New year, new you, right? Congratulations if 2023 is the year you decide to leave your job and start your own business. This is a big move that could make your working life more fulfilling. However, depending on your circumstances and how prepared you are beforehand, leaving your “sure thing” job in favor of an uncertain income as a freelancer can be risky.
In order to achieve financial success as a freelancer and maximize the benefits of your departure from being an employee as your job, make sure you do the following steps:
1. Put Aside Some Emergency Cash
Not having a steady stream of income is one of the characteristics of being a freelancer. This can be advantageous—you’ll get paid more for completing more work—or disadvantageous—you’ll get paid less if business is slow for your clients. But if you decide to work for yourself, you’ll need to get used to this ambiguity. Fortunately, you can prepare for it by increasing your savings balance before leaving your salaried employment.
2. If You Can, Get Your Finances In Order Overall
Before you lose the security of a consistent income, it’s a good idea to get your finances in the best shape you can. This include paying off high-interest debt (like credit card debt) and checking your credit report for any mistakes or inconsistencies.
Remember that because you have a variable income and no regular employment, you may have to go through additional hoops if you want to finance a car or a house as a freelancer. So, if you plan to buy a property, you need have a strong credit score to help you receive lender approval.
3. Consider Taxes
The life of a freelancer has many advantages as well as some possible drawbacks. You’ll need to stay on top of your taxes by sending the IRS quarterly anticipated payments (and your state, unless you live in a state without income taxes). Missing these will result in a penalty, and failing to pay your taxes is never a good decision.
So, note it in your calendar (in 2023, the dates you need to know are April 18, June 15, and September 15, and taxes on Q4 for 2023 are due Jan. 15, 2024). Considering working with an accountant is another option, as it will be trickier now than it was when you were a W-2 employee to determine what you must pay and what you can write off.
4. Make One Final Use Of Your Insurance Advantages
Going freelance also means you’ll lose the wonderful health insurance benefits provided by your last job. This advice may not be as important for you if you’re going to join your spouse’s health insurance plan, but if you’re going to pay for your own health insurance, make sure you schedule any last-minute appointments under the plan you’re leaving.
For instance, schedule an eye test and think about purchasing a new pair of glasses while you can still find them at a reasonable price if you have vision insurance via your W-2 employer.
5. Roll Over Your Matching 401(k) Contributions
While there are ways for freelancers to prepare for retirement, if you’ve previously worked for another company, you might already have a 401(k) account with them. Make sure you have a plan for that account before you leave your employment, such as rolling it over into a new IRA account. Additionally, if you are able to contribute enough to your 401(k) to receive the full employer match, do so. Why leave unclaimed money lying around?
As you can see, there are many things to consider when it comes to managing your finances as a freelancer and ending your employee days. Breathe deeply, write a list of everything you need to do, and good luck. You can do this.
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