Saving for Retirement as a Freelancer

By Elizabeth Wellington, Contributor, on January 9, 2017

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Saving for retirement and other long-term financial goals is a priority for freelancers. But without the financial structure of a nine-to-five job, it’s trickier to allocate your resources. You need to set aside money for quarterly taxes, health insurance and living expenses, and by the time you get to savings, you may not feel you have enough wiggle room to save for retirement. Together with my accountant and financial advisor, I figured out how to allocate money in a way that maximizes my long-term impact while meeting my short-term needs.

Allocate for Business Finances First

Before I transfer money from my revenue into personal income, I account for the financial needs of my business. In particular, I plan ahead for quarterly taxes and expected business expenses. As a freelancer, I don’t have a lot of business overhead, because I sell a service rather than a product. The majority of my revenue goes straight into personal income. That said, I set aside 10 percent of my business revenue for related expenses: fees, office supplies, memberships, accounting services and unexpected business costs. This money stays in my primary business checking account.

When I first started freelancing, I opened a separate business checking account with my bank. It serves as a holding place for money set aside for quarterly taxes. As I receive revenue, I transfer 30 percent into the tax account. That way, I’m never caught off guard by my taxes, and I always know what I owe ahead of time.

Plan for Personal Finances Second

When I’ve covered the needs of my business, I transfer a weekly salary into my personal checking account. This set number is based on 60 percent of my expected annual income, as I put the rest aside for taxes and business expenses. These allotted funds cover my living expenses, savings and retirement.

First and foremost, I allocate my salary to pay for my rent, health insurance and groceries. It comes to about 75 percent of my weekly salary or 45 percent of my business revenue. Even during slower weeks, I can always cover these costs, because I account for the “feast and famine” nature of freelancing by planning ahead. When I get big projects that boost my income significantly, I still pay myself the same salary. That extra revenue covers me during slower periods or vacations and sick days.

Save up and Have Fun With the Leftovers Third

Once I’ve covered my basic living expenses, I think about savings and retirement. I put 10 percent of my weekly check into a savings account. I use this money to save up for shorter-term and longer-term goals, such as vacations or saving up for a down payment. Next, I set aside around 15 percent of my income in retirement accounts. As a freelancer, you have a lot of options when it comes to saving for retirement: Roth IRA, Traditional IRA, SEP IRA and Solo 401k.

I often have leftover business revenue after covering all my professional and personal needs. When that’s the case, I give myself 25 percent of the extra revenue as a bonus. I do something fun with it, like buy a new outfit or give myself an overnight nearby. The rest of it goes into my savings account for my future needs.

Being intentional about how I allocate money sets a solid foundation for my growth as a freelancer. I know the costs I should expect (both personally and professionally) and create a solid base for planning my financial future.

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