Replacing Your 9 to 5: A Freelancer’s Guide to Finances

Gone are the days of having to punch a time clock and answer to a boss just to make ends meet. Every year, more people are taking their skills on the road and hanging out their shingles as part of the growing freelance revolution. If you’re thinking about taking the leap of faith and turning your side-gig into a full-time freelancing career, you’re in good company.

While freelancing was once a rare occurrence, it’s now extremely commonplace. In 1989, only six percent of the working population operated under a freelance agreement. Today, 16.5 million people work under the “gig economy,” and a study by LinkedIn predicts that freelancers will make up 43 percent of the workforce by 2020!

While many freelancers find this work arrangement extremely rewarding, replacing the income and benefits that come with a traditional 9 to 5 job can present a challenge. The following three financial moves that will help ensure your transition goes smoothly.

1. Build Up Your Emergency Fund

When you say goodbye to your traditional job, the consistent paycheck is one of the hardest things to give up. Having a sufficient emergency fund before you take the leap is one of the best ways to ease this stress.

Begin by taking an honest look at your expenses. Write down everything you spend money on, including things that only happen once in a while, like doctor’s visits, prescriptions, auto repair, and so on. If you already use a spend-tracking program, like Mint or Quicken, this will be fairly easy. If not, start tracking your spending right away using a phone app, spreadsheet, or a pen and paper. This is the only way to get a true grasp of how much you really need.

Once you have an idea of your average annual spending, subtract things you could do without in a crisis. This usually includes expenses like eating out, bar tabs, new shoes, and maybe even Netflix. What’s left is your bare minimum annual spending need. Your emergency fund should be enough to cover 50 to 100 percent of this number. This will give you six months to a year of wiggle room if you don’t make as much as you anticipate.

If you’ve completed this exercise and found that you aren’t there yet, don’t despair! Open a savings account right away and start squirreling away as much as you can. Look for ways to start freelancing as a side gig while still holding onto your current job. This will give you time to build up a client base while also providing the extra money you need for your emergency fund.

2. Secure Proper Insurance Coverage

Insurance is one of the most expensive benefits employers provide. Failing to plan for proper coverage as a freelancer can have catastrophic consequences. Before you even think about putting in your notice, figure out how much and what kind of insurance you need and get some quotes. Make sure you add these costs into your budget and emergency fund savings goal.

Here are some of the coverages you’ll want to consider.

Health Insurance

Health insurance is a necessity you can’t afford to overlook. Do your research and learn more about the important tax considerations and whether you’re better off getting coverage through the Healthcare Marketplace, a private provider, or other sources.

Disability Coverage

Have you thought about what would happen if you were seriously ill or suffered an injury that prevented you from working? In the traditional workplace, most employees are covered by some sort of disability insurance. When you’re a freelancer, this coverage is up to you. The Freelancer’s Union is a great resource for disability insurance coverage.

Life Insurance

How would your family cope if you passed away today? Do they have enough money to get them through the hard times? Life insurance helps protect your loved ones and sets them up for a secure financial future.

Consider consulting with a financial advisor or a qualified insurance agent to determine how much coverage you need. In most cases, you can get a simple term policy for a small monthly premium and the cost is well worth the peace of mind it provides.

Liability Coverage or E&O Coverage

Depending on what type of freelancing you do, you might want to consider purchasing liability and/or errors and omissions (E&O) policies. These types of policies can cover a variety of misfortunes including accidental injury, a mistake that causes damage to a client, and cyber-security issues. An insurance professional can help you decide which policies are right for you.

Supplemental Insurance

Supplemental insurance policies, like those provided by Aflac, can help cover expenses beyond your medical bills when you’re sick or injured. Since freelancers don’t have the luxury of paid sick days, this coverage can give you extra financial security for a small monthly cost.

3. Establish a Retirement Plan

Once you’ve saved up a solid emergency fund and covered your insurance expenses, it’s time to start thinking about putting money away for retirement. Many employers provide a company retirement plan and offer profit sharing or a match to help encourage employees to save enough fro a comfortable retirement.

As a freelancer, you’ll have to take the initiative to handle your own retirement planning. Until you start turning a solid profit, a traditional or Roth IRA is probably sufficient. As long as you have enough earned income, you can put away up to $6,000 a year if you’re under 50, and $7,000 if you’re 50 or older.

If you have more than that to put away, consider another self-employed retirement plan like a SEP IRA or Solo 401(k). These plans allow you to put away as much as $56,000 per year ($62,000 if you’re 50 or older). It’s always a good idea to consult with a financial advisor and/or a tax professional before deciding which savings plan is best for you. Whatever you decide, commit to making savings a priority and work it into your monthly budget.

Some Final Thoughts

Getting your finances in order before leaving your traditional job will help you thrive during both the ups and downs of your new freelance career. Make sure you have your emergency fund, insurance coverage, and retirement plan under control from the start. This will allow you to focus on growing your business while giving yourself the peace of mind in knowing that you’ve set yourself up with a solid financial foundation.

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Originally published at on February 28, 2019.

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