You’ve probably heard a lot of financial advice. Pay yourself first. Build an emergency fund that will carry you for three months. Save 10-15 percent of your income for retirement. Live on what you make and not a penny more.
If you’re a freelancer with a fluctuating income, most of this advice is dead on arrival. For one thing, your cashflow is irregular and arrives in difficult-to-time lumps, which makes it hard to skim 10 percent off the top and put it toward retirement. For another, you’re wary of using a big pay-out to pay down your debt or fund your retirement, only to run up against a delayed payment that sends you scrambling for cash.
So realistically, how does a freelancer build a plan to save for retirement? We sought expert advice to help you manage your finances over the long haul and set yourself up to stop working—or at least work less—one day. Here’s the advice we got in nine steps.
Step 1: Calculate your minimum monthly spend
Unlike full-timers collecting steady paychecks, freelancers can’t automate their way to financial security with recurring transfers or withholdings. So, where to start?
Sean Fox, co-president of Freedom Debt Relief, suggests the first thing freelancers do is estimate their monthly outlays. “Look for trends. Usually, people with fluctuating incomes will be able to see some patterns emerge, when business is a little busier or a little slower during the year,” he said. “They will also understand the absolute minimum amount of money needed to get by on in a month. With that information, it becomes easier to budget for routine expenses and savings.”
Step 2: Budget by listing your recurring expenses in order of priority
Once you know your monthly outlays, set up a budget. Here’s the trick: Start at zero. Do not simply look at the average amount you’ve spent over the last several months. Rather, every expense must be justified and scrutinized and in effect, minimized. (When companies do this, it’s called zero-based budgeting.)
Then order your monthly expenses by priority—housing costs, followed by basic necessities like heat, electricity and food, and then any insurance bills, credit card or car payments, etc. As you get paid through the month, start allocating the money to the most important items on your list and work your way down. When you have good months, you’ll meet all your expenses and be left with spare cash to spend, save or invest (we’ll get to that). When you have bad months, you still ensure that your most important bills are paid and you keep a roof over your head.
The upside here is that you take care of all your necessary expenses and you do not, as financial advisors are often known to say, “pay yourself first.” In fact, you only pay yourself once the basics are taken care of.
Oh, and basics include taxes. Set aside 30 percent or so every time money hits your bank account. You don’t want to come to the end of the financial year and have to scramble to pay the IRS.
Step 3: Establish a buffer account to even out your cashflow
When you have extra money after necessities and taxes, sock it away.
Conventional advice calls for three to six months of expenses in an emergency fund for car breakdowns, accidents, medical bills, etc. But us freelancers? Our emergencies are a lot more frequent and varied. We’re dealing with delayed payments, checks “stuck in the mail,” clients going out of town and forgetting to forward invoices, assignments falling through, magazines that pay upon publication and keep delaying said publication, and on and on and on. This kind of unpredictability must be baked into our financial plan.
Your emergency fund should act as a “buffer” that you dip into—and you should expect to dip—to even out your cashflow during dry months. It’s good to make it as large as you possibly can (9-12 months) so you’re well prepared for unanticipated setbacks. During slow months, transfer the difference between your actual income and your minimum required income from step one into your checking account. During cash-rich months, do the opposite if it’s lower than you’d like it to be. Only when you have a buffer up and running should you move on to other savings—a “real” emergency fund, retirement, health expenses and so on.
Not only will a buffer provide peace of mind, it will liberate you to take on longer-tail projects that may be more in line with your career aspirations—opportunities that you would turn down if you were fully dependent on invoices for cash.
Step 4: Never go into debt to fund your lifestyle.
If you can avoid it, steer clear of debt to fund day-to-day living—especially in the form of high-interest credit card debt. Enough said.
Step 5: Open a tax-advantaged retirement account
Once you’ve established enough savings to cover the month-to-month swings in income, set your sights on retirement. Prioritize this above discretionary spending if you can.
