One of the biggest challenges of working as an IT contractor is losing the reassurance and security that comes from receiving a fixed pay packet at the end of the month. While many IT professionals choose to go the contractor route to increase their earnings, they do open themselves up to weekly, monthly and annual fluctuations. For that reason, careful budgeting is essential.
A budget plays a crucial role in helping IT contractors live without a guaranteed income and still maintain their quality of life, even during periods between contracts. But how should you go about creating a budget you can rely on? These are our top tips…
One of the most important parts of any IT contractor budget is determining a fair and realistic day rate – one that you’ll be happy to work for and which will allow you to achieve your goals. This can be done by calculating how much you need to earn to live comfortably and factoring in the market rate for your skills.
If you already have a contract in place then it’s much easier to work out how much you’ll earn versus the cost of bills and living expenses. You should also aim to put some money aside every month in case it takes time to find your next role.
Every IT contractor must choose the type of legal structure they want to work under. This will affect the proportion of earnings you take home, so it’s something you must decide before you can create a reliable budget. You have two options open to you, either operating under an umbrella company or creating a limited company.
The structure you choose will impact your earning potential as contractors operating as limited and umbrella companies are taxed in different ways. There may also be restrictions on the structure you can choose based on the type of contract you have and the work you do.
These are some of the other main umbrella and limited company considerations.
At one point or another, despite being in extremely high demand, most IT contractors will experience a period where they are without a contract for longer than they might like. Alternatively, you might experience a period of ill-health. For that reason, it’s essential to factor savings into your budget of between 10-20 percent of your take-home pay.
While savings might be something those working as employees can afford to dip into and spend, contractors should consider a proportion of their savings as money they no longer have. That will ensure there’s always a buffer in place in case of a rainy day. Having sufficient savings to maintain your quality of life for at least six months should be considered a minimum.
If you can think of nothing worse than creating yet another spreadsheet, take a look at some of the apps and other software that’s available to help you manage your finances as an IT contractor. There are plenty of budgeting tools out there, but as a starting point, you might choose to look at:
Although different budgeting tactics work for every IT contractor, we think these tips provide an excellent starting point to make you more aware of your income and expenditure and help cover those leaner times. Be sure to get expert contractors’ budgeting and financing advice from our partners at Parasol, Giant, Income Management and PayStream.
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