Freelance is the future of work. One study reports that the freelance workforce has grown three times faster than the overall U.S. workforce. If that growth rate holds steady, more than half of the U.S. workforce will be freelancing by 2027.
This is good news if you’re an online ESL teacher. Chances are, you’re an independent contractor eager to take advantage of the booming gig economy. But beware: Financial security can be elusive even for the most well-paid educators. Here’s why.
Freelancers and independent contractors make 17 percent more per hour than full-time employees in non-freelance jobs. Still, freelancers earn 28 percent less over the course of their careers, mainly because they work fewer hours than their traditionally employed peers. They also pay for everything from health benefits to office supplies, which takes a chunk out of their take-home pay.
Dismal earnings don’t have to become a part of your financial future. Today, we’ll explore these four money management skills that will help you maximize your earning potential:
- Creating a household budget
- Budgeting for taxes and business expenses
- Keeping records of your income
- Tracking unbillable hours
By applying these simple but powerful financial tips, you can start skillfully managing your income in a way that will yield long-term rewards. Ready to become master of your financial future? Read on.
1. Creating a household budget
Unlike traditional employees, independent contractors can increase their earnings at will. If you want to earn more money teaching ESL online, you can open more bookings and attract more students. Unfortunately, that added income will quickly go to waste unless you already have a solid grip on your personal spending. A household budget, then, is an essential first step to becoming a financially savvy freelancer.
First, calculate your monthly expenses. Be sure to include fixed expenses, like debt service and utilities, as well as variable expenses, including groceries, clothing and entertainment. Add a 15 percent buffer to your monthly expenses to cover any unexpected expenditures.
Next, find the balance. Subtract your average monthly expenses from your total monthly income. If you’re operating in the red, use the next step to identify areas where you can cut back.
Set spending limits. Start by differentiating between essential and non-essential expenses. You can’t eliminate your water bill, but you can cut the cord and save a significant chunk of cash. You can also save money on your variable expenses by making frugal choices. If personal debt is weighing you down, consider debt consolidation, which can roll all your debt payments into a single monthly payment.
Finally, track your spending and adjust accordingly. You may find that you’ve overbudgeted in one area and underbudgeted in another. Make necessary adjustments to ensure your budget remains an accurate picture of your household’s income and expenses.
Budgeting can be a time-consuming and cumbersome process. Fortunately, high-tech tools like Mint or Goodbudget can make it easier. Spreadsheet programs like Excel, on the other hand, can be powerful tools for building a budget from scratch.
Once you have your personal finances under control, you can focus on your business expenses.
2. Budgeting for taxes and business expenses
Being your own boss is great, but there is one glaring downside. You have to withhold your own taxes and pay for your own equipment. If this sounds intimidating, take heart. A few easy strategies will help you stay in control of your business finances.
First, though, a brief primer on gross and net income.
Gross income, or pre-tax income, represents your total earnings. This total does not have taxes or other expenses withheld. As a result, your gross income is not an accurate representation of how much money you really have. For that, you need to look at your net income, or the amount of money left over after you subtract taxes and other withholdings.
Separating your withholdings from your income is essential to keeping your business in good shape. This keeps you constantly focused on your net income and gives you an accurate picture of how much money you have to spend.
Setting aside your own taxes may seem intimidating, but it doesn’t have to be if you follow a few simple rules.
Rule 1: Be prepared to set aside at least 25 to 30 percent of your pay for taxes. This covers both income tax and self-employment tax. The latter is considered your FICA tax, which includes Medicare and Social Security. If you’re employed by someone else, your employer withholds these taxes from your paycheck, and they also pay half. Independent contractors, by contrast, are solely responsible for paying the entire amount.
Thirty percent sounds like a lot. But, you’ll appreciate the peace of mind it will buy. Plus, by putting aside more than you think you’ll need to pay taxes, you essentially give yourself a hefty tax return at the end of the year. Vacation, anyone?
Rule 2: Withdraw your tax withholdings from each paycheck, and keep them separate from your personal and business accounts. This eliminates the chances that you’ll accidentally spend your tax savings on this week’s groceries. Keep a record of your tax savings to date, but be careful to exclude your tax withholdings from your operating budget.
Rule 3: Whatever you do, do not dip into your tax savings for any reason, or you risk shortchanging Uncle Sam. You may be tempted to “borrow” from taxes and pay back the money later. But, what if you lose your job? You’re still legally obligated to pay taxes for the income you’ve already earned. Don’t risk it. Leave that money untouched until tax time.
