Freelancing full-time is an increasingly popular career move. Studies suggest half of the American workforce will be freelancers by 2027. Wow.
Of course, there are some important things to consider before you take the professional leap of faith. How you’ll leverage your skill set and network to find business and make bank is a great example.
But it’s also important to factor in your future.
Freelancers are prone to think about immediate needs. “What’s my next big deadline?” “How will I pay my rent?” “Do I have the leftover money for that new, fancy pair of shoes?” However, freelancers don’t have the luxury of a 401(k) or employer-funded healthcare, so it’s a good idea to think several years down the road.
“There’s typically no unemployment, retirement, or paid-time-off benefits,” explains Abbey Woodcock, founder of informational websites Business of Copy and Freelance Co-Op. This means that freelancers need to take it upon themselves to prepare for retirement, time off, or emergencies.”
Overwhelemed? Don’t worry—we’ve broken down five ways to prep your budget for full-time freelancing.
1. Up your rate.
Is it just us, or is negotiating your rate one of the most complicated parts of freelancing? Charge too much, and you may not get the gig. But charge too little? Well, it may not be worth it. Sure, a lot goes into figuring out your rate – and your future should be one of them.
“Just because you made $20 per hour at your full-time job, doesn’t mean you should price your service at $20 per hour,” Woodcock says. “You need to factor in components like payment-processing fees, software, and taxes.”
She recommends making a list of all the overhead costs you foresee coming down the pipeline, including your savings goals. From there, you’ll be able to determine how much you need to cover your expenses, short and long-term.
2. Do the numbers.
So how do you know how much you should save for future expenses like taxes? You’ve got to do the math.
“Just because a client pays you $1,000 doesn’t mean you made $1,000,” Woodcock says. “What is your profit margin on that $1,000?”
Get closer to the bottom line by asking yourself some big questions. How much should you set aside for taxes? A good guide is anywhere from 25 to 30%. Are you saving for retirement? How long do you spend looking for clients? Because every freelancer knows that nobody pays you to hustle. Having a better sense of your needs will give you a better understanding of your ideal rate.
3. D.I.Y. 401(k)
Truth is, everyone will retire. Yes, even you, you super-freelancer. But unless you set some money aside now, you won’t have any dough for your twilight years.
“As a freelancer, saving for retirement rests solely on your own shoulders,” says Kevin Michels, CFP, EA, and fee-only financial planner at Medicus Wealth Planning. “You don’t have an employer matching your 401(k) contributions or doing profit-sharing, in fact, because you don’t have a full-time employer, you don’t even have access to a ready-made 401(k) plan.”
Don’t panic, you have some options. Michels says freelancers can either utilize an Individual Retirement Account (IRA) or set up their own 401(k) plan. You might want to talk to your financial planner – or money-savvy uncle – but Michels explains a couple of ground rules:
- Opening up an IRA is simpler than opening up a self-employed 401(k) and should be done if you don’t plan on saving more than $5,500 for the year.
- If you’re able to save more, you can open up a self-employed 401(k) and contribute up to $18,500 for the year. Additionally, you can contribute up to 25% of your eligible earnings as a profit-sharing contribution. Between both contributions, you can max out a self-employed 401(k) plan at $55,000.
- Self-employed 401(k)s are fairly easy to set up and should be done at one of the major discount-brokerage firms like Fidelity or Vanguard. Some of these companies allow you to set it up all online, while others require you to fill out a few simple forms.
- In addition to a Traditional/Roth IRA and a self-employed 401(k), you could also consider setting up a SIMPLE IRA or SEP IRA instead.
4. Build a rainy day fund.
Dreaming of backpacking through Europe for two months straight? Itching to start your own website or company? Planning to start a family? Well, you’re going to need some money. That’s what’s so great about a rainy day fund (aka emergency fund, F-U fund …we’ve heard ’em all) –you can do whatever you want with the money you set aside.
“You should have enough in a savings account that you can say ‘no’ or refund a client for any reason, whether you have a family emergency or want to look for new clients,” Woodcock says. “Money should never keep you tied to a bad situation.”
Woodcock recommends having six months of living expenses in your bank account, but you can’t acquire that much overnight. Start by setting aside $25 to $50 each week. It doesn’t seem like a lot, but, trust us, it adds up.
5. Take a health check.
One of the biggest questions most people have about freelancing is healthcare – and for good reason. Even if you’re not booking a series of annual checkups or experiencing a medical emergency, having a solid healthcare plan will give you some much-needed peace of mind.
To answer the question once and for all: Yes, freelancers are able to get their own healthcare. While there are plenty of companies like Oscar that demystify the whole experience, Michels says you can sign up for insurance through your state or federal exchange. And, depending on your income and size of your family, he adds you can also apply for a subsidy through the government.
So, how much are you supposed to save?
“When picking their plan, freelancers should make sure they have enough money to cover their deductible and out-of-pocket max if they ever face a medical emergency,” Michels says.
5. Leverage free (and almost free) resources.
One price you don’t have to negotiate: free! An easy way to save money is to tap into the abundant free resources available to freelancers online.
How do you budget for the future as a freelancer? Tell us in the comments below!