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How to Escape Debt in 2016

How to Escape Debt in 2016

The new year is right around the corner and if you’re like most people, you’ve probably got a running list of resolutions to achieve and milestones to reach. If getting out of debt ranks near the top, now’s the time to starting thinking about how you’re going to hit your goal. Developing a clear-cut action plan can get you that much closer to debt-free status in 2016.

1. Add up Your Debt

You can’t start attacking your debt until you know exactly how much you owe. The first step to paying down your debt is sitting down with all of your statements and adding up every penny that’s still outstanding. Once you know how deep in debt you are, you can move on to the next step.

2. Review Your Budget

A budget is a plan that sets limits on how you spend your money. If you don’t have one, it’s a good idea to put a budget together as soon as possible. If you do have a budget, you can go over it line by line to find costs you can cut out. By eliminating fees and unnecessary expenses like cable subscriptions, you’ll be able to use the money you save to pay off your debt.

3. Set Your Goals

How to Escape Debt in 2016

At this point in the process, you should have two numbers: the total amount of money you owe and the amount you can put toward your debt payments each month. Using those two figures, you should be able determine how long it’s going to take you to pay off your mortgage, student loans, personal loans and credit card debt.

Let’s say you owe your credit card issuer $25,000. If you have $500 in your budget that you can use to pay off that debt each month, you’ll be able to knock $6,000 off your card balance in a year. Keep in mind, however, that you’ll still need to factor in interest to get an accurate idea of how the balance will shrink from one year to the next.

4. Lower Your Interest Rates

Interest is a major obstacle when you’re trying to get out of debt. If you want to speed up the payment process, you can look for ways to shave down your rates. If you have high-interest credit card debt, for instance, transferring the balances to a card with a 0% promotional period can save you some money and reduce the amount of time it’ll take to get rid of your debt.

Refinancing might be worth considering if you have student loans, car loans or a mortgage. Just remember that completing a balance transfer or refinancing your debt isn’t necessarily free. Credit card companies typically charge a 3% fee for balance transfers and if you’re taking out a refinance loan, you might be on the hook for origination fees and other closing costs.

5. Increase Your Income

How to Escape Debt in 2016

Keeping a tight rein on your budget can go a long way. But that’s not the only way to escape debt. Pumping up your paycheck in the new year can also help you pay off your loans and increase your disposable income.

Asking your boss for a raise will directly increase your earnings, but there’s no guarantee that your supervisor will agree to your request. If you’re paid by the hour, you can always take on more hours at your current job. And if all else fails, you can start a side gig to bring in more money.

Hold Yourself Accountable

Having a plan to get out of debt in the new year won’t get you very far if you’re not 100% committed. Checking your progress regularly is a must, as is reviewing your budget and goals to make sure you’re staying on track.

Photo credit: Â©iStock.com/BsWei, ©iStock.com/marekuliasz, ©iStock.com/DragonImages

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Minimum Payments on a Credit Card

Your minimum monthly payment is the lowest amount that you need to pay on your credit card balance. Any less could result in a derogatory mark, any more will clear more of the principal. 

Your monthly payment is one of the most important aspects of your credit card debt and failure to understand this could seriously impact your credit score and leave marks on your credit report that remain for up to 7 years.

With that in mind, let’s take a closer look at how these payments operate and how you can quickly clear your credit card debt.

How Minimum Payments on a Credit Card are Calculated

The minimum payment is calculated as a percentage of the total balance at the end of the month. This percentage ranges from 2% to 5%, but it has been known to go lower. 

As an example, if you have a $5,000 credit card balance and are required to pay 5% a month, then your monthly payment will be $250. However, this only covers the principal, which is the money that you borrowed. It does not cover the interest, which is where things get a little complicated and expensive.

What Influences Your Minimum Monthly Payment?

The reason credit card interest is so high is because it compounds. This means that if you have an annual percentage rate of 20% and a debt of $20,000, that debt will climb to $24,000, at which point the next billing cycle will commence and this time you’ll be charged 20% on $24,000 and not $20,000.

