The first step to tackling debt is to get current on any accounts that you’re behind on, especially if they have gone into default. Having an account go into default can destroy your credit score, as well as plague you with calls from collection agencies. If you find yourself struggling with defaulted accounts, you can reach out to a debt counselor who can help.
It’s common knowledge that mixing your business and personal finances is an unwise idea for anyone, whether you’re a freelancer, a business owner or a full-time independent contractor. However, it can become tempting, especially if one or both of these factors are suffering. Making sure your personal finances are in order makes it easier to focus on your business finances, as to take care of your work finances, you need to have your personal finances in order first.
It’s important to have an emergency savings fund built up in case of unforeseen circumstances. Nobody likes to think about it, but surprise expenses like medical bills, car repairs, or even a loss (or reduction) of income can significantly change your financial situation overnight. This is especially important for independent contractors, who may not be covered by traditional unemployment insurance, or may need equipment like a working computer and internet access to complete their work.
As this rainy day fund is critical in case of emergency, your first financial priority should be building up this account. To make this easier, consider “paying yourself first” by putting a certain amount of your pay into a savings account first, then paying any bills or purchasing non-essential items. It’s recommended that you have at least six months of living expenses in this account, but it never hurts to have more.
Although it may be tempting to put this money into Certificates of Deposit (CDs) or stocks, you want this money available to you immediately when disaster strikes. This means your best bet is to place this money in a safe savings account you will have access to anywhere you go, anytime. However, you can shop around for a savings account with a high interest rate to allow your money to grow over time.
Budget Like a Pro
Once you have an emergency fund built up, the next step is to formulate an efficient (and realistic) budget. At first glance, this is as simple as calculating how much money you bring in each month versus how much you spend each month. However, this process can be more complicated than that. For example, when calculating your monthly expenses, be sure to include any subscription services you have (even ones you may have forgotten about). Also don’t forget bills that don’t come up every month, like car insurance payments, annual checkups and vehicle inspections.
The second part of setting up a budget is seeing where you can cut costs. Getting rid of subscriptions—both business and personal—that you don’t need or don’t use is a good way to save money. Many companies also offer discounts to customers who use an automatic payment plan—it’s worth calling up your providers and seeing if this is an option. Of course, you can also shop around for the best deals on services you need, such as car and home insurance and utility providers. Reducing the number of times you go out to eat and shopping at discount stores also offer an opportunity to cut costs.
Debt Is the Enemy
Although debt is a necessary part of life for most people, it’s very costly and can easily ruin your credit score, as well as your greater financial plan. Personal credit scores can also impact your eligibility for small business loans, making a poor credit score especially consequential for independent contractors looking to expand their operations. Therefore, it’s very important to pay off all debt if you can do so.
If all of your accounts are current, then it’s time to focus on paying off debts early. Only making the minimum payment on loans and credit cars can cost you thousands of dollars in interest, as well as increasing your credit score. That’s why it’s recommended you pay off the account with the highest interest rate first, while making minimum payments toward your other debts. Once an account is paid off, you get to enjoy the freedom of not having that debt, and can spend the money that went toward paying it off on your other business-related expenses.
If paying off your debt completely isn’t an option in the near future, consider refinancing loans you currently have. Interest rates are at a record low currently, which can allow you to save a significant amount of money. A popular way to save money in interest and free up more money each month is refinancing a mortgage, although other loans such as student loans and car loans can be refinanced as well.
Although storing your money in a savings account is very safe, it’s generally not the best way to manage your money, outside of an emergency fund. Investing your money allows you to grow your money through a portfolio of investments. A portfolio is the entire array of investments you are currently involved with. Some examples of investments would be stocks, bonds, mutual funds, real estate, CDs, robo-investors and more.
There are many different ways to invest, and you can manage your investments yourself, or hire a financial planner to do it for you. The one thing to remember, however, is that diversification of investments is key. With any investment, there is some level of risk. If you only use one type of investment, you are running the risk of losing all the capital you’ve put forth on that investment. Diversification reduces your overall level of risk. Investment strategies are especially crucial for independent contractors, as you won’t have as many traditional, employer-backed options to begin saving toward your retirement years.
Although being an independent worker has many perks, there are challenges as well, especially from a financial standpoint. Being aware of these challenges and accounting for them can make your life and business easier and more successful.