Embarking on the journey of financial planning for gig workers is a necessity for independent contractors and freelancers navigating the gig economy. Beyond the basics, the irregular income and lack of traditional benefits underscore the need for a proactive approach to financial management. This blog post is your guide to actionable tips specifically crafted to aid in planning for the future amidst the uncertainties of gig work.
Explore crucial topics such as building emergency savings, navigating retirement planning, handling taxes, and more. By implementing these targeted financial planning strategies, you can establish a foundation of security to weather the fluctuations in income. Dive into the insights that follow to discover the key actions empowering you to take control of your financial trajectory as a freelancer. Through strategic foresight and disciplined planning, you can foster financial resilience in the face of the challenges posed by inconsistent gig work.
Track Your Income and Expenses
If you want to effectively manage your finances as a freelancer, the first step is to track your income and expenses. Create a simple spreadsheet to log all payments received from clients as well as business and personal expenses. Record the date, amount, and client or expense category for each transaction. Tally up your income and expenses at the end of each month to determine your profit or loss.
Identify Inconsistent Income Periods
As a freelancer, your income may vary from time to time. Review several months of income data to identify any patterns in your cash flow. You may notice certain months where your income dips due to seasonal changes or client payment cycles. Plan ahead for these inconsistent income periods by setting money aside during profitable months to cover essential expenses.
Look for Potential Cost Savings
Analyzing your expenses may reveal opportunities to cut costs. Look for expenses that seem disproportionately high and see if you can search for ways to reduce or eliminate them. You may also notice expenses for services or subscriptions that you’re no longer using. Cancel them immediately to avoid paying unnecessary fees. Finding even small ways to trim your budget can help you keep more of the money you earn during good months.
Set a Budget Based on Your Income and Expenses
Having a clear picture of your income and expenses, you can set a realistic budget. If your income fluctuates, base your budget on your average monthly income over the past 6-12 months. Track your actual income and expenses against your budget each month and make adjustments as needed to account for changes in your cash flow. Following a carefully crafted budget will help ensure your finances stay on track.
Build an Emergency Fund
As a gig worker, building an emergency fund should be your top financial priorities. Your emergency fund will act as a financial cushion in case of unexpected expenses like hospital bills, medical bills, home or car repairs, or loss of income. Having access to cash reserves can help ensure you avoid going into debt or struggling to pay for essentials during difficult times.
Set a Savings Goal
A good rule of thumb is to save up enough to cover 3 to 6 months of essential expenses like rent, food, and transportation. Start by saving at least 10-15% of your income each month. Automate transfers from your checking right to your savings account so you pay yourself first before paying any bills. Any windfalls like tax refunds or bonuses should also go straight into your emergency fund.
Keep the Money Liquid
The money in your emergency fund should be easily accessible, so keep it in a savings account. While the interest rates on savings accounts are low, the goal here is liquidity, not growth. Look for accounts with no monthly fees and low or no minimum balance. Some online banks offer higher interest rates and charge fewer fees.
Use the Money Only When Needed
The emergency fund is only for real financial emergencies. Avoid the temptation to use the money for non-essentials like vacations, hobbies, or entertainment. Only withdraw money from the fund when you have an unforeseen expense and no other way to pay for it. Once you use any of the money, make replenishing the fund a top priority again.
With discipline and time, you can build a robust emergency fund to help insulate you from financial hardship. An emergency fund may not seem exciting, but it will give you peace of mind knowing you have a financial safety net in place. For gig workers and freelancers, that kind of stability is invaluable.
Open a Solo 401(k) or SEP IRA
As a freelancer, saving for retirement is entirely up to you. A Solo 401(k) or SEP IRA are two excellent options for gig workers to set aside funds for the future in a tax-advantaged account.
Solo 401(k)
A Solo 401(k), also known as a Self-Employed 401(k), allows you to contribute up to $19,000 as an employee in 2020, plus up to 25% of your self-employment income as an employer, up to a combined maximum of $57,000. Any contributions you make can be either pre-tax or Roth. A Solo 401(k) offers more flexibility and higher contribution limits than a SEP IRA. However, it does require more paperwork to establish and maintain.
SEP IRA
A Simplified Employee Pension (SEP) IRA is also a great choice for the self-employed. You can contribute up to 25% of your self-employment income, up to $57,000 in 2020. Contributions are made pre-tax, allowing them to lower your taxable income for the year. A SEP IRA is very easy to set up and maintain, with minimal paperwork required. However, it typically allows for lower contributions than a Solo 401(k).
As a freelancer, saving enough for retirement is challenging but critical. Opening a tax-advantaged retirement account tailored for the self-employed, like a Solo 401(k) or SEP IRA, is a savvy move to maximize your savings and take control of your financial future. Meet with a reliable financial advisor to determine which option is right based on your income, age, and retirement goals.