However, credit card interest is calculated daily, not yearly. To arrive at your daily percentage rate, simply divide your interest rate by 365 (the number of days in a year) and then multiply this by your daily balance.

For example, if we stick with that 20% interest rate, then the daily rate will be 0.00054%. If we multiply this with the daily balance, we get an interest rate of $2.7 for the first day. Multiply this by 30, for the total days in a billing cycle, and it’s $81. That’s your total interest for the first month.

So, when we calculate the 2% minimum monthly payment, we’re calculating it against $5,081, not $5,000, which means we get a total of $101.62, reducing the balance to just $479.38.

In other words, you pay over $100, but reduce the balance by a little over $20 when you make that monthly payment. If penalty fees and interest rates are added to that, it will reduce in even smaller increments.

Pros and Cons of Only Paying the Minimum Payment on your Credit Card

As discussed above, it’s imperative that you make the minimum payment, avoiding any late payment charges or credit score reductions. However, if you only make those minimum payments every month then it will take a long time to clear your balance and you may struggle to keep your head above water.

The Benefits of Paying More Than the Minimum

Many borrowers struggle to pay more than the minimum not because they don’t have the money, but because they fail to see the benefits. They focus on the short-term and not the long-term, seeing an extra $100 payment as a lost $100 in the present, as opposed to a saved $500 in the future.

However, if you can get over this mindset and start paying more than the minimum, you will do your future self a huge favor, helping with all of the following:

Shorten the Term and Lessen the Interest

Every extra dollar that you add to your minimum payment can help you get out of debt quicker than if you simply stick with the minimum. This is true for all debts—a higher monthly payment means that more money goes towards the principal, which means there is less interest to compound.

Credit card debt is like a snowball gathering momentum as it rolls, and this is exacerbated every time you miss a payment and are hit with penalty fees. By paying more than the minimum, you’re taking a giant chunk out of that snowball and slowing its progression.

You’ll Improve Your Credit Utilization

Your credit utilization ratio is one of the most important parts of your credit report, counting for 30% of your total. This ratio takes your total available credit (such as a credit limit on a credit card) and then compares it to total debt (such as the balance on that credit card). The higher the number, the more of your credit has been used and the more your credit score will suffer.

Every time you pay more of your credit card balance, you’re reducing this score and significantly boosting your credit score.

Avoid Maxing Out Your Balance

Not only will a maxed-out credit card do some serious damage to your credit utilization score, but it can also have a direct impact on your credit score on the whole. Lenders don’t want to see it and credit bureaus will punish you for it. If you’re still using the card and only paying the minimum, you may be stuck in a cycle of persistent debt, but by paying more and using it less, you can prevent that.

You May Get a Better Credit Limit

Credit card issuers monitor their customer’s activities very closely. If they clear their balances every month without issue, they are more inclined to increase their credit limit, offer them rewards, and generally provide them with good opportunities. If they are accumulating large amounts of credit card debt and only meeting their minimum payments, they’ll be less inclined to do any of those things.

It always helps to get on a creditor’s good side, because you never know when you will need that improve credit limit or access to that generous rewards scheme.

What Happens if you Only Make the Minimum Payment?

If you only pay the minimum, the debt will take a long time to clear and you’ll repay huge sums of interest in that time. If we go back to the previous example and assume an APR of 20%, a balance of $5,000 and a minimum payment of 2%, you will repay over 400% in interest alone and it will take you decades to repay the debt.

Thankfully, very few credit card providers will actually let you pay such a small amount on such a substantial debt. But even if we increase the minimum payment to 5%, it still looks abysmal for the borrower. It would take them about 9 years to pay the balance, requiring $250 a month and paying close to $2,500 in interest.

Although it’s more realistic, this is still a poor option, especially when you consider the card will still be active and you may still be using it, which means that every time you make a repayment, you’re adding more debt and offsetting all your hard work.

Your credit score will not suffer if you only make the minimum payment. Providing you make it on time then you will build a respectable payment history, a stable credit report, and a credit score that is sure to impress lenders. However, it won’t look great for your finances as you’re giving yourself an expensive liability that will cripple your debt-to-income ratio and your credit utilization ratio for years to come.

