It doesn’t matter if you have one foot in the gig economy or you’re fully committed to the lifestyle. It can be challenging to make financial plans when you’re working with a side gig income. Here are some thoughts to help you align your freelance finances with monetary success.
The Rise of the Gig Economy
A decade ago the thought of “freelancing” was a highly professional activity. Only those with elite connections and quality networks were able to keep work flowing consistently.
Since then, the internet has completely rewritten the playbook. People from all walks of life can participate in a massive variety of freelance activities. Everything from ridesharing to writing has become accessible to all and sundry — if they’re willing to embrace the quirky aspects that come with working gigs.
For several years now it’s been clear that many Americans are certainly willing to take on the “boom or bust” nature of the freelance lifestyle.
Just shy of one in four Americans (24% to be precise) earned money in the gig economy in 2016. Two years later, the statistic had risen to 36%. Since then the number of individuals tapping into freelance forms of income has continued to thrive, to the point where it’s difficult to even keep track of just how many people are getting in on the side hustle action.
Some of these individuals are finding gigs to earn a little spending money on the side. Others are using it as a critical supplement to their income. And then there are the brave few that have dived headlong into a full-time freelancing career.
Regardless of whether you’re working full-time or part-time, though, there’s typically one primary focus that comes with freelancing: earning money. This introduces an interesting conundrum, as finding work, earning money, and then actually receiving the money you’re owed is a more complicated process than many people may think.
If you’re working in the gig economy, here are a few suggestions for ways to meet your financial goals with a partial or even a full freelance income.
Create a Firm Financial Foundation
If you want to use gigs to help meet both short- and long-term financial goals, the first thing that you need to do is create a solid fiscal foundation to work from. It’s the classic Biblical image of the wise man building his home on the rock rather than the sand.
If you don’t have solid financial principles guiding your day-to-day monetary activities, it’s very difficult to confidently build toward financial goals in the future — especially in the highly uncertain and unpredictable gig economy. With that in mind, make sure to adopt the following financial activities first and foremost to lay the groundwork for future success:
- Budget smaller: Create a budget that is smaller than what you’re currently earning. That way you’ll be okay if your freelance income dips at any point.
- Create an emergency fund: Saving up a stash of cash is a great way to help you weather any temporary financial setbacks without the need to raid your long-term financial savings.
- Choose a proper business structure: If you’re picking up a few hundred extra dollars on the side, you can report that as a sole proprietor. However, if you’re freelancing full time, it’s wise to set up an LLC or even an S-Corp to protect you legally and help you save on taxes.
- Have a system in place for invoicing and payments: You want to be exceptionally clear when listing your payment terms and conditions so there is no confusion about when payment is expected or how a customer can process their payment to you.
- Set aside your taxes immediately: Always calculate your approximate taxes and set them aside as soon as you’re paid. That way you aren’t surprised by a large payment come April. (Surprise tax bills are not nice)
Taking the time to set the stage is the critical first step in long-term financial freelance success.
Understand the Ebb and Flow of Unsalaried Compensation
Typically, when flexibility is brought up in the context of freelancing, it’s about schedules, work hours, and the type of work that you can choose to take (or to leave behind). Along with being a benefit, though, flexibility is also a key aspect of survival in the freelance world — especially when it comes to your financial goals.
The ups and downs of most freelance income can make it very difficult to plan ahead. You’ll likely experience periods of both feast and famine. Most freelance work pays per job, per word, or per hour.
This is one of the greatest challenges of freelancing jobs for anyone, from veterans to former teachers — you won’t have consistent paychecks rolling in each week. Instead, you’ll need resources to help you plan for the weeks where you’ll get a lump sum and then other times where you wait several weeks to get paid.
This is where having a firm foundation is critical. Things like budgets, emergency funds, and setting aside taxes all protect you and allow you to actually plan in the activity of saving toward financial goals.
Set the Right Kind of Goals
Once you’ve created a solid foundation and learned to work with the ebb and flow of your income, the final thing you want to do is set financial goals. These should include short-, medium-, and long-term goals.
For instance, creating an emergency fund or getting life insurance would be good short-term goals. Saving up for a house or using your freelancing skills to start your own small business — an increasingly common trend — would be ideal medium-term goals. Investing in stocks and saving for retirement are typical long-term goals.
As you set your goals, make sure that they’re SMART goals. In other words, they should be:
By setting calculated and thoughtful goals, you provide focal points to work towards and measure yourself against.
Conquering Your Financial Goals as a Freelancer
If you can create flexible financial habits that adapt to SMART goals, you’ll be able to take full advantage of the freelance lifestyle while avoiding many of its common monetary pitfalls. So start by evaluating your current finances.
Do you have a firm foundation in place? Once that’s done, you can begin to build in flexibility and establish financial goals to work toward both now and for the foreseeable future.
Dan Matthews is a freelance writer with a penchant for financial wisdom and solid research. You can find him on Twitter @danielmatthews0 and LinkedIn.