Look Into Health Insurance Options
As a gig worker, you are responsible for securing your own health insurance. There are several options to consider:
Private Health Insurance Plans
You can purchase an individual health insurance plan directly from an insurance company. Shop plans on the health insurance marketplace in your state to compare costs and coverage. Plans range from basic catastrophic coverage to comprehensive plans. Factor the premiums, deductibles, and out-of-pocket costs into your budget.
Public Health Insurance Programs
If your income qualifies you, public options like Medicaid or the Children’s Health Insurance Program (CHIP) provide low-cost or free coverage. Some states expanded their Medicaid programs under the Affordable Care Act. Check if you qualify based on your state’s income requirements.
Health Care Sharing Ministries
Health care sharing ministries are faith-based programs where members share medical costs. Members make monthly contributions that are used to pay other members’ health care costs. These are not insurance plans but can provide an affordable option for some. However, there are risks as there are limited guarantees of payment.
COBRA
If you recently left a job where you had health insurance, you may be eligible to continue those benefits for 18-36 months under COBRA. While COBRA provides comprehensive coverage, the premiums can be significantly higher than other options. COBRA is best used as a temporary bridge between jobs.
As a gig worker, shopping for health insurance requires research to find an affordable plan that meets your needs. Compare all options based on factors like premiums, deductibles, coverage limits, and provider networks to choose a plan that is within your budget and health care priorities. With diligent planning, you can secure health insurance and gain valuable financial protection.
Consider Incorporating
Tax Advantages
As a gig worker, incorporating your business allows you to take advantage of certain tax benefits. By incorporating, you can deduct certain business expenses to lower your taxable income. You may be able to deduct home office expenses, travel, and vehicle costs. Incorporating also allows you to set up tax-advantaged retirement plans, like Solo 401(k) or SEP IRA. These plans allow you to contribute significantly more than a traditional IRA.
Liability Protection
Incorporating your gig work business, whether as an LLC or corporation, establishes a legal distinction between your business and personal assets. This provides a degree of liability protection in the event your business faces a lawsuit. Your individual assets such as your home, vehicle, and bank accounts are protected from business liabilities and legal judgments.
Nevertheless, there are instances where personal liability may apply to business debts and claims. Seeking advice from an attorney is recommended to gain a thorough understanding of your liability protections.
Professional Credibility
Formally incorporating your gig work business helps establish your credibility and professionalism. Having “Inc.” or “LLC” after your business name signifies you have taken the proper steps to legally establish your company. This can help inspire confidence in clients and customers that you are operating a legitimate business. Some gig work platforms and private clients may actually require you to have a registered business entity before engaging your services.
While incorporating provides significant benefits for gig workers and freelancers, it does come with additional responsibilities and costs. You will need to file annual reports to maintain your incorporation and pay higher taxes like self-employment tax. For some, the extra effort and expense may not outweigh the benefits. You need to evaluate your own situation to determine if incorporating is right for you. If you do decide to incorporate, be sure to work with a tax professional to set up your business properly.
Automate and Streamline Your Finances
Set Up Automatic Payments
As a gig worker, inconsistent income means manual bill payments each month. Automate as many bills as possible to ensure on-time payments and avoid late fees. Set up automatic payments for rent, utilities, insurance premiums, and any other fixed monthly expenses. For variable expenses like credit cards, set a reminder to pay at least the minimum amount due a few days before the due date.
Use Budgeting Software
With fluctuating income, budgeting is essential for gig workers. Use an app like Mint, You Need a Budget (YNAB), or EveryDollar to track income and expenses. These tools make it easy to create budgets, see reports, and ensure you stay within budget each month. They can sync transactions from your accounts to automatically track and categorize spending. Review your budget and reports regularly to make adjustments as needed.
Open a High-Yield Savings Account
A high-yield savings account lets your money work harder for you. Look for an account with an annual percentage yield of at least 1% or higher. Use this account as an emergency fund in case you have a slow month. You can also use it for short-term savings goals. The higher interest rate will allow your money to grow faster over time compared to a traditional savings account.
Consider a Side Hustle
For extra financial security, consider additional side work for a steady stream of income. A few hours of work per week can generate $500 to $1,000 or more in additional monthly income. You can leverage your existing skills for freelance work or explore other options like online tutoring, market research studies, website testing, or online surveys. Build up your side hustle over time and the extra money will help ensure you can cover essential expenses even during slow months.
Following these steps to streamline your finances will provide greater financial stability and security for any gig worker. Automating payments, using budgeting tools, opening a high-yield savings account, and establishing a side hustle are all effective ways to plan for the uncertainty that comes with freelance work. With the right systems in place, you can thrive as an independent worker.
Invest for the Long-Term
As a gig worker, having an emergency fund and managing your cash flow are critical for short-term financial security. However, to achieve long-term financial stability, you must invest your money to allow it to grow over time through compound interest. The sooner you start investing, the more your money can work for you.