Are There Any Advantages to Just Paying the Minimum?

The only advantage to paying just the minimum is that you will have more money in your pocket at the end of the month, which will allow you to make additional investments and purchases that would otherwise not be available to you. However, this is a pretty narrow-minded way of looking at it, because while you will have more cash in the long-term, it comes at the expense of many additional risks and obligations, not to mention thousands of dollars’ worth of additional interest paid over the term.

What Happens if you Can’t Pay the Minimum Payment?

If there is a late payment or a missed payment, your creditor may charge you a penalty fee or a penalty rate. If your payment is due for more than 30-days they may also report you to the credit bureaus, at which point a derogatory mark will appear on your credit report and your credit score will drop.

This can happen even with a single missed payment, which is why you should never simply skip a payment on the basis that you’ll just double-up next time around.

Instead, contact your creditor, explain your situation, and see if there is anything they can do to help you. They may say no, but it doesn’t hurt to ask, and, in most cases, they will offer you some kind of reprieve. After all, they want their money, and if they can increase their chances of getting paid by providing you with some leeway, they’ll often be more than happy to do it.

Some people believe that you can simply pay a few dollars and it will count as a minimum payment and not show on your credit report. This is a myth. Technically, any payment that doesn’t meet the full minimum requirement can be classed as a late payment and can lead to fees and derogatory marks.

Resources to Lower Minimum Payments on a Credit Card

It’s important to keep a close eye on your credit card statement and activity at all times. Monitor your spending, making sure it doesn’t go overboard, and if you find yourself struggling to make payments at any time, checkout the following resources and options to get the help you need:

  • Credit Counselors: Speak with a trained expert who has helped many individuals in a similar position. They will discuss your finances and your debts and will help you to find a solution.
  • Debt Management: A debt management plan can help when you’re struggling to meet your debt obligations and have a huge debt-to-income ratio. They will provide assistance and help you swap multiple debts for a single consolidation loan.
  • Debt Settlement: An option that works best for individuals with multiple debts and missed payments. It’s one of the cheapest ways to clear personal loan and credit card debt, as well as other forms of unsecured debt.
  • Debt Consolidation: Another consolidation loan option, this time with a long term, ensuring that you pay less per month but more over the term. This is a good option if you’re stuck in a tricky spot right now and need to reduce your outgoings.

In all the above cases, you can use the NMLS Consumer Access site to find a legitimate and reputable company or professional working within the financial sector. You can also use resources like the Better Business Bureau as well as the many guides, reviews, and help files right here on the Pocket Your Dollars website.

How to Reduce the Balance on a Credit Card Debt

One of the best ways to reduce your balance is to initiate a balance transfer. As the name suggests, this entails moving your balance from one card to another. Balance transfer cards entice you by offering a 0% APR on all transfers and this lasts for up to 18% with the best providers. 

In that time, you won’t pay any interest on your balance, which means all your monthly payment will go towards the principal and you can reduce your debt in huge leaps as opposed to small steps.

These cards are not without their issues, however. You will need a good credit score to get a card that has a good APR and balance transfer offer. If you don’t, and you fail to clear the balance during that introductory period, you may be paying more interest than you were before.

In most cases, though, these cards will be just what you need to ease the burden of mounting credit card debts and get back into the black. Take a look at our guide to the best balance transfer cards to learn more and discover how you can move your current balance to a card that has more preferable terms, in the short-term at least.

The Bottom Line: Clear that Balance

A minimum payment is the least amount you need to commit to a credit card balance. If credit card debt was a house party, the minimum payment would be the equivalent of showing up, saying your introductions, and then hiding in the corner for the rest of the night. If you really want to make an impact, you need to be proactive.

It doesn’t have to be twice or thrice the size of your minimum payment. It doesn’t have to be a consistent sum that you pay every month, but it does have to be something. Don’t worry if it’s only 1% or 2% of the balance, because every additional payment helps. Just pay whatever you can afford, whenever you can afford it. A small amount of money today can save you a huge sum of money in the future.

