Why Freelancers Should Think About Their Financial Future
From a finance standpoint, freelancing can be unpredictable - but that doesn’t mean there aren’t ways to build stability into your routines.
Freelancing or being self-employed means you're willing to forego stability. Writer Katrina Hatchett previously noted that freelancing also allows you to be your own boss, set your own schedule, take your own days off, and focus on work that you feel passionate about. But it also means that you should stay on top of your finances.
Nothing is ever really predictable with the freelance life. One month may net you a hefty four or even five-figure sum for a project, while the next month may only earn you a slate of smaller payments for shorter projects. The income you take home varies on a month-to-month basis even though your business and living expenses are fixed.
Having variable income can understandably stress anyone out, much more so to freelancers who don't have day jobs. Like everyone else, you only want to build a strong financial foundation and secure your future, and luckily, there are ways to make that happen:
Open up a high-yield savings account
A typical savings account only earns you around 0.10% at your local bank, which obviously won't do much if you want to pad your savings. On the other hand, a high-yield savings account would be much more beneficial for you, as CNBC notes this could earn up to 16 times more than traditional savings.
Picture this: You have $5,000 in savings – with the national average of only 0.10% annual percentage yield (APY), your return will only be $5 over the course of a year. But if you put the same amount of money in a high-yield savings account earning 2%, you would earn $100, making it a better option. Don't let your money sit in your savings account; make it work for you instead.
Go for low-risk investments
Diversification is key to improving your overall portfolio returns, but as a freelancer, you can't always afford to take that risk. It's better to go for low-risk investments as it's very unlikely that you'll lose your principal. Although a high rate of return is also unlikely, at least your money isn't merely sitting in your savings account.
The Balance recommends that you look into options like money market accounts and certificates of deposits (CD). The former functions like a savings account but offers a higher interest rate in exchange for a specific minimum balance. In contrast, CD guarantees a fixed interest rate over a period of time, typically six months, one year, or five years.
If you wish, you can make the most out of CDs by building a CD ladder. A Marcus article on ‘How to Build a CD Ladder—and Why’ notes how this is essentially a savings strategy where you spread money across multiple CDs with different maturity dates, so that you can enjoy higher rates. And while it's a set-it-and-forget-it approach, it's a great investment option for retirement plans or the like – much needed for freelancers hoping to future-proof their finances.
Build an emergency fund
Since freelancing is financially unpredictable, it would serve you best to beef up an emergency fund so you have something to rely on for a rainy day or particularly slow periods when your day-to-day expenses can't be funded from your general checking account. There may also be instances where your workload is lean, so a large emergency fund may be handy to ride out those times.
Keeping three to six months’ worth of expenses in a savings account you won't touch is ideal. Insider also recommends to build your fund when times are good, and rely on it when things aren't as great. And sure, building a fund for a rainy day takes discipline and strict budgeting, but you'll be glad to have it when the time comes that you need it.
Sofia Molly is a New York-based financial writer. She's dedicated to helping her readers improve their financial situations and live their best lives. When she's not on the laptop you'll find her relaxing and meditating at the local yoga studio.