Money plans are vital for anyone who wants to manage their money and set their own business grow. Your financial plan for expansion becomes even more important if you’re a contractor because while this can be a very fulfilling path, it’s also financially unpredictable.
Even if you have been contracting for years, a contractor career is unpredictable because there is never a regular salary and therefore financial stability. In this blog post from Umbrella Search, get ready to understand what financial planning entails and how contractors can control their budget and grow faster.
We’ll also be learning how contractors can use budgeting to manage expenses, and still have a cushion of cash to stay secure like a regular employee. The idea is to educate you on why investing, insurance, retirement savings and other financial habits are the key to a contractor’s financial wellbeing – the key to successful growth.
What Is Financial Planning?
Planning for money is about planning the use of your money to plan all of the expenses you could possibly have later in life. It includes considering your financial situation, as well as future goals and then executing financial decisions that will help you accomplish these goals without bringing on a heavy economic burden.
You’ve got investments, savings, taxes, retirement, mortgage, insurance etc. When you have a good budget, you also need to think about your investments, savings, taxes, and insurance. There’s more liberty and flexibility with being a contractor, but the money may not come every day.
Finance Management for Contractors To Secure Financial Stability
Let's now focus on money management techniques for contractors’ long term success and stability.
Write down your expenses and money
The money you earn through your contracting career has to cover your own; so you have to know how much money is coming in and going out. For convenience, create an individual account separate from your company account.
If you’re a contractor, you may have months when it is going well, and your bank account has blown up, and then the following month, everything feels like a dry spell. To insure yourself from such occurrences, withdraw only one lump sum from your business bank account per month to test the waters if you had a regular paycheck.
Control expenses now only in the amount you set each month. Make a budget. As you make the budget, put your focus on necessary expenses instead of unrestricted spending. This goes for personal, but you must also budget your business, and spend as well.
Write down the cost and identify the areas you can lower unnecessary expenses. There are financial tools that can help keep your expenses organised and visible, but Excel does the trick.
Though contractors don’t receive a recurring monthly payment all months of the year, having a monthly budget lets you know when a certain monthly expense is going to come due so you can plan accordingly.
Start an emergency fund
Keeping an emergency fund is all the more important as a contractor because you’ll never know when your next pay check comes. With an emergency fund, you’ll be stress-free for a while, but financially stable. Invest a specific sum every month you should deposit into this emergency fund that will protect you in case of any unfortunate circumstance.
You should have at least a year’s salary set aside in this emergency fund, which should be liquid and easy to dip into in case of an emergency. You’ll want to put a bigger percentage in the emergency fund in the months when business is good.
Make regular credit card payments
Credit cards look pretty tempting when you’re going to buy a big ticket item but carrying too much debt can spell disaster. These are risks, however, credit cards are incredibly useful, especially for contractors. By being responsibly responsible with the credit card, contractors are able to create and sustain a good credit score that lenders can use to assess their affordability. Such good credit score can be a game-changer when you’re applying for business loans, getting lower insurance premiums, or negotiating mortgages. The trick is to use your credit cards in moderation, make sure to settle the payments promptly and avoid the traps of interest debt.
Take an Insurance
Since there is no employer in contracting, there’s also no employer-sponsored life and health insurance for you and your family. And so comprehensive insurance coverage is something that you & your family cannot ignore.
Also, consider business insurance which will be a comfort to know that you’re safe in the event of an unexpected event.
Don’t delay on paying your taxes
As a contractor, it makes sense for you to research the tax dues, the tax to pay, and save the money required ahead. Also, you must be as efficient in making the most of your business expense which is not taxable but it will lower your taxes. You need to budget 20-28% of your income for taxes, depending on your status as a limited company contractor or a self-employed contractor. If on the other hand, you choose to work via an umbrella company, tax side of the contracting will be take care of.
Save for retirement
As a freelance contractor, there will also be no pension scheme from the employer. So, get yourself a pension fund where you can put a little money away which is your extra income when you grow old. If you have something you can rely on in the case that you’re ready to quit and retire, you’ll not have to worry as much.
After all, if you make wise investments then you can have good financial stability even when you’re a novice contractor. Simply implement these budgeting tricks and you will be able to make use of money like every other working adult, not only will you get some psychological tranquility, but you will be saving more money towards your dream and your future.
And as you begin to get more for your career, spending tends to increase as well. Whether it’s upgrading your business expenses, or just getting a bit more room to grow, the urge to spend is there. But this is money pressure, and before you know it, your higher salary hasn’t really added much to your financial stability.
In conclusion
The real long-term secret is to be careful not to increase outgoings as income increases. instead, start saving even more money once you are earning more. Saving will give you the cushion that will get you through some quiet periods, or allow you to buy into your business when it becomes viable, or leave you with confidence for the future.
The thing to keep in mind is, it is not your gross income that determines your true wealth, but rather how much you invest and how well you use it. Don’t spend too much and don’t waste any more, and you’ll get close to achieving it.
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