Being a freelancer has its highs and lows. Instead of having a steady income which is paid per month, freelancers often find difficulties in managing their money because they need to do so many things at once. Unbeknownst to a lot of people, being a freelancer actually requires a higher level of management and most of the time stronger effort even though it may seem to other people that freelancers are very free and casual in doing their jobs. A freelancer has to find their own clients, and as a result, the workload may be unpredictable. Some days a freelancer may be given so many projects that they can barely sleep for weeks, but during some other days, they may receive no work at all which leaves them no option but to spend the money from their savings account in order to survive. Since being a freelancer is financially less secure than a traditional job, here are some tips on how to save money as a freelancer and really prepare for retirement:
Set Up Emergency Savings
Since the financial security of a freelancer is less predictable and less secure compared to full-time employed people, it is very important for you to set up emergency savings to help cover your expenses in any times that you cannot work and even to pay things out during in-between paychecks. It is recommended that freelancers prepare for three to six months worth of essential living expenses, which includes accommodation expenses, transportation, groceries expenses, utilities payments and debt money in their emergency savings.
If you have more than six months worth of essential living expenses saved up, it may be best for you to allocate the surplus into an investment account. This is beneficial because a year’s worth of living expenses, for instance, is a large sum of money and by letting it to stay in a regular bank account you will earn very little to no interest at all. Since one of the benefits of being a freelancer means that you are more flexible in choosing your income sources, therefore as a result you are faced with very little risk of job loss because you will always be able to find new projects to finance your expenses.
In addition, another important factor to consider in determining how much money that you as a freelancer should put into your emergency savings account would be your partner’s job, if you have one, and whether or not you have dependents which you should also take into account. If your partner is employed with a full time job, your savings will be sufficient for a longer period of time. The amount which is sufficient for six month worth of living expenses if you were single will be enough to cover nine or ten months if you are also supported by your full-time employed partner. If you do not have an extra system of support however you are also responsible for your dependents, for instance children, then you must also consider their needs when calculating your emergency savings account. If you have children, you should take into account their school tuition fees or medical needs which should be readily available when you need to pay for them.
Setting up a specific account for emergency expenses will also help you to really prepare for retirement. If you only save up for retirement, there is a big chance that you will be ended up using a large portion of your retirement money when there is an urgent emergency which is quite costly. Since most freelancers work without obtaining the benefits that full time employed people usually get, which includes healthcare insurance benefits, therefore they should also be more prepared in getting ready for the worst scenario possible.
Open An Individual Retirement Arrangement
Really preparing the retirement itself can be highly challenging even to the best of freelancers. Ideally, you should put aside a significant share of your income to be put towards your retirement account. How significant the amount is would depend to each person, but on average 10% or 20% of your income would suffice for that purpose.
If you think that it is hard for you to commit to setting aside 10% or 20% of your income by yourself, then you should consider to set up your own retirement arrangement. There are several options of individual retirement arrangements which you may choose depending on your location. If you live in the United States, you can mainly choose between a traditional Individual Retirement Arrangement (IRA) or a Roth Individual Retirement Arrangement. A traditional Individual Retirement Arrangement is established under the Employee Retirement Income Security Act by which it allows you to invest money for your retirement using a post-tax savings plan. The main difference between a traditional Individual Retirement Arrangement with the Roth Individual Retirement Arrangement would lie in its taxing system. In the Roth Individual Retirement Arrangement, your money will grow tax-free in which you will already have paid the taxes on the money that you put into.
Both the traditional Individual Retirement Arrangement and Roth Individual Retirement Arrangement have its own advantages and disadvantages, and what may work for others may not be suitable for you. If you are still considerably young and active, you are flexible to choose both the Roth Individual Retirement Arrangement and the traditional Individual Retirement Arrangement. However, there is an age limit of 70 and a half years old set in order for you to be able to contribute to the traditional Individual Retirement Arrangement. In both the traditional Individual Retirement Arrangement and the Roth Individual Retirement Arrangement, the amount which you can contribute to both Individual Retirement Arrangement cannot exceed the total income which you earn annually, and it cannot exceed the IRS imposed limits. However, a Roth Individual Retirement Arrangement adds another provision to its income restrictions namely that your contribution can be reduced and even be eliminated based on your modified adjusted gross income. Furthermore, if you choose the option of Roth Individual Retirement Arrangement, you will not be able to claim your contribution as a deduction on your tax return while in the traditional Individual Retirement Arrangement it is possible for you to be able to deduct portion of your contributions from your tax return.
Considering the perks of each Individual Retirement Arrangements, a Roth Individual Retirement Arrangement may be more beneficial if you are considerably younger and is still a long time away from your retirement since in the Roth scheme you will pay the taxes on your contribution now but not when you withdraw the money during your retirement years. What makes the Roth Individual Retirement Arrangement scheme more preferred by younger people would be its flexible withdrawal system. In the Roth scheme, you will be able to withdraw your contributions at any time, although not the earnings, without being subjected to any penalty or fine. You can, later on, withdraw your earnings and not pay taxes for it when you have reached the five years holding period or when you have surpassed the age of 59 and a half. Therefore, choosing to establish a Roth Individual Retirement Arrangement can actually serve as a second layer of your emergency backup savings. In the traditional Individual Retirement Arrangement scheme, you will not be paying your taxes now however you will have to pay the taxes on withdrawals. However, the traditional Individual Retirement Arrangement scheme is suitable for you if you expect to receive a lower tax bracket in your retirement years. Bear in mind that each of the Individual Retirement Arrangement is subject to income limits, and choose the best one that is suitable for you and your family.
Prepare For Other Miscellaneous Expenses
If you still have extra money that you do not want to spend or use for any of your needs, you may establish a small savings account to prepare for small financial unexpected needs. Every once in a while, you may need to pay for an unexpected car damage or to pay for the doctor’s fee for your beloved family members. However, this small savings account must be distinguished from what is truly your emergency savings account, which prepares you for major and significant emergencies instead of small financial bumps like what were previously mentioned. Keep a low one thousand or two thousand dollars in this small savings account, and you will be good to go. If it is difficult for you to provide such an amount in the small savings account, stashing one hundred dollars every one or two months will already be extremely useful. However much you can put into it, you will be grateful for this small savings account when something actually comes up while you are still waiting for your next paycheck. Even if you are not likely to experience such emergencies because you may not have any dependents or assets that need regular maintenance, you can still save up the money for traveling or to purchase something significantly costly when you want to.