Freelancers may tell you there are no easy ways to save for retirement. That’s understandable; paying the bills is a priority when you work with a variable income. Yet, you’ll also find peril in the bills-first approach. Do it often enough, and you’ll always find an excuse not to save.
What can you do? Employ these two easy ways to save for retirement — and then, do everything you can to avoid the mistake that almost torpedoed my freelance career early on. More on that in a bit. First, let’s talk about what you should be doing:
- Save automatically. Even if it’s just $10 a month, set up an automatic withdrawal from your business checking account to an SEP IRA or Self-Employed 401(k) account. Just pick a date and set the withdrawal order with your broker. The major discount brokers usually offer at least one of these accounts and several other options. Still unsure? Try a service like Digit, which regularly scans your accounts to find money you won’t immediately need and could save. Transfer this amount into your business account first, then into your retirement accounts every time you eclipse $100 in savings.
- Save unexpected or late income. Other times, you’ll deal with clients who’ve paid so late, you forgot the check was even in the mail. Or, maybe, you wrote a book or have an online store, so small payments trickle in whenever you make a sale. Think of these and similar payments as “free money” intended to work for you, and redirect the funds into your retirement account.
Retirement Savings Earned the Hard Way
You could always do what I did, but I wouldn’t recommend it. A few years ago, I let our (now former) accountant talk me into taking money from our house to fund our retirement accounts. It sounded like such a good idea: We’d get a tax break on the increased interest, plus a tax deduction for the SEP contribution. He also knew one of my gigs was writing for The Motley Fool, and I’d put up good investing returns following my own advice.
But I deluded myself. I fell in love with the idea that I could outsmart the market by earning higher returns than the cost of the borrowed funds, as if I was a hedge-fund manager acting on behalf of no one except my family. Why save when the market gives you free money, right? Here’s what I forgot: Taking liquid funds (i.e., home equity) and placing them in an illiquid account (i.e., my SEP) forced me to figure out a different way to repay borrowed funds — and I had no idea of how to accomplish that.
Also, taking money from a home equity line of credit, or HELOC, is about as easy as using a credit card. I got addicted to the simplicity of it, and soon enough, our credit line was tapped. We had to scrap our plans to have the mortgage paid off by the time our eldest entered high school.
Take the Shortest Path
Our home still isn’t paid off, but the story doesn’t end terribly. My old accountant’s theory was partially right. I did, in fact, generate spectacular returns using those borrowed funds. So, despite failing to contribute to the SEP in over five years, we’re still far ahead of most Americans in terms of retirement savings.
But I could’ve made it easier by implementing automatic savings and leaving home equity untouched. How do I know? A little over a year ago, we started automatic redirects to accounts where we save for taxes and fixing up the house. In one case, we’re already into the five figures, which proves the strategy works. I just wish I realized it sooner.