Contracting work can be rewarding—but it can also come with a unique set of challenges. The foremost of those challenges: managing expenses. Contracting work means footing your own bill when it comes to business-related expenses, and while tax deductions can be a bonus at the end of the year, they won't necessarily offset costs.
How can someone working on a contract basis save more money and cut expenses without reducing the quality and consistency of their work?
How to Save Money as You Go
Saving money while making a consistent income isn't rocket science. It often comes down to a matter of proper budgeting and living below one's means. But for contractors—for whom both income and expenses are irregular—saving money isn't so predictable. It requires adopting a "save money as you go" mentality that can make it feel even more difficult. Here are a few tips for saving money with ongoing expenses.
- Always plan out your time. Failing to plan is planning to fail. An effective schedule is flexible and realistic, and it keeps a project moving forward. But it doesn't just happen—effective planning requires real work and preparation. As the Project Management Institute notes, putting more thought into the early phase of a project can save time down the road—which often translates to saving money as well.
- Understand and plan your taxes. Independent contractors new to the idea of working without an employer will soon get a rude awakening: They owe taxes, and no one else will automatically deduct those taxes for them. Tax planning is essential, whether it means adequately estimating taxes throughout the year or keeping track of business-related expenses to reduce the tax bill come tax time. Using a Solo 401(k) to reduce the expenses associated with retirement savings can further help.
- Create financial buffers. Independent contractors should create financial "buffers" in the form of emergency accounts, which can help prevent going into debt to handle emergency expenses. This will help you avoid paying interest in the long term and helps promote peace of mind. This advice usually extends to personal finance, but the same principles hold true in business and contracting.
- Keep the 50/30/20 rule in mind. Many entrepreneurs recommend a 50/30/20 rule: Live off 50% of your income, use 30% for flexible expenses and put 20% into savings. This might seem particularly aggressive, but saving that much money as a contractor can help you build a substantial financial buffer. This can help offset unforeseen circumstances such as periods of low business or even recessions.
How to Save Money by Habit
These strategies will help you save money in general. But what about specific strategies for contractors who have to spend a lot of their money on business supplies? Here are a few tips:
- Choose your business credit cards wisely. Use credit cards that rewards you for purchases where you shop the most often. As a contractor, earning points from your expenses means you'll get more than just supplies for your dollar. These rewards can then be reinvested into your business.
- Buy in bulk when feasible. Buying supplies in bulk means you'll generally have a lower cost per unit—the trick is to know when you'll actually need these bulk items. That's where planning comes in. Does it make sense to purchase a lot of wood, for example, for future use—or are you not sure you'll need it until you know which projects head your way?
- Research, research, research. Want to know what goes into an effective contractor's "planning" phase? Doing lots of research when it comes to prices and quality. That isn't to say you should necessarily opt for the low-expense items, but if you can find high-quality goods at low prices, it will come through diligent effort.
It isn't always easy being a contractor—it can be a life full of uncertainty and instability. But with the right approach and an eye on fiscal discipline, it can also be a life full of financial freedom.