Minimum Payments on a Credit Card is a post from Pocket Your Dollars.

Source: pocketyourdollars.com

What’s a Good Credit Score?

Whats a good credit score?

Your credit score is incredibly important. In fact, this number is so influential on various financial aspects of life that it can determine your eligibility to be approved for credit cards, car loans, home mortgages, apartment rentals, and even certain jobs. Knowing what your credit score is, and what range it falls under, is important so you can decide what loans you can to apply for, and if necessary, if steps need to be taken to improve your score.

So what constitutes a good credit score?

The Credit Score Range Scale

The most common credit score used by lenders and other business entities is the FICO score, which ranges from 300 to 850. The bigger the number, the better. To create credit scores, FICO uses information from one of the three major credit bureau agencies – Equifax, Experian or TransUnion. Knowing this range is important because it will help you understand where your specific number fits in.

Know what factors influence a good credit score to help improve your own credit health.

As far as lenders are concerned, the lower a consumer’s number on this scale, the higher the risk. Lenders will often deny a loan application for those with a lower credit score because of this risk. If they do approve a loan application, they’ll make consumers pay for such risk by means of a much higher interest rate.

Understand Your Credit Score

Within the credit score range are different categories, ranging from bad to excellent. Here is how credit score ranges are broken down:

Bad credit: 630 or Lower

Lenders generally consider a credit score of 630 or lower as bad credit. A number of past activities could have landed you in this category, including a string of late or missed credit card payments, maxed out credit cards, or even bankruptcy. Younger people who have no credit history will probably find themselves in this category until they have had time to develop their credit. If you’re in this bracket, you’ll be faced with higher interest rates and fees, and your selection of credit cards will be restricted.

Whats a good credit score?

Fair Credit: 630-689

This is considered an average score. Lingering within this range is most likely the result of having too much “bad” debt, such as high credit card debt that’s grazing the limit. Within this bracket, lenders will have a harder time trusting you with their loan.

Good Credit: 690-719

Having a credit score within this range will afford you more choices when it comes to credit cards, an easier time getting approved for various loans, and being charged much lower interest rates on such loans.

Excellent Credit: 720-850

Consider your credit score excellent if your number falls within this bracket. You’ll be able to take advantage of all the fringe benefits that come with credit cards, and will almost certainly be approved for loans at the lowest interest rates possible.

Understand the factors that make up a good credit score.

Whats a good credit score?

What’s Your Credit Score?

Federal law allows consumers to check their credit score for free once every 12 months. But if you want to check more often than this, a fee is typically charged. Luckily, there are other avenues to take to check your credit score.

Mint has recently launched an online tool that allows you to check your credit score for free without the need for a credit card. Here you’ll be able to learn the different components that affect your score, and how you can improve it.

You’ll be able to see your score with your other accounts to give you a complete picture of your finances. Knowing what your credit score is can help determine if you need to improve it to help you get the things you need or want. Visit Mint.com to find out more about how you can access your credit score – for free.

Lisa Simonelli Rennie is a freelance web content creator who enjoys writing on all sorts of topics, including personal finance, investing in stocks, mortgages, real estate investments, and anything else to do with the world of economics.

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Home Buyer’s Guide: How to Purchase a Property, From Start to Finish [Free Download]

Purchasing a home is both exciting and a major milestone in your life, so you’ll want to be prepared for what to expect to avoid a stressful process. Having an in-depth look at the buyer’s journey can help you make informed and confident decisions.

From finding a real estate agent, negotiating offers to getting your keys on closing day, we’ve outlined all the steps of a home buyer’s journey in our free Buyer’s Guide, which you can download here.

The Buyer’s Guide will cover the buyer’s timeline from meeting an agent to preparing for closing day. We’ve outlined the 8 steps in a home buyer’s journey below.

1. Working With An Agent

Every city is filled with thousands of agents, but not all are equal. We believe it is important to choose an agent that you feel confident with. Before you commit to working with an agent, make sure you have a good understanding of the knowledge and experience they offer. It’s important that you ask your questions before making the decision to work with them.

