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Financial Planning Tips for Contractors

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Financial Planning Tips for Contractors 1

Financial Planning Tips for Contractors 2

Understanding Your Cash Flow

When you’re working as a contractor, income tends to fluctuate from month to month. One month you might have several well-paying jobs, while the next, you might only have one or none. Planning out your finances ahead of time can help reduce stress and ensure bills get paid on time. To do this, you need to have a good understanding of your cash flow.

Income and expenses should be tracked using a spreadsheet or a financial app, this will help you identify patterns of income and spending, which will help you properly budget for your essentials. Once you have some historical data gathered, you can predict future income and prepare for slower months or periods of downtime. Find extra information on the subject in this external resource we suggest., keep learning!

Building a Financial Cushion

Once your income and expenses are tracked, plan to set aside a portion of it into an emergency fund. This should be a bill-like obligation to yourself that you leverage throughout, as various expenses or financial pitfalls appear.

The goal is to save enough to cover three to five months of expenses. While it may take time to get to that point, putting away as much as you can, even if it’s only $50 or $100 per month, will add up and offer peace of mind when those rainy days arrive.

Tax Preparation

As a contractor, tax planning can be a little bit more complicated than just your regular W-2 employee return. Firstly, you should be setting aside your tax obligation funds for each month as traditional employees do not have the same responsibility. Secondly, avoid penalties and prepare for quarterly estimated taxes, by saving 25% to 30% of each paycheck in your tax savings fund. When income is not taxed before receiving your paycheck, as in traditional employment, it is essential to set aside a portion of your income for tax purposes.

You may wish to enlist support from a tax professional to ensure that you are in compliance with all tax laws, and help you understand the tax deductions specific to your line of work.

Retirement Planning

Good news! As a contractor, you are not excluded from Retirement savings. It is highly recommended to take advantage of an IRA with automatic monthly deductible contributions. Depending on your financial situation, look into Traditional or Roth IRAs to determine which is best for you.

Contributions to your IRA can be based on a percentage of your income, thus pick a percentage that allows you to save, and maintain your living expenses adequately. Planning for retirement is equally important for everyone, so starting early, even at a low percentage, will only help secure that financial freedom you need in retirement.

Preparing Your Future

Lastly, work on creating multiple income streams to add to your gig work. It is not uncommon for a contractor to have various streams of income to have consistent earnings. Building supplemental income can offer options to bolster savings, pay down debts, or invest.

You might consider setting up a consulting business through each contract, selling various products, or providing a service with skills beyond your project scope. However, never overload yourself and always ensure to balance your profitable pursuit with your time.


As a contractor, it is essential to take hold of your finances. It is a good practice to track your cash flow, delegate an emergency fund, plan for taxes, start a retirement fund, and prepare for the long run.

By taking these steps, contractors can maintain control of their finances, work on growth-focused opportunities, and overcome any financial obstacle they might face. Essentially, prudent financial planning can help to ensure contractors thrive and remain confident in the trajectory of their career. Looking to delve further into the topic? contractors for accountants, external material we’ve put together for you.

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