Online ESL teachers rely on a suite of high-tech tools to do their jobs. Yet laptops, headphones, cameras and other equipment can be costly to replace. The solution: Set aside an additional 8 to 10 percent of your income to cover equipment expenses. This eliminates the headache of frantically scrounging for funds when your computer goes kaput.
You should keep this money separate from your household spending, and you should also exclude it from your household budget. But, unlike your tax savings, your equipment savings can be a bit more flexible. Let’s say you need to buy a new iPad, but you don’t have enough money in your equipment account to cover it. You can make the purchase anyway and pay yourself back over time. Best of all, because your equipment budget is separate from your household budget, you won’t have to scrimp on groceries to make up the difference.
3. Tracking your earnings
Tracking outgoing expenses is a critical part of sound financial management. Keeping tabs on your income is important, too. Even if your teaching platform includes a “payment” tab that tracks your earnings, you should still keep your own records. Here’s why.
Late-paying and non-paying clients are a regrettable fact of life in the freelance world, so successful freelancers keep meticulous records and promptly follow up on any late or incorrect payments. Getting into the habit of tracking your own income puts you at an advantage, particularly if you’re looking to expand into other lines of contract work. Plus, it helps you quickly detect billing errors you or your client company may have made.
Track your income on a class-by-class basis. For each class, be sure to include:
- The class date and time
- Your base pay
- Any additional pay incentives
- The finish type assigned to the class
You should also track the total number of classes taught, especially if you get paid more for teaching a certain number of classes per month. Reconcile your records with your company’s records regularly to swiftly find and resolve any discrepancies.
4. Tracking unbillable hours
How much do you actually earn per hour?
To answer that seemingly simple question, you first need to pinpoint how many unbillable hours you accumulate every week. This is the time you spend on activities that cannot be billed to the client. For online ESL teachers, unbillable activities include preparing for lessons and creating learning aids. Almost all independent contractors have unbillable hours, and unpaid time is often essential to the quality of the billable service. But, if left unchecked, unbillable hours can essentially lower your per-hourly earnings. Let’s look at an example.
Suppose you teach 96 hours a month at $20 per hour. That amounts to $1,920 per month before taxes. Sounds pretty good, right? But, now subtract 30 percent of your earnings for taxes and another 8 percent for equipment. Your net income is $1,190.40 per month, or just $12.40 per hour.
Now, let’s factor in your unbillable hours. If you have six hours of unbillable time per week, you’re now spending 120 hours a month on your classes. But, because only a portion of those hours are billable, this lowers your net hourly wage to $9.92 per hour.
Some contractors spend a sizeable chunk of their time on unbillable tasks. But, they also charge much higher per hourly rates. This is why some freelancers charge $70 or more.
For those of us who can’t set our own hourly rates, it’s critical to use our unbillable hours wisely. This time should be devoted primarily to activities that directly affect the quality of the billable service. This includes:
- Lesson planning
- Writing feedback to parents, if required
- Professional development opportunities, like webinars and training
Bookkeeping and business planning don’t directly impact the quality of your work. However, they contribute to the long-term viability of your enterprise, so you should make time for these activities, too.
Other unbillable activities, by contrast, don’t improve either your service or your business. Think carefully before investing time in these activities. If possible, eliminate them completely.
Providing unpaid expertise, especially on a billable product
You may be happy that your company is asking for your input on the lesson you just taught. But, this is really a solicitation for unpaid work. If they use your feedback to improve their curriculum and then charge their clients for it — or, worse, if they hike the price because it’s an “improved product” — consider yourself stiffed. A good rule of thumb: Never offer your expertise unless the company intends to pay you for it.
Creating extravagant props, reward systems and classroom decorations
We get it. That handmade reward system you found on Pinterest would be oh-so-perfect for your next class about land animals. But, before you go nuts with the Tacky Glue, stop and think how much that time will cost you, literally.
Let’s say the project will take three hours, and you earn $18 per hour. That’s $54 worth of your time you’re spending. You can probably buy something similar at more affordable price.
Same goes with your classroom décor. A well-lit and well-designed classroom space is essential to retaining clients. But, do you really need to redecorate every three months? Probably not.
The future belongs to freelancers. Make the most of it. If you learn how to manage your finances, you can gain better leverage over your earnings and build a business that stays strong in the long-term.
What money management strategies do you use? Is there anything I forgot? Leave your thoughts in the comments. And, if you like what you see, please subscribe.