statements
When was the last time you went through your bank statement line by line? If you can’t remember, it’s time to print out your most recent statements and go through them to check for any double charges, fraud, or forgotten subscriptions.
Those looking to cut expenses and create more room in their budget should pay special attention to any subscriptions they’re no longer using. When in doubt, remember that you can always cancel memberships and rejoin in the future.
Freelancers should also take note of any business expenses and pull those receipts. Organizing your receipts for tax time is a stress-free activity you can do while listening to a podcast or drinking a glass of wine.
5. Open Up a Second High-Yield Savings Account Just for Your Quarterly Taxes
If you’re a freelancer, you’re probably intimately familiar with the dread and anxiety taxes can bring up. That’s why I also recommend creating a high-yield savings account specifically earmarked for your freelance taxes.
Since most tax professionals recommend saving 30% of your income for quarterly taxes, your tax savings can quickly add up. Do yourself a favor and earn some interest on it in between tax filings! An HYSA set up expressly for tax money will also help you out when you finally meet with your accountant.
Whatever your current situation is, the new year is the time to reflect on our finances and our relationship with them. Use quarterly tax dates (April 15th, June 15th, September 15th, January 15th) as tentative deadlines and check in on your progress. Money management is a form of self-care, and after 2020 we could all use a little bit more of that.
Scarlett McCarthy is a Brooklyn-based freelance content writer, screenwriter, and playwright. In January 2020, she founded Literally Broke, a personal finance platform for artists and creatives. In its first year, Literally Broke has been featured in Time, US News & World Reports, and Apartment Therapy.
Header illustration by WNW Member Lu Zhang, a New York-based freelance illustrator.