Those turning to freelancing or contract work have driven one of the fastest growing and robust areas of the labor market. In the past few years, with the labor movement in flux due to COVID-19 and the so-called Great Resignation, the number of people who performed contract or freelance work in the US reached 59 million, 2 million more than what was tracked in 2019.
But for those new to freelancing, it’s vital to secure your finances to make it a long-term career or simply use the work while you discover your next gig.
Of course, the numbers around freelancers are skewed. While 36% Americans reportedly work as full-time freelancers, the percentage of people that truly view it as a career choice will vary from those that plan to work in this capacity for the foreseeable future all the way to those that only plan to do so while they look for a full-time job.
How you view your freelancing career will certainly impact the way you plan your finances. The longer you expect to go it alone, the more of these steps you should take. Having the right approach, depending on why you became a freelancer and what your long-term goals are, will help protect your financial picture.
Viewing it as a short-term gig
For many, the route to freelancing is one of last resort. Instead of seeing it as a lifestyle pursuit, it actually serves as a way to protect the finances until the first or next job opportunity arises. It’s the fourth most cited reason for turning to freelancing. For those over 55, it’s a particularly important side hustle during the job search, since the average length of time to find the right gig can last weeks longer than those of younger workers.
If you’re in this situation, then you need to find a way to cover your expenses while giving you enough free time to search for a full-time role. This requires you understanding how much you need monthly. By looking at your spending, you can determine the amount of funds that you require to live your life – accounting for food, fixed costs, and other needs. These should include the costs that you cannot live without or have little flexibility in reducing. For example, your rent or mortgage costs won’t change simply because of your shift to freelancing – you need to account for that in your budget. Same with food, utilities and other needs.
Also look for ways to cut back spending, whether it’s reducing the number of streaming channels you have or other subscriptions. You can always restart these expenses once you land the full-time gig.
With that number, seek out work that can cover it. Reach out to old colleagues and bosses to see if they have work that you can take on. If it takes 20 hours a week to accomplish covering your expenses, then you can use the additional time to search for that full-time role. And, who knows, the work with past colleagues could also land you a job.
Like freelancing for now, but up for anything
Many others turn to freelancing as a best choice among two evils. Instead of viewing it as a lifetime pursuit, it’s more of a tactic to get out of a bad situation or career while they figure out what to do with the rest of their life. About one-in-five that turn to full-time freelancing, it’s seeking to escape a bad situation that drove them to do so.
This person does not know if their freelancing career will last a few months or years. Because of this unknown, they must begin acting as if they will continue in their contract pursuits for the foreseeable future. To ensure security, it requires building an emergency fund.
Building the emergency fund can ensure you have protection in case certain months of work are slower than others. Plus, it protects you from turning back to a bad job solely because you fear you’re near running out of money.
When working a normal nine-to-five, having three to six months of expenses stocked away in an emergency fund can provide the protection you need. Typically, there’s severance, in case a downsize occurs, which adds more protection to the finances. But when freelancing, moving the emergency fund to six months or more in an easily accessible account, like a savings account, will give you flexibility in case unexpected expenses rise or if work suddenly slows.
You can build this up, once you’ve obtained clients, by paying yourself a certain amount each month, whether that’s $3,000, $4,000, $5,000, $6,000 (after accounting for taxes) or more, depending on your industry, initial success, experience and expenses. When you begin to make more, continue paying yourself the initial amount until you’ve reached enough in savings to have a sizable emergency fund.
By having this in place, you don’t have to worry about taking a bad position, instead allowing yourself to focus on what you truly want to do.
This is my career, I’m sticking with it
By far, the reason that most people become freelancers: to work for themselves. This freedom comes with upsides, like setting your own schedule. There are significant downsides as well, like the lack of paid time off. But in order to make this work, you not only need to have a clear pathway to clients, you also must have a strong handle on your financial plan.
Besides understanding your budget and setting an emergency fund, the full-time freelancer must consider retirement. By saving for long-term goals, it can grow your net worth, reducing the pressure on a month-to-month basis. Plus, doing so ensures you keep more of the money you make.
By setting up a solo 401(k) or SEP-IRA, you can then treat saving as if you worked within an office. Every month, you can automatically send some of your funds to a retirement account that invests in a target date fund or a series of mutual funds. And you can also deduct from taxes significantly more than traditional workers; up to 25% of your compensation or $61,000 a year.
It gives you a chance to both earn more in the short-term and grow funds for the long-term. By doing so, you can turn this career decision into a life-long pursuit.