There are many perks to being a contractor. When you are your own boss, you have greater control over your career and this freedom and flexibility can allow for a good work-life balance. Your earning potential is unlimited, but it is important to note that you need to be smart with financial management as a contractor. Work can fluctuate, you are responsible for your own finances and you always need to think ahead. So, if you are just getting started as a contractor or you are looking to improve your financial management, read on for a few tips that will hopefully prove to be useful.
Separate Your Finances and Get Organized
First, you need to make sure that you separate your business and personal finances otherwise things could get messy. You do not want to be using one for the other, plus it is much easier when it comes to things like tax and auditing your finances. Additionally, you need to get organized by having a clear system in place for your business finances – using accounting software or outsourcing to an accountant is smart. You also need to set your tax money aside each month so that you can keep this separate and know how much is yours.
Stick To Budgets
Leading on from this, you will also want to control your business and personal spending with the use of budgets. As your income can fluctuate each month, you may want to divide your regular expenses and divert a percentage of your income towards these each month to control spending and avoid overspending.
Build Up An Emergency Fund
As mentioned in the introduction, work can fluctuate as a contractor and this can cause a great deal of stress. In these situations, you do not want to be strapped for cash, which is why it is so important to have an emergency fund that you can use to cover any shortfall and to manage during quieter periods. You will find it helpful to have between 3 and 6 months of expenses available if work slows down or dries up and to have this in a separate but easily accessible account.
Protect Your Income
Following on from this, it is also a good idea to protect your income in the form of income protection insurance. One of the biggest worries about working as a contractor is suddenly being unable to work – sickness or injury could leave you in a tricky situation financially. Income protection insurance will cover you for periods that you are unable to work and help to provide peace of mind knowing that you are protected.
Take Out Contractors Insurance
Another important type of cover to arrange is contractors’ insurance. Contractors insurance will protect you against industry-specific threats that could pose a significant risk to your business and finances, including damage, accidents, and lawsuits. This type of insurance will safeguard you from the costs associated with these issues. You will want to find a customized insurance plan from somewhere like Contractors Insurance that will give you the best level of protection. Again, this is also important for providing you with peace of mind knowing that protection is in place.
Analyze Your Expenses Regularly
As a contractor, every cent counts and this is why it is important to try and keep your costs down. You want to keep costs down to maximize profits, but keep in mind that you do not want to make cuts that could cost more in the long run, make work harder, or negatively impact the end product. You should get into the habit of going through your expenses a few times a year and trying to find ways to make savings.
When you are a contractor, you are often so focused on the present and securing work that it can be hard to think ahead. This is a big mistake, as you need to plan for your future, especially for when you want to stop working. This is why you need to set money aside each month, pay into a private pension and look for ways to build wealth, such as investing and passive forms of income.
Hopefully, these financial tips will come in useful for any contractor and help you to enjoy the benefits that this type of work can bring. Working as a contractor has its perks, but you need to be smart with your finances in order to realize these and have strong control over both your personal and business finances.