Here are five financial tips for people working in the gig environment.
1. Start an Emergency Fund
When it comes to the freelancing world, it can either be abundant with work and client payments or a drought. Typically, you should aim to set aside money in an emergency fund consisting of three to six months’ worth of expenses. However, when it comes to gig workers, you might want to set aside a savings account that's even more robust than that — for example, nine months to one year. This will make it easier for you to manage irregular work or payment cycles.
2. Create a Monthly Budget
Usually, when creating a budget, you start by detailing your monthly net income. However, if the money you earn each month fluctuates, it’s best to start by listing what expenses you need to pay first, such as your:
- Mortgage / Rent
- Car Payments
- Student Loan Payments
You’ll then want to create a second budget, which should include money for things you "want to have," like a new smartphone, dinner out, or a weekend trip.
If you work a gig with a busy season, you should plan to save more during these months to prepare yourself when work is slower and income is lower. Be sure to account for retirement and savings planning as part of your budget options.
3. Budget for Taxes
With being self-employed, you have to pay both self-employment and income taxes. Freelancers typically have to pay estimated taxes quarterly, and these deadlines can come up quickly when you're busy trying to build a business. So, your best bet is to set aside money each month that you designate only for paying your taxes. This way, when it comes time to pay, you're not scrambling to come up with the money.
As a gig worker, it’s a good idea to save at least 20% of your income in a separate account specifically for taxes. Then, if you owe less than you saved at the end of the year, you’ll have extra money you can use for savings or other financial goals.
4. Pay Yourself a Salary
Create a salary based on your monthly personal expenses. Any extra money you make after you meet these obligations, you can use for such things as:
- Business Expenses
- Extra Savings
The income you make will most likely vary month to month, so it's helpful to have a specific salary amount you can draw from emergency savings if needed. This will help keep your personal finances consistent.
5. Save For Retirement
Saving for your retirement is all up to you since you are self-employed and don't have the perks of employer-sponsored plans. However, as a freelancer, you still have several retirement account options available to you, including Roth 401k, individual 401k, Roth IRA, or Traditional IRAs. A financial advisor will assist you in determining which accounts will work best for your unique savings goals.
Setting up automatic transfers from your checking account into your retirement accounts is a great way to put your savings on autopilot. Just make sure you have enough money every month to cover these transfers – especially since income from freelance work can vary month to month.
We’re Here to Help!
The gig economy is an excellent opportunity to earn more, run your own business, and turn your passions into new revenue streams. To ensure your success, you must manage your money effectively and plan for your retirement and upcoming tax payments.
If you’re interested in learning more about setting up an emergency fund, retirement planning, or have questions on budgeting, we’re here to help. Please stop by any of our convenient branch locations or contact us at (949) 588-9400.
Each individual’s financial situation is unique and readers are encouraged to contact Eagle Comunity Credit Union when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.
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