Many full-time, 9-to-5 employees dream about becoming a freelancer. And who can blame them? This career path is flexible, fun and allows you to make your own schedule. But the responsibility of being your own boss comes with its own challenges, and the ebb and flow of freelance work can sometimes stop your cash flow in its tracks. That’s where an emergency fund can come in to help you overcome any financial hiccups you may experience.
Shockingly, around 57 million Americans have no money saved for emergencies, as CNBC reports. Of course, it’s good practice for everyone to have an emergency fund in place, but having that extra money in the bank is particularly important when you’re a freelancer with a variable income. After all, what happens if your business hits a legal roadblock? And what do you do if you don’t earn enough money to pay the bills this month?
Here are three reasons why it’s especially important for freelancers to have an emergency fund in place:
1. Higher Personal and Business Expenses
When you were a 9-to-5 employee, you had the luxury of splitting certain costs with your employer — making it easier for you to tackle payroll taxes, insurance costs and retirement savings. But now that you’re a freelancer, you can’t lean on your employer for financial support in these areas.
This means that you’re responsible for higher personal expenses and the additional burden of business expenses. This may include the cost of buying equipment, paying for legal advice, hiring contractors and maintaining your insurance coverage. Unfortunately, these additional expenses can add up quickly. And don’t forget, you’re now responsible for paying the Self-Employment Tax to cover Social Security and Medicare, as well.
Thankfully, if you have the necessary savings in place, you can easily tackle both regular and unexpected expenses — allowing you to spend less time worrying about paying the bills and more time boosting your bottom line.
2. Inconsistent Cash Flow
With the flexibility of your freelance lifestyle comes an inconsistent income and the uncertainty of when you’ll be paid next. This month, you may have more clients than you can handle, but next month you may struggle to find work.
You never know what the future holds, which is why it’s crucial to have emergency savings — just in case. To allocate enough cash to your fund, consider which expenses you can cut back on, or how you can save more money to increase your cash flow. Lean months are inevitable as a freelancer, so it’s better to start preparing for them now by saving for a rainy day.
The ideal size of an emergency fund will differ based on your unique business expenses and cost of living. Some financial experts recommend having anywhere from three to six months’ worth of expenses saved, but others argue that freelancers need much more. Consider your own lifestyle and specific needs so that you can create a savings plan that works best for you.
3. Regular Business Upgrades
In order to survive long-term, all business need to constantly grow and adapt to meet changing marketplace needs. Ask yourself: What if your business needs upgraded equipment to move your services to the next level? Or perhaps you’re interested in taking a class to add a new skill to your portfolio. How will you pay for it?
A large part of being self-employed is continuously learning and improving your business model so that you can stand apart from the masses. By setting aside additional funds in a savings account, you can keep investing in your future growth — even if you’re experiencing a few lean months.
When the worst-case scenario happens and you have to dip into your emergency savings, there’s plenty of info out there to help you get out of the woods. Here are a few resources you can use to turn your finances around:
- Incorporate some new budgeting tips to get your spending and saving back on track.
- Create a new financial plan that accounts for the typical ebbs and flows of freelance work.
- Take a step back and reframe your mindset on your work/life balance.
- Search for emergency grants from organizations that award funding to freelancers in difficult circumstances. Some are more general, but others are focused in particular fields — so try searching within your own field for emergency grants, too.
Start an Emergency Fund Today
Saving money isn’t easy — especially when you’re self-employed. Here are a few tips on how to start your emergency fund:
- Create a dedicated savings account. A great way to set aside money for an emergency — and stop yourself from accessing it — is to create a dedicated savings account. This will separate your savings from your regular bank account so you’re not tempted to overspend.
- Save a portion every time you get paid. In his book, “Profit First,” Mike Michalowicz suggests moving a percentage of your earnings to a “profit” account. Every time you get paid for client work, take 5 percent (or more, if you can) and put it into a separate fund.
- Automate your payments and savings. Building up a large rainy day fund takes time and patience. Start small and automate your finances as much as possible — including your savings. Auto-pay your bills every month so you can avoid late fees or interest payments, then set your savings to automatically move money into another account so you don’t even have to think about it.
Setting aside some extra money in the bank is essential when you’re a freelancer living on a variable income. Work comes and goes, and your clients’ budgets are always changing. When you’re financially prepared for anything that comes your way, you’ll feel more secure if you have to take time off from work. With these tips, you can start building up your emergency savings today.