When you make the leap from full-time to freelance, you abandon the idea of trading your time for money. Sure, you still charge an hourly rate, but your freedom to choose projects that align with your professional goals is worth so much more than that. Accepting that youre the one in charge of your income and growth is incredibly freeingand it can also be terrifying.
In saying goodbye to your employer, you also said goodbye to a flush retirement account in exchange for decades of employee loyalty. Who wants to wait forty or so years to truly live life anyways? The beauty of being on your own is that you can live your best life at this moment or whenever you feel like youre ready.
That being said, everything worth having takes patience and planning, and your take-a-break-from-work plans are no different. That goes for buying a house, college education funding for your family, and taking a year off to travel, too. Whatever your dreams are, chances are theyll need money to make them happen. Investing is your path to funding your goals.
Business in the front, party in the back
In whichever manner you decide to do it, keep your finances separate. When your invoices come in, deposit them in your business account and when you buy groceries, use your personal one, etc. By dividing your accounts and keeping your finances in the best order that they can be in, youll ensure that youre not muddying the waters of how much you really earn. (Bonus: it is beyond helpful at tax time.)
For lots of freelancers, their businesses are entirely self-funded, so when some money does start trickling in it goes toward paying back credit cards or re-upping the coffers. Beware of this bad habit. Always pay yourself, always. Then you can decide what to do with the money, based on your goals and objectives. Its a slippery slope to automatically dedicate earned income to past debts it creates a scenario where youre working hard but not seeing the fruits of your labor and are always behind.
Separating your business and personal finances doesnt end at the transactions. Your personal goals and business goals should be running on different tracks as well. When you create a consistent income for yourself, you can create plans to run alongside the income.
First things first
Before you begin investing, you need to have a safety net in place. For most people, a $500 to $1,000 mini-emergency fund will suffice, but for freelancers, its advised to stash away three to six months worth of living expenses. Because your income will fluctuate and little emergencies will pop up, you need this account in place.
Stash the money somewhere liquid, but not too accessible. Also, put some thought toward what constitutes an emergency. A new laptop when yours mysteriously kicks the bucket? Yes. A new laptop because you are tired of the one you have? No. If a new laptop is something that you want, plan for it. Set up a separate account and contribute regularly to and pay cash and keep your emergency funds in place.
Freelancer retirement strategies
Retirement planning is at the forefront of most investors minds, and as well it should be. Its the largest goal youre likely working toward and requires the most planning and strategy. There are many retirement investing options available to those who are not attached to a formal 401k arrangement: Traditional, Roth, and SEP IRAs, independent investments in ETFs, annuities, and index funds are just a few. Each investment option comes with its own pros and cons; its important to know which is best for your situation.
Traditional IRA
A traditional IRA is an independent retirement account that allows investors to exercise control over their retirement. A pro for the Traditional IRA is that the growth is tax-deferred. You pay taxes on your investment gains only when you make withdrawals in retirement. A con is that once you reach age 70, you’re required to start taking distributions from your accountand then pay those taxes.
Roth IRA
Just like a Traditional, a Roth IRA offers totally tax-free growth on your retirement savings. The pros are that you invest the money now, after its already been taxed, and pay nothing upon withdrawal. The cons are that the limits are pretty lowjust $6,000 for 2020 ($7,000 if youre over 65).
SEP IRA
The Simplified Employee Pension IRA, or SEP, is a type of traditional IRA that lets self-employed people and small-business owners save up to $57,000 in 2020 toward retirement. A huge pro with a SEP IRA is that contributions are tax-deductibleincluding those made into your employee accounts. One con for sure is the mandatory distributions at 70, like those associated with a traditional IRA.
Annuities
An annuity is a product sold by insurance companies. You pay for the annuity through a lump sum or by making payments over time, then the insurance company invests your money, paying you the residuals at the end of the term. One giant pro is that an annuity has the ability to pay out regular payments each month. These payments could provide a supplemental income during your retirement, even enough to cover your regular expenses. These are complex arrangements orchestrated by an insurance company and as such, come with high fees. Most will have administrative fees, mortality, and expense fees that cover the costs and risks of insuring your money.
Stock market
When you buy stock, which is a share of a company, and that company does well and issues you more payments, you earn dividends. Weve all heard stories about people getting in on the ground floor with massive companies like Apple and Google and then making incredible amounts of money, and all investors hope that will happen to them. However, it’s important to remember that anything with this much possibility for reward will require significant risks as well.
One of the ways to mitigate that risk is by diversifying your portfolio. The idea behind diversification is that having a variety of investments will yield a greater return while assuming lower risk.
Many investors practice diversification by curating a portfolio of stocksperhaps including some known performers, like Amazon and Alphabet (Googles parent company). You can also do this by investing in companies you believe in, and using a combination of first-hand knowledge on a category, additional research, and insights gleaned from trusted friends and experts.
To think big you might have to think small
A stock is a small piece of a company. Stocks are measured in shares, and shares are assigned values based on buy and sell value. Some stocks, like penny stocks, have very low prices per share while others can cost more than $1,000 per share.
It used to be that an investor could only buy into a company if they could afford an entire share. That has all changed with fractional investing, which is the process of slicing shares into tiny bits so people can buy in at different financial levels. Public offers fractional investing for both stocks and ETFs, so youre able to invest in accordance with your budget.
Getting educated
Just like anything else, theres a lot to learn about finance and investing and its ever-evolving. While some things never change (buy low and sell high), there are nuances to keep up with and ideas that may inspire you. Investing uses a part of our brains that we dont get to exercise that oftenyoull need to warm up that muscle before you flex it.
Weve put together a selection of resources for investors who want a solid base of knowledge to begin their investing journey here. Youll find loads of resources from books to magazines to podcasts to Instagram accounts to follow. Once you begin investing, you could find your tribe and learn from them as well. Public is a social investing app, which means that its users can see investments made by people in their network and start conversations and learn from the people they trust. Pick your friends brains and leverage their knowledge.
The bottom line
Just because you said goodbye to the shackles of a traditional 9-to-5 doesnt mean youve left a cushy future behind as well. There are ways to make the most of your finances on your own.