2. Financing Your Purchase

Before you set a budget and start looking for a home, you’ll have to understand what costs to expect when purchasing a home. Here are some of the major costs involved:

  • Deposits
  • Down payments
  • Mortgage insurance
  • Closing costs

You’ll also want to calculate a rough estimate of the down payment that you will be expected to pay. Depending on the price of your home, your minimum down payment can range from 5% to 20%. If you’re interested in learning more about how to finance your home, you can get our free Financing Your Purchase guide here.

3. Searching For A Home

An important part of searching for a home is understanding how the home will fit with your needs and your lifestyle. You’ll want to consider home ownership as well as different types of properties and features. 

Types of Home Ownership

  • Freehold Ownership
    • You purchase the home and directly own the lot of land it sits on
  • Condominium Ownership
    • For condos, you own specific parts of one building: titled ownership of your unit, along with shared ownership in the condo corporation that owns the common spaces and amenities
  • Co-Op Ownership
    • You own an exact portion of the building as a whole and also have exclusive use of your unit

Types of Properties

  • Detached houses
  • Semi-detached houses
  • Attached houses
  • Condos and apartments
  • Multi-unit

Tip: Depending on your budget and desired location, you may need to be flexible to find a home that meets your needs. By being willing to trade some features for others, you’ll have more options to choose from.

4. Negotiating An Offer

When you are making an offer to purchase a home, the purchase agreement should include the essential components listed below. Your agent can help put together an offer that is compelling, while safeguarding your interests and puts you in a competitive position to secure your new home.

You’ll also have the opportunity to choose the conditions that you’ll want in your offer. Some of these may include a home inspection or a status certificate review.

5. Financial Due Diligence

Whenever you make an offer on a house, you need to provide a deposit to secure the offer. The deposit is in the form of a certified cheque, bank draft, or wire transfer; it’s held in trust by the selling brokerage and is applied towards your down payment if your offer is successful.

There are two types of deposits:

  • Upon acceptance
    • The deposit is provided within 24 hours of the seller choosing your offer
  • Herewith
    • The deposit is provided when the offer is made

6. Property Due Diligence

To firm up a deal or educate yourself more on the state of the property, you’ll likely want to have a home inspection if you’re purchasing a house. If you’re purchasing a condo, then your lawyer will review the building’s status certificate.

Home Inspection

A home inspector will assess elements of the home such as the walls, windows, plumbing, heating and roof to judge the condition of the home. This process is non-invasive and is essential to help provide buyers with a good idea of the home’s current condition and the confidence of putting in an offer. 

Tip: The home inspector will provide a summary of suggested work along with a minimum budget estimate for the repairs needed. 

Status Certificates

If you’re purchasing a condominium, you’ll need to obtain a status certificate from the condo board or management for your lawyer’s review. This document will include valuable information about the condo’s budget, legal issues, reserve fund, maintenance fees and future fees increases – and the lawyer can help identify potential red flags

7. Preparing For Closing

Before the big day, you’ll want to keep a checklist of what to do ahead of time. Some of these include:

  • Review your contract
  • Complete a final walkthrough of the home
  • Purchase home insurance
  • Meet with your lawyer
  • Know how much cash you’ll need
  • Secure cash required for closing

8. Closing Day

Closing Day is when you’ll finally get the keys to your new home! In addition to bringing the cash required for closing, you’ll have to sign a few more documents which will include:

  • Mortgage loan
  • Title transfer
  • Statement of adjustments
  • Tax certificates

For the full details on the home buyer’s journey including examples, advice, pictures and sample calculations, download a copy of our free Buyer’s Guide here.

The post Home Buyer’s Guide: How to Purchase a Property, From Start to Finish [Free Download] appeared first on Zoocasa Blog.

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Do College Rankings Matter?

student at college campus mobile

All articles about college rankings should perhaps be read with a grain of salt and primarily through a lens of what matters most to individuals about the college experience and what they’re hoping it will be an investment toward.