Start with retirement accounts
If your gig work offers access to tax-advantaged retirement accounts like an IRA or 401(k), contribute enough to get any employer match offered. These accounts allow your hard-earned money to grow tax-free or tax-deferred for decades. Index funds and ETFs are simple, low-cost options suitable for long-term investing.
Build a diversified portfolio
Don’t put all your eggs in one basket. Invest in a mix of bonds, real estate, stocks, precious metals, or other assets based on your financial goals and risk tolerance. A diversified portfolio will provide the best opportunity for solid returns over time. You can invest in the stock market through index funds and ETFs or use robo-advisors that will invest your money for you.
Increase contributions over time
Start by investing whatever amount you can to get into the habit. Then, increase your contributions by at least 1-2% each year as your income rises. Small but regular increases will add up significantly over time through the power of compounding.
Rebalance periodically
The allocations in your investment accounts can shift over time due to market changes. Rebalancing involves selling some of the assets that have gained value and using that money to buy more of the assets that have declined in value. Rebalancing helps ensure your money remains allocated appropriately based on your financial goals. For most investors, rebalancing once a year or when allocations shift by 5-10% is sufficient.
Investing for the long term requires a lot of patience and discipline. However, by starting early, keeping fees low, diversifying properly, and increasing contributions over time, you can build wealth and achieve financial security as a gig worker. Staying committed to your investment strategy through market ups and downs will serve you well in the decades to come.
Find an Accountability Partner
As a freelancer, it can be easy to lose motivation or procrastinate without colleagues or managers monitoring your progress. To help stay on track, find a reliable accountability partner. This is someone else in a similar field or career path you trust, who can check-in on your goals and milestones. You do the same for them in return.
Look for an accountability partner through online communities and networking groups in your industry. Explain that you’re looking for someone to connect with regularly to share your goals, deadlines, challenges, and wins. Be open about what you hope to gain from the partnership, e.g. staying productive, bouncing ideas off each other, sharing resources. Find someone with a complementary skillset who you respect.
Once you’ve found a willing partner, determine how you’ll communicate and check-in. This could be via weekly phone or video calls, or simply messaging on a regular basis. Share short term goals, deadlines, and metrics to keep one another on track. Be open to feedback and hold each other accountable if goals aren’t progressing. However, remain constructive and encouraging. This type of partnership works best when built on mutual trust and respect.
While an accountability partner isn’t a manager, their support can help you achieve maximum productivity and success as a freelancer. With someone invested in your progress, you’ll find more motivation to accomplish goals and push through challenges. Likewise, offering your support to another freelancer in return creates a mutually beneficial relationship and an additional layer of work-life balance. Finding the right accountability partner could be one of the best steps you take for your freelance career.
Financial Planning for Gig Workers FAQs
As a freelancer, you likely have many questions about how to effectively manage your finances. Here are some of the most frequently asked questions regarding financial planning for gig workers:
How much should I charge for my services?
When determining your rates, consider your level of experience, education, skills, and typical rates for similar freelance work. You’ll also want to factor in your business expenses. It may be helpful to research standard rates for your industry to determine a competitive yet sustainable price range.
How do I find new clients?
Some effective ways to find new freelance work include:
- Building a professional website to promote your services.
- Creating profiles on freelance websites like Upwork, Fiverr, and Freelancer.
- Networking on LinkedIn and other social media platforms.
- Contacting former employers, colleagues, and professors who may know of opportunities.
- Joining relevant professional organizations and online groups to make industry connections.
-Attending conferences, meetings, and events related to your field.
-Cold calling or emailing prospective clients to pitch your services.
How do I keep records for tax purposes?
As an independent contractor, you are responsible for keeping thorough records of your income and expenses. Some recommendations:
•Maintain records of all payments received from clients including invoices, contracts, and 1099 tax forms.
•Save receipts for any business expenses like supplies, travel, phone/internet, and insurance costs.
•Keep a mileage log to record business-related travel. You can deduct mileage at the IRS standard rate.
•Consider using accounting software like QuickBooks Self-Employed to help organize your records.
•Consult an accountant for guidance on what documentation you should keep for tax filing. Records should be maintained for at least 3-7 years.
•You will need to pay self-employment tax (Social Security and Medicare) and may need to make quarterly estimated tax payments. An accountant can help determine your tax liability and ensure you avoid penalties.
With diligent financial planning and record-keeping, you can gain more control over your freelance finances and set yourself up for success as an independent contractor. Be sure to also build an emergency fund, pay off debt, and contribute to retirement savings when possible. If you have additional questions, consider speaking to a financial advisor.
Conclusion
Financial planning for gig workers is key to survival in an inconsistent income environment. Implementing the advanced strategies around budgeting, taxes, investments, and insurance outlined here will help you build stability and thrive over the long-term. Though it requires diligence and commitment, taking control of your finances will give you peace of mind and allow you to focus on doing your best work. The steps you take today to shore up your financial foundation will pay dividends for your future, letting you weather any storms and find success on your own terms. With smart planning and execution, you can make the gig economy work for you.