Why Should You Have 3 Kinds of Savings As a Freelancer?

Each time you receive your income, you may want to keep an expenses account with a tight budget to save an extra buck. What if you know how to plan the right savings as a freelancer? Here are the 3 kinds of savings you should have as a freelancer to thrive and have a financially secure future.

Freelancing has become one of the most popular ways of working, as it allows you to work on your terms and have a global client base. However, along with the immense benefits of freelancing, you could face issues with irregular income and money management. As a freelancer, you will have days with almost no money and days when you will make extravagant money. It poses a lot of freelancers with the question of how to budget their money and savings while taking care of their regular expenses.

Here are a few tips on how you can manage your finances:

Analyzing your expenses

 Firstly, to manage your finances, you should have an accurate understanding of where your money goes, how much you spend, and on what. You must try to analyze your expenditure patterns for the last two years and make a monthly expenditure sheet based on that. Then make a yearly budget sheet with broad headings of your expenses and lump sum amounts of money allocated to each. Make sure you keep your personal and work-related expenses separate. Then, you will have a clear insight into your expenditures. Based on this understanding, make a monthly and yearly budget for yourself.

Analyzing your income source

Now that you know where your money goes, you should know how to regulate the amount of cash allocated in your budget. Make a sheet of your yearly income and also carefully analyze which are the months in which you're at your peak and which are the months where you're making less money. Here, you can also add potential sources of income you can earn in the future. You will get a fair idea of how much capital you can make and how much you currently earn.

Earmark funds for your savings

You can divide your income into two major headings: expenses and savings. Expenses also include taxes. Your budget discussed at the first point covers only your expenditures. It means that your entire income does not go to your liabilities, but a part of it does. 

Hence, you need to set aside some money for your savings; the rest goes to your expenses. The ratio of savings to expenditure differs for different people. But it is essential to have at least 25 to 30% of your funds reserved for savings annually. For freelancers, we can further divide savings into 3 categories, as explained below:

1. Emergency fund: The emergency fund typically includes money for emergencies that are usually unprecedented and unexpected for most people.

2. Savings for investment: Investment doesn't mean economic investment. That is one way of investing your money. But you can also use your savings to invest in further education, upskilling, or spending on your work or business. One significant investment that everyone should make is investing money in insurance. These include health insurance, life insurance, disability insurance, renter's insurance, etc. Investing in insurance ensures that you do not lose your hard-earned money in a situation of emergency.

3. Savings for the future or retirement: This is the most common form of savings. People save money for retirement because there is no direct or regular source of income after retirement.

Do not overspend

You must have self-control over your spending. If you are making a lot of money, you have the tendency to spend a lot without thinking twice. Hence, it becomes excessively crucial to have a fixed budget. Once you know that there will be months when you make almost no money, you must have a planned budget for your expenses. Your mind will automatically prevent you from overspending in the months when you make a lot of money. Another trick is to pay in cash instead of using online payment methods or cards. It is because when you pay using online methods or cards, there's no tangible form of money, so you might not know how much you spent. 

In fact, when you pay by cash, your brain will identify that you have lost some money. It automatically makes you think and helps prevent overspending.

Educate yourself on taxes

Different countries have different taxation laws, and it is very significant to have a good grip on taxes. Always be aware of the tax laws. You should calculate your taxable income and reserve money for your taxes on the budget.

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