At first glance, freelancing sounds appealing, perhaps even trendy. Without a doubt, the gig economy comes with freedom to choose clients and projects, flexible working schedule, and greater opportunity to set your rates. However, once you become a self-employed earner, it won’t take long before reality hits you.
As a freelance professional, you could miss out on some of the employee-sponsored benefits, such as sick pay, maternity leave and death-in-service. You’ll need to cover these benefits for yourself and create a viable path to your financial security.
So how can you create a long-term financial plan whilst tending to your freelancing duties? Here’s a freelancer’s guide to achieving financial security.
Establish a Baseline Income
Every freelance – from writers to graphic designers – should know how to price their work. Whether you decide to charge an hourly rate or on a project basis, you need to establish a baseline rate. Basically, this is the minimum rate you’re willing to work for.
As a general rule of thumb, your baseline income should account for your professional expenses, such as internet bills and equipment, office space and regular expenses like food, clothes and rent. Freelancers should prioritize on being debt-free in order to build a solid financial strategy.
Meanwhile, it’s advisable to raise your baseline rate as your skills and experience increase. Raising your rates accordingly will allow you to put the extra money towards your financial independence.
Cut Unnecessary Expenses
Oftentimes, a freelancer’s income varies each month. It’s in your best interest to calculate your average monthly budget and strictly follow it. Auditing your expenses, both personal and business, is a smart move when it comes to achieving your financial security goals.
By doing so, you will avoid spending money foolishly on things you don’t really need. Slashing miscellaneous personal and business expenses also helps avoid falling into debt. Debt not only affects your current income but also your ability to secure financial services in the future.
If you borrow money and default on repayment, you risk getting a negative credit score. This makes it harder to access loans in the future. So instead of going into debt to fund your lifestyle, cut stupid expenses and reroute them to your savings account.
Don’t Forget Insurance
If you got terminally ill or passed away today, would your loved ones suffer due to a lack of your income? Life insurance for the self-employed may seem like an unnecessary cost when there are other expenses to take care of. But accidents happen—and it’s better to be prepared.
Unlike a traditional salaried job, freelancing doesn’t include a life insurance benefit. Therefore, it’s important to protect yourself and your loved ones should anything ever happen. There are two main types of life insurance: term life and Whole of Life.
Term life insurance is temporary and provides coverage for a specified period, usually 10-30 years. Whole of Life insurance is permanent and provides lifelong coverage. You can choose either of these policies depending on your needs and budget. You can buy life insurance directly from an insurance company or through a financial adviser.
Set Emergency Savings Fund
It’s no secret that freelancing is a roller coaster ride. Freelance income flows in direct response to a multitude of factors, such as the seasonality, economy, and changes in a client’s needs. You’ll need to put in place an emergency savings fund to respond to any unexpected events.
It’s advisable to use a high-yield savings account to store and build your liquid savings for future events. High-yield savings accounts pay a higher than average yield, meaning that your funds won’t be sitting completely idle. They allow you to reach your goals faster.
Plus, in case of any cash flow issues, it’ll be easy to access your funds. Aim to save at least six months of money on hand. The more you save, the better for you.
How Prepared Are You Financially?
Financial planning is essential to your long-term stability as a freelancer. You might assume that you don’t need to plan your finances as you won’t retire from the trade. Well, life happens. As you get older, you may fall sick and unable to work anymore.
Besides, here’s the thing: freelancing is constantly changing. The technology is rapidly growing and your skills may be replaced by AI in the future. So what will you do if such unexpected events happen?
To cushion yourself from the uncertainties of the future, map out your short- and long-term financial goals now. Make the necessary sacrifices today to achieve your financial security for tomorrow!