4 Steps for Financial Success as an Independent Contractor

Personal finance can be a tricky business for independent contractors and freelancers. With fluctuating income and multiple sources of revenue, independent contractor status can complicate traditional advice on personal finance. At the same time, the extra flexibility and lack of a salary cap means your income can grow exponentially! Because of these unique attributes, planning personal finances as a freelancer requires a different perspective.

Here are four financial must-dos to ensure you earn as much as you can:

#1 Separate Your Income and Business Assets

In 2016, your primary goal — if you haven’t done it already — should be to separate your business finances from your personal assets. Instead of entangling the two, make a necessary and permanent split. If the majority of your income comes from independent contracting, consider incorporating your business into an LLC. Incorporating offers extra levels of liability protection and gives you an EIN number to give to clients instead of your social security number. With an LLC, you can also turn to local banks and credit unions for business accounts that keep your revenue stream separate from your personal finances. There is an upfront cost to form an LLC and annual fees to maintain incorporation. LegalZoom and Stripe Atlas both offer easy, affordable ways to incorporate.

Although, if you’re not ready to incorporate? In the least, open a separate personal checking account for your freelancer revenue. You shouldn’t be paying for business expenses from the same account that you buy shoes and your groceries — it gets too complicated. I also suggest opening a separate savings account to keep money set aside for your quarterly taxes. This distinction ensures that you can withhold your tax money and don’t mistake these savings for cash-on-hand.

# 2 Build a Financial Buffer

Many independent contractors live paycheck to paycheck, either because of financial hardships or out of habit. This approach to finances can create tragic problems when your income fluctuates. Even if money is tight, work on building a savings buffer one dollar at a time. Set aside as much as possible to give yourself a safety net — most experts suggest 20%. If you get sick, you need to take a personal day, or you have an unexpected financial burden arise, you can lean on these savings rather than loans or family.

Learn more: How to afford health insurance with irregular income.

# 3 Create Multiple Budgets

Laura Shin, a freelance finance expert and Forbes writer, encourages independent contractors to create two budgets: a dream budget for high-income months and a conservative budget for tighter times. Each month, you follow the one most aligned with your income. When you experience an extra windfall or busy season, compensate for slower months by adding more to your savings and retirement accounts. During slower months, your leaner budget enables you to pay for essentials without dipping into emergency funds. I actually added to Shin’s planner by adding third budget based on my monthly income — most months, I rely on this budget. My goal for 2016 is to have enough revenue to shift toward my dream budget.

#4 Enjoy a Bonus

Research from Harvard Business School suggests that employees work best when they receive unconditional gifts from their bosses. This year, I wonder if the same is true for freelancers? You may not receive an extra check from your clients, but you can give yourself a bonus. After you send in your tax return, take any extra savings you set aside in your tax account, and cut yourself a bonus. As an “employee” of your own freelance business, you add to your personal life in an uplifting way.

These four steps help you move toward your personal goals while building on your autonomy as a freelancer. Doing so creates clarity around your financial outlook, leaving you with more time to devote to your life outside of work.

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Elizabeth Wellington is a freelance writer, editor, and content strategist who lives to tell stories. You can find her with a cup of tea in hand, scratching away in her favorite notebook.

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