How I Built My Freelance Freedom: A Guide to Financial Security (Part 1)

The desire for independence and flexibility drives the growth of the Indian freelance economy. According to Razorpay, by 2025, India’s freelancer population will touch 50% of the total workforce, and its value will be USD 25 billion.

With such rapid expansion, mastering financial habits becomes crucial for long-term success as a freelancer, regardless of experience level.

To be a successful freelancer in the long term, you need to understand and practice good financial habits. It helps to know where your money is going, as I learned the hard way.

In this guide, we will take a close look at:

• The need for budgeting
• Managing irregular income
• Building an emergency fund
• Tax planning for freelancers

When I started freelancing, managing my finances was challenging because I only received payment upon project completion. This brought home to me that my income would never be constant from month to month. Everything would depend on the projects I worked on, and their duration.

This made me very cautious about my expenses, and I decided to make small investments and be careful with my money.

Over time by developing friendships with fellow freelancers and learning from their experiences, I gained insight into managing income fluctuations. This highlights the need to have a budget.

To begin, let’s take a look at why freelancers need to have a budget.

 The Need for Budgeting

For all the effort that we freelancers invest in our work, our incomes are never constant. Much depends on how much we work, and when the money hits our bank accounts.

But bills must be paid.

So, for us to be financially stable despite our fluctuating incomes, we need to consider budgeting our money. Not only must we meet our expenses, but also set aside something for a rainy day.

Hence, to stay financially stable with fluctuating incomes, I’ve realized that budgeting is crucial. Tracking my income and expenses regularly provides clarity, helping me make wise financial choices to reach my goals.

Also Read: How To Build Financial Security As A Freelancer

Besides, I need to set aside money for taxes. I need to ensure that I have enough money to cover my costs for business-related things like equipment, software, subscription renewals, and marketing. When you budget, you eliminate any financial strain and become financially healthy.

So, budgeting is necessary for every freelancer as it empowers us to take control of our finances. It also helps steer us through all the tough times of self-employment and lead comfortable lives.

Managing Irregular Income, Gaining Financial Security

Our irregular income is a key problem that hurts us. Since we don’t earn a fixed salary and enjoy the benefits of working in a traditional setting, we need to learn to budget our income effectively.

Strategies for Budgeting with Unpredictable Income

Here, I use three strategies to budget my irregular income. They are:

1. Arriving at a monthly average income based on earlier incomes

Your first task is to establish a baseline for budgeting your income. To do this, find out your average annual income. This will help you allocate money realistically and set financial goals.

2. Build a contingency fund for financial security

We all experience lean times at some time in the year.  To pay your bills in these times, it’s prudent to set aside some money. As time passes and your income stabilizes, you can anticipate your expenses and plan without feeling any financial strain.

Building such a fund acts as your safety net. With it, you can concentrate on getting work done rather than worrying about how to pay your bills.

Also Read: How Can I Be Financially Secure As a Freelancer?

3. Use income tracker tools

Income tracker tools will help you manage your funds well. Explore various online platforms and software tools to track your expenses and revenue, and generate taxation reports. Use these tools to achieve your personal and business goals and improve your overall financial position.

Building an Emergency Fund

We have already explained the need for financial stability for freelancers. One of the pillars of this need for stability is to have an emergency fund.

In this section, we’ll explore the need for an emergency fund. We will also provide practical tips to calculate the amount you need to save each month.

Setting up an emergency fund is an essential component of your financial planning. Here are some crucial aspects:

Importance of  an emergency fund for freelancers’ financial security

My inconsistent workload and projects make me financially unstable. So, I set up an emergency fund, and you might like to do this too.

Such a fund is a safety net in case of accidents, or disability. With this fund, you needn’t rely on loans or credit cards. 

How to calculate the size of your emergency fund

How much you should set aside in your emergency fund depends on your monthly expenses, your stable income, and your risk appetite. Generally, experts advise putting in about three to six months of living expenses into the fund.

Add together your utilities bills, rent, groceries, monthly installments, etc to determine the right amount.

Tips for building an emergency fund

Here are five tips to build your emergency fund:

• When you’re setting up your fund, start with small amounts. Gradually, increase it according to your means.

• Set up automatic transfers into your savings account to help you with your monthly expenses.

• Trim extra spending and put in all extra money into your fund. Find cheaper ways to meet your expenses.

• Try to increase your income by working on more projects, or raise your fees.

• Pump in any tax refunds or bonuses into your emergency fund as an extra contribution.

Tax Planning for Freelancers

In India, freelancers are liable to certain taxes. Here’s some handy help:

Understanding Tax Implications in India

These are the taxes you would have to pay as an Indian freelancer:

Income Tax:

This tax is calculated based on your income after taking deductions into account.

Professional Tax:

This varies from state to state and is applicable to you only if you exceed a particular income threshold.

GST (Goods and Services Tax):

If your annual turnover exceeds ₹20 lakhs (₹10 lakhs in north-eastern states), you will need to pay GST every month.

Business Deductions:

Any expenses you make for your freelance business can be deducted from your income, which reduces your tax liability. These would typically be internet bills, rentals for co-working spaces, professional subscriptions, courses, software, and stationery.

Tax Budgeting

Here are some more taxes you’re liable to pay:

Advance Tax: 

If your tax liability is over ₹10,000, you’re liable to pay Advance Tax. It is charged in installments throughout the year. Paying this helps you avoid paying penalties for late tax payments.

You can also contribute to tax-saving instruments like National Pension System (NPS), Public Provident Fund (PPF), or Employee’s Provident Fund (EPF) to reduce your tax burden.

 Find a Financial Advisor

Tax Laws and Regulations: 

Complex tax laws might intimidate you. If this sounds like you, get yourself professional guidance. Your financial advisor will guide you on how much to pay to achieve financial security. He will also make an investment plan for you.

Chartered Accountant: 

Ask around for a competent chartered accountant (CA) to help you with tax forms, and the filing process. This will ensure accuracy and will be time-saving for you.

Takeaway

For everyone, particularly freelancers, mastering financial management is critical for long-term success. By learning to budget your money, build an emergency fund, and do appropriate tax planning, you can have a financially stable future.

Ready to be financially stable? Implement these strategies today and achieve your goals.