Here’s Why Freelance Financial Planning Is Hard
March 5, 2019
Give every dollar a job, they say. Set goals. Stick to your budget. Don’t raid your savings. We know this advice; we’ve heard it everywhere. Freelance financial planning seems simple enough at the outset. So why is it so hard to stick to the road map? Is it really that different from financial planning as a traditional employee?
In short, yes. Both freelance income and the freelance job market have a bright forecast, year after year. But actually managing cash flow once it comes in and taking steps to build wealth and security is more complex when you’re a freelancer, independent contractor, or self-employed business owner. From bSolo’s own survey of 1,000 independent workers, 1 in 3 freelancers have identified their top financial challenges as “saving for retirement” and “saving for short-term goals and unexpected expenses.”
This isn’t an impossible situation. Many freelancers beat the odds. But, it’s important to understand the nature of the beast, such as why it’s hard to change your financial behaviors when you start having irregular income or when you leave the HR payroll and benefits system. It’s good to know the factors that might work against your financial plan, so you know that you’re not alone in these struggles, and so you can be proactive in finding solutions.
Bringing old money habits to your new lifestyle
Just because more of us are going freelance doesn’t mean that we all suddenly got better at personal finance. Eight out of ten American workers live paycheck-to-paycheck. It’s easy to coast on the rhythm of payroll, and as it turns out, many people do.
Most of us are still bringing our old money habits to our new life, like not knowing what we’re spending every month—or not regularly saving a percentage of our income. For many people, leaving a biweekly paycheck, even when they’re technically making the same annual “salary,” is a big adjustment.
You have fat seasons and lean seasons, and you’re earning different amounts of money each month, from different sources. In our latest rounds of research, we’ve seen more and more the toll that irregular income takes. It can take time to find your new rhythm, but many independent workers have learned to plan for, and embrace, irregular paydays.
What it’s like to leave the perks of payroll
Freelancers today lack access to conveniences that traditional employees receive as a default. When you’re traditionally employed, payroll automatically disperses income into withholding taxes, tax advantaged savings, insurance premium payments, and take-home pay. But for the self-employed, income is variable, and there’s no automated system that tells you which part of your take home pay is really yours. There’s also the time variable: managing all these jobs of the job takes time away from billable work or away from the freedom they sought to gain.
A paycheck is a clever and convenient invention—it sends all the right amounts to the right accounts before it even hits your bank account. And, if you’re an employee, it’s all set up for you. Newbie freelancers, on the other hand, must take time on top the work they’re already doing for clients to shop around for these benefits. And then they must pay for them out of pocket. Yet another consideration for freelance financial planning.
For what it’s worth, most freelancers are fine with it: 70% said they’d rather buy their own benefits if it means taking home more pay.
Why freelancers aren’t saving for retirement
Choosing an independent career doesn’t mean you can’t save for the future. But, those who are regularly saving and contributing to retirement are beating the odds. According to the US Department of the Treasury, nearly half of people with traditional jobs are able to save for their post-work year. For independent workers, that number drops down to an eye-popping eight percent.
In our capacity as researchers, we’ve interviewed many freelancers who told us that they prefer to leave their savings in cash, because they haven’t built up an emergency fund or saved enough for quarterly estimated taxes. When we probed deeper, we learned that they’d consider saving for retirement if they could easily see the penalties for withdrawing from these accounts and weigh their options. We also learned that there’s not a lot of familiarity around independent retirement accounts in general, so we’ve put together a plainspoken guide on the matter.
Time equals money, and it’s super stressful
A weird thing happens to our brains when we’ve been self-employed for a while. We slowly but surely begin to equate time with money. This bit is more about psychological scarcity than actual scarcity, but it seems relevant. It’s not like freelance financial planning is the same as leisure time, exactly, but it might be tempting to think that it’s less important than our most urgent client work. Actually, the opposite is true. More than anything, having a plan is what will help you to secure your financial future.
Perhaps it’s time to figure out what you’re willing to outsource and what you’d prefer to do yourself. Sometimes, delegating the task to a freelance-friendly financial advisor, or smart tools that automate regular tasks (such as saving or budget-tracking) is the easiest way to stick to a financial plan for good.
What does a solid financial plan look like?
If you have decided to consult a financial advisor, or start using some financial tools that can help, here’s a rundown of what you should get out of it.
First, you’ll want to see a full, honest assessment of your financial situation, including all of your banking, loan, and investment accounts—as well as any other assets or debts. This creates a picture of your earning, spending, and saving patterns, and your entire net worth.
You’ll also want to set some goals for yourself, while keeping the financial viability of your business in mind. Time to break out your vision board: What do you need to have peace of mind and a sense of abundance? Zero student loan debt? A yearly vacation to an exotic place? An office for your business? The general rule of thumb is to create SMART goals—goals that are specific, measurable, achievable, relevant and timely.
With your current financial situation and goals in place, you can get started and track your progress. Ideally, the plan will be flexible and will adjust to changes in your cash flow to keep you on track. It should help you plan ahead so you’re never strapped for cash during emergencies. And, you’ll have the peace of mind that you’re financial house is is in order, so you can focus on your business and the rest of your life.
This article is being provided for informational purposes only and should not be viewed as a recommendation of any product, service or strategy referenced.