Prominent publications and people have conveyed a variety of views about whether college rankings matter:

The editor-in-chief of the Science Family of Journals said no in May 2020. “To any logical scientific observer, the fine distinctions of where schools show up on this (U.S. News & World Report Best Colleges) list are statistically meaningless—but try telling that to a roomful of alumni or parents,” H. Holden Thorp wrote.

Ian Bogost, distinguished chair at Georgia Tech, wrote in The Atlantic in June 2020: “The absurdity of a numerical ranking mechanism for colleges becomes apparent the moment you look at how U.S. News calculates it. The methodology reads like a Dungeons and Dragons character sheet: 8% for class size; 10% for high-school-class standing; 4.4% for first-to-second-year student retention, and so on.”

But just because the consensus leans toward “no” doesn’t mean it should be the last word on anyone’s ultimate decision about where to go to school.

Even U.S. News & World Report says on its best-colleges website: “The rankings provide a good starting point for students trying to compare schools. … The best school for each student, experts say, is one that will most completely meet his or her needs, which go beyond academics.”

What Are the College Rankings?

There is no single, ultimate, etched-in-stone set of college rankings. All over the world, there are entities using a wide array of criteria to appraise universities.

Rather than expecting a “yes” or “no” to the question of whether college rankings matter, it would be more beneficial to understand why “It depends” could be more appropriate.

If you’re aiming for an education from a prestigious school, and money is no object—well, first of all, congratulations and good luck.

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Everything You Need to Know About Budgeting As a Freelancer

Could logging in to your computer from a deluxe treehouse off the coast of Belize be the future of work? Maybe. For many, the word freelance means flexibility, meaningful tasks and better work-life balance. Who doesn’t want to create their own hours, love what they do and work from wherever they want? Freelancing can provide all of that—but that freedom can vanish quickly if you don’t handle your expenses correctly.

“A lot of the time, you don’t know about these expenses until you are in the trenches,” says freelance copywriter Alyssa Goulet, “and that can wreak havoc on your financial situation.”

Nearly 57 million people in the U.S. freelanced, or were self-employed, in 2019, according to Upwork, a global freelancing platform. Freelancing is also increasingly becoming a long-term career choice, with the percentage of freelancers who freelance full-time increasing from 17 percent in 2014 to 28 percent in 2019, according to Upwork. But for all its virtues, the cost of being freelance can carry some serious sticker shock.

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“There are many hats you have to wear and expenses you have to take on, but for that you’re gaining a lot of opportunity and flexibility in your life.”

– Alyssa Goulet, freelance copywriter

Most people who freelance for the first time don’t realize that everything—from taxes to office supplies to setting up retirement plans—is on them. So, before you can sustain yourself through self-employment, you need to answer a very important question: “Are you financially ready to freelance?”

What you’ll find is that budgeting as a freelancer can be entirely manageable if you plan for the following key costs. Let’s start with one of the most perplexing—taxes:

1. Taxes: New rules when working on your own

First things first: Don’t try to be a hero. When determining how to budget as a freelancer and how to manage your taxes as a freelancer, you’ll want to consult with a financial adviser or tax professional for guidance. A tax expert can help you figure out what makes sense for your personal and business situation.

For instance, just like a regular employee, you will owe federal income taxes, as well as Social Security and Medicare taxes. When you’re employed at a regular job, you and your employer each pay half of these taxes from your income, according to the IRS. But when you’re self-employed (earning more than $400 a year in net income), you’re expected to file and pay these expenses yourself, the IRS says. And if you think you will owe more than $1,000 in taxes for a given year, you may need to file estimated quarterly taxes, the IRS also says.

That can feel like a heavy hit when you’re not used to planning for these costs. “If you’ve been on a salary, you don’t think about taxes really. You think about the take-home pay. With freelance, everything is take-home pay,” says Susan Lee, CFP®, tax preparer and founder of FreelanceTaxation.com.

When learning how to budget as a freelancer it’s necessary to estimate your income and expenses before setting aside savings for tax payments.