Saving for retirement is a major priority and something freelancers must itemize for in their budgets, said Riley Adams, CPA, senior financial analyst at Google and owner of the financial independence and entrepreneurship site Young and the Invested. It’s also a good way to treat a windfall. “If you know a major payment is coming due on a contract but you haven’t contributed an adequate amount to your tax-advantaged retirement accounts yet for the year, you should strongly consider setting aside money for that purpose before making any discretionary purchases. Continuing to do this over long periods of time will ensure a greater chance of success come retirement.”
Step 6: Treat retirement like any other bill
Saving for retirement is like anything else—you begin slowly, build some momentum, then you start seeing the numbers add up and it starts to feel exciting.
Saving 10 percent of your income and putting it toward debt or retirement shouldn’t be too difficult for most people. As one of my mentors once said to me, “If you can’t live on 90 percent of your income, you can’t live on 100 percent of your income.”
Fox of Freedom Debt Relief recommends thinking of your savings percentage as any other monthly payment. If your income is stable enough, he recommended billing yourself: “Try arranging for regular transfers from a checking to a savings account, for instance. In the budget, record this amount as a regular expense.”
Step 7: Continuously define short-term, medium-term and long-term goals
Retirement, of course, isn’t the only thing you need money for. Once you have a buffer and a retirement account in place, you can turn to other expenses. To name a few:
- Buying a home
- Saving for kids’ college
- Medical emergencies
- Trips abroad
- Investing in your own education and business to stay marketable and competitive
These short-to-medium-term goals must be managed alongside your retirement savings, and sometimes, ahead of them. But how do you decide which savings goal to prioritize and how much to allocate to each?
Fox said this is an individual decision for each freelancer, and something that should be done in consultation with family. “Your goals could range from retirement at a certain age to having time to train for a race to taking an overseas vacation,” he said. “Write them down and build your budget with the goals in mind. You’ll modify along the way (maybe you’ll have to visit Chinatown in San Francisco instead of Shanghai), but you’ll have a plan.”
Step 8: Save every windfall
Big ghostwriting project, book deal or lump-sum payment leave you flush with cash? It’s time to celebrate! Break out the champagne! Time to live large tonight!
Not so fast. Set aside money for taxes first, then you can celebrate. And once you’ve treated yourself to dinner and expensive wine, consider what you’re going to do with the rest of your winnings.
“Because this payment could be one-time, it’s best to immediately top up an emergency fund and then max out any retirement accounts to which you have access,” advised Adams from Young and the Invested. From there, he suggested putting the money towards other financial goals such as buying a house. And if there’s still anything left over, consider investing in assets that will create passive income. “If the payment is sizable enough, you might be able to live off some of the proceeds and have the rest provide income to cover your cost of living.”
What you don’t want to do is fall into the trap of thinking that there is more where that came from. There may well be, and for your bank account’s sake, hopefully there is. But if there isn’t? If your book doesn’t earn out or if your corporate client suddenly goes out of business? That windfall could be your safe harbor.
Step 9: Never assume that you won’t retire
You’re a freelancer. You love your work. I wouldn’t dare even think of suggesting that you consider a future where you might choose to not, well, work in your trade. But here’s the thing: Industries are constantly changing. The same applies to your lifestyle. As you get older, life will happen, illness will happen, travel will happen, unexpected events will happen. The cushion that you create now will allow you to take away the pressure from the work you do then for money.
Far too many writers that I speak to, for example, hold on to the belief that they either cannot retire or don’t want to. Both of these attitudes can prevent you from making the necessary sacrifices today in order to secure your future tomorrow.
Mridu Khullar Relph is an award-winning journalist and author and has written for TIME, The New York Times, CNN, ABC News, and more. She is the author of over a dozen books, including The Freelance Writer’s Guide to Making More Money. She runs the popular website for writers www.TheInternationalFreelancer.com.
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