Whether you freelance or run your own business as an entrepreneur, you work hard to create valuable products and services that clients and customers want. In return, you enjoy the freedom and flexibility that come from running your own show.
There are downsides of making your own living, though. You’re solely responsible for paying your own expenses. And you don’t have an employer to help you build a nest egg for retirement.
That doesn’t mean you should just ignore the challenge of building your own financial security, especially if that is one of your Do Year’s resolutions. Check out our list of easy ways to gain financial stability below.
Building financial security by investing wisely
You can go beyond just saving for necessities like taxes, emergency funds and health insurance premiums. In fact, you need to go beyond saving if you want to build up a nice nest egg for your future.
The rate of return you can get from savings vehicles like bank accounts and money markets is highly unlikely to keep up with the average rate of inflation of 3.22 percent. That’s about twice as much as the average rate of return from a regular savings account.
Inflation is a big part of what causes the cost of goods and services to rise over time. Your $4 latte today will likely cost you double that in 30 years, due to inflation. If you only set aside some of your money in a savings account, you’ll actually end up with less in that account in 30 years than what you started with!
Investing is one great step to take to build your own financial security because average market returns not only keep pace with inflation, but tend to beat inflation (and help you to grow wealth over time).
How freelancers can make investing work
If you want to grow wealth and build financial security, you need to invest some of your earnings. But the idea of putting money into the market can still feel scary, especially if you don’t know where to start (or don’t trust Wall Street).
So let’s break down some basics. Investing wisely starts with taking a long-term approach. The stock market is not a get-rich-quick solution for most people. The faster you try to earn a return, the more risk you take on and the more likely you are to lose your investment.
Instead, invest for the long haul. Doing so means you can contribute small, manageable amounts of money (like a hundred bucks to a thousand dollars per month, depending on your earnings and where you’re at with your business) to an account for entrepreneur and freelancers, like a SEP IRA.
This is known as dollar-cost averaging. Doing this with basic index funds, a type of mutual fund that tracks broad parts of the market, is a great way to start. One of the biggest reasons why is because these kinds of investments offer lower expense ratios, which are the annual fees all types of funds charge to the people who invest in them.
After a period of 20, 30, or 40 years, this method can help your small but consistent contributions add up to serious wealth through compound interest.
When compound interest is a freelancer’s best friend
Compound interest is when your money earns a return, or interest — and then that interest earns more interest. It’s what can help you exponentially grow serious wealth.
Time is the critical factor here. The length of time you can save and invest is even more important than how much you can save and invest. Take a look at the following example to see how:
|Money Saved Each Month||How They Saved||Total Amount of Money in Account After 30 Years|
|Person A||$250||Contributed $250 per month to investment account for 30 years||$283,382.36 (assuming 7 percent return)|
|Person B||$750||Contributed $750 per month for 10 years.||$124,348.03|
Even though Person B contributed way more per month than Person A, Person A ends up with far more over the same 30-year period. Time is a bigger factor to compound interest than the amount you contribute.
Don’t wait until you feel comfortable contributing lots of money each month. If you can only invest $50 per month right now, go for it!
Starting small today will leave you in a better financial position than waiting until you can make big contributions years down the road.
What’s your take? How are you working to build your own financial security for the future as you build your business today? Tell us your story in the comments below—and tune in to our FB Live with Brunch and Budget about financial goals on 1/18 at 4 PM PST!