When you’re starting to budget as a freelancer and determining how often you will need to file, Lee recommends doing a “dummy return,” which is an estimation of your self-employment income and expenses for the year. You can come up with this number by looking at past assignments, industry standards and future projections for your work, which freelancer Goulet finds valuable.

“Since I don’t have a salary or a fixed number of hours worked per month, I determine the tax bracket I’m most likely to fall into by taking my projected monthly income and multiplying it by 12,” Goulet says. “If I experience a big income jump because of a new contract, I redo that calculation.”

After you estimate your income, learning how to budget as a freelancer means working to determine how much to set aside for your tax payments. Lee, for example, recommends saving about 25 percent of your income for paying your income tax and self-employment tax (which funds your Medicare and Social Security). But once you subtract your business expenses from your freelance income, you may not have to pay that entire amount, according to Lee. Deductible expenses can include the mileage you use to get from one appointment to another, office supplies and maintenance and fees for a coworking space, according to Lee. The income left over will be your taxable income.

Pro Tip:

To set aside the taxes you will need to pay, adjust your estimates often and always round up. “Let’s say in one month a freelancer determines she would owe $1,400 in tax. I’d put away $1,500,” Goulet says.

2. Business expenses: Get a handle on two big areas

The truth is, the cost of being freelance varies from person to person. Some freelancers are happy to work from their kitchen tables, while others need a dedicated workspace. Your freelance costs also change as you add new tools to your business arsenal. Here are two categories you’ll always need to account for when budgeting as a freelancer:

Your workspace

Joining a coworking space gets you out of the house and allows you to establish the camaraderie you may miss when you work alone. When you’re calculating the cost of being freelance, note that coworking spaces may charge membership dues ranging from $20 for a day pass to hundreds of dollars a month for a dedicated desk or private office. While coworking spaces are all the rage, you can still rent a traditional office for several hundred dollars a month or more, but this fee usually doesn’t include community aspects or other membership perks.

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If you want to avoid office rent or dues as costs of being freelance but don’t want the kitchen table to pull double-duty as your workspace, you might convert another room in your home into an office. But you’ll still need to outfit the space with all of your work essentials. Freelance copywriter and content strategist Amy Hardison retrofitted part of her house into a simple office. “I got a standing desk, a keyboard, one of those adjustable stands for my computer and a squishy mat to stand on so my feet don’t hurt,” Hardison says.

Pro Tip:

Start with the absolute necessities. When Hardison first launched her freelance career, she purchased a laptop for $299. She worked out of a coworking space and used its office supplies before creating her own workspace at home.

Digital tools

There are a range of digital tools, including business and accounting software, that can help with the majority of your business functions. A big benefit is the time they can save you that is better spent marketing to clients or producing great work.

The software can also help you avoid financial lapses as you’re managing the costs of being freelance. Hardison’s freelance business had ramped up to a point where a manual process was costing her money, so using an invoicing software became a no-brainer. “I was sending people attached document invoices for a while and keeping track of them in a spreadsheet,” Hardison says. “And then I lost a few of them and I just thought, ‘Oh, my God, I can’t be losing things. This is my income!’”

As you manage the cost of being freelance, consider digital tools and accounting services to keep track of invoices, payments and income.

Digital business and software tools can help manage scheduling, web hosting, accounting, audio/video conference and other functions. When you’re determining how to budget as a freelancer, note that the costs for these services depend largely on your needs. For instance, several invoicing platforms offer options for as low as $9 per month, though the cost increases the more clients you add to your account. Accounting services also scale up based on the features you want and how many clients you’re tracking, but you can find reputable platforms for as little as $5 a month.

Pro Tip:

When you sign up for a service, start with the “freemium” version, in which the first tier of service is always free, Hardison says. Once you have enough clients to warrant the expense, upgrade to the paid level with the lowest cost. Gradually adding services will keep your expenses proportionate to your income.

3. Health insurance: Harnessing an inevitable cost

Budgeting for healthcare costs can be one of the biggest hurdles to self-employment and successfully learning how to budget as a freelancer. In the first half of the 2020 open enrollment period, the average monthly premium under the Affordable Care Act (ACA) for those who do not receive federal subsidies—or a reduced premium based on income—was $456 for individuals and $1,134 for families, according to eHealth, a private online marketplace for health insurance.

“Buying insurance is really protecting against that catastrophic event that is not likely to happen. But if it does, it could throw everything else in your plan into a complete tailspin,” says Stephen Gunter, CFP®, at Bridgeworth Financial.

Budgeting as a freelancer allows you to select a healthcare plan that best suits your employment status, income and relationship status.

A good place to start when budgeting as a freelancer is knowing what healthcare costs you should budget for. Your premium—which is how much you pay each month to have your insurance—is a key cost. Note that the plans with the lowest premiums aren’t always the most affordable. For instance, if you choose a high-deductible policy you may pay less in premiums, but if you have a claim, you may pay more at the time you or your covered family member’s health situation arises.

When you are budgeting as a freelancer, the ACA healthcare marketplace is one place to look for a plan. Here are a few other options:

  • Spouse or domestic partner’s plan: If your spouse or domestic partner has health insurance through his/her employer, you may be able to get coverage under their plan.
  • COBRA: If you recently left your full-time job for self-employment, you may be able to convert your employer’s group plan into an individual COBRA plan. Note that this type of plan comes with a high expense and coverage limit of 18 months.
  • Organizations for freelancers: Search online for organizations that promote the interests of independent workers. Depending on your specific situation, you may find options for health insurance plans that fit your needs.

Pro Tip:

Speak with an insurance adviser who can help you figure out which plans are best for your health needs and your budget. An adviser may be willing to do a free consultation, allowing you to gather important information before making a financial commitment.

4. Retirement savings: Learn to “set it and forget it”

Part of learning how to budget as a freelancer is thinking long term, which includes saving for retirement. That may seem daunting when you’re wrangling new business expenses, but Gunter says saving for the future is a big part of budgeting as a freelancer.

“It’s kind of the miracle of compound interest. The sooner we can get it invested, the sooner we can get it saving,” Gunter says.

He suggests going into autopilot and setting aside whatever you would have contributed to an employer’s 401(k) plan. One way to do this might be setting up an automatic transfer to your savings or retirement account. “So, if you would have put in 3 percent [of your income] each month, commit to saving that 3 percent on your own,” Gunter says. The Discover IRA Certificate of Deposit (IRA CD) could be a good fit for helping you enjoy guaranteed returns in retirement by contributing after-tax (Roth IRA CD) or pre-tax (traditional IRA CD) dollars from your income now.

Pro Tip:

Prioritize retirement savings every month, not just when you feel flush. “Saying, ‘I’ll save whatever is left over’ isn’t a savings plan, because whatever is left over at the end of the month is usually zero,” Gunter says.

5. Continually update your rates

One of the best things you can do for yourself in learning how to budget as a freelancer is build your costs into what you charge. “As I’ve discovered more business expenses, I definitely take those into account as I’m determining what my rates are,” Goulet says. She notes that freelancers sometimes feel guilty for building business costs into their rates, especially when they’re worried about the fees they charge to begin with. But working the costs of being freelance into your rates is essential to building a thriving freelance career. You should annually evaluate the rates you charge.

Because your expenses will change over time, it’s wise to do quarterly and yearly check-ins to assess your income and costs and see if there are processes you can automate to save time and money.

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“A lot of the time, you don’t know about these expenses until you are in the trenches, and that can wreak havoc on your financial situation.”

– Alyssa Goulet, freelance copywriter

Have confidence in your freelance career

Accounting for the various costs of being freelance makes for a more successful and sustainable freelance career. It also helps ensure that those who are self-employed achieve financial stability in their personal lives and their businesses.

“There are many hats you have to wear and expenses you have to take on,” Goulet says. “But for that, you’re gaining a lot of opportunity and flexibility in your life.”

The post Everything You Need to Know About Budgeting As a Freelancer appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com