“Money and self-employment always lead to Murphy’s Law, you almost always need more than you think.”

Brett Fellows, a planner with Oak Capital Advisors in Mount Pleasant, South Carolina

Whether you’ve been plotting your own corporate coup for a long time and planning to join the freelance economy, or you find yourself suddenly self-employed after years working inside of a company, managing self-employment is one of the more challenging tasks financial planners watch clients do.

Roughly one-third of American workers are freelancers, earning their wages through an assemblage of clients whose business adds up to a living wage.  This trend is expected to rise, with 43% earning a living as gig workers by 2020, according to Intuit data.  According to UpWork Millenials are leading the way at 47%. With so many people running their own businesses, planners have a lot of advice. But most of it starts with this: You can’t plan if you don’t have investable assets, and the ups and downs of freelancing can complicate that picture.

“Money and self-employment always lead to Murphy’s Law,” notes Brett Fellows, a planner with Oak Capital Advisors in Mount Pleasant, South Carolina. “You almost always need more than you think.”

Here are the themes advisors say they see when formerly full-time workers go freelance.

Understand what you really need to earn

Most people who leave a staff job in their field in order to freelance in it need to earn 20% to 30% more as a self-employed person in order to maintain the same lifestyle. That’s because freelancers must buy their own health (and other) insurance benefits, don’t receive a corporate match for their retirement investing accounts, and lose other perks ranging from subsidized gym memberships and public transit to free lunches and travel to industry conferences.

Going freelance is a prime time to look at your budget as well as projected profit and loss statements for your business. If you’re in a service business with low overhead—you work from home, you mainly need a laptop, printer, mobile phone, business cards, and a trade association membership or two—things may not be particularly complicated. But if you’re buying and storing inventory, dealing with shipping logistics, or must travel to develop business, expenses may outweigh income in the early years.

If you’re partnered and your spouse or significant other can include you on a health plan, you may be able to earn a little less than the 30% rule. But probably not too much less: That’s because as a self-employed person you’ll pay self-employment tax—in which you pay both the employer and the employee share for Social Security and Medicare. And not all people who receive healthcare through a full-time employer can extend affordable benefits to their partner.

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Mind your cash flow, and keep a plush cash cushion

“I recommend that my self-employed clients have one year of living expenses saved.”

What you earn as a freelancer during a given year may resemble what you used to earn at a full-time job, but keep in mind that the funds may pour in unpredictably. In an $85,000 year, you might earn $10,000 during first quarter and $25,000 the other three. Or you might earn $7,000 in a month—but all of it on the 30th. This means that you’re going to need a cash cushion or to manage lines of credit without letting them creep ever-northward.

“I recommend that my self-employed clients have one year of living expenses saved,” Fellows notes. “Of course, this is case by case. One year applies to a sole breadwinner. In a two-earner couple, you might be fine with six months’ worth.”

Fellows says this money should be in a savings account, not the market.

“If you need the money within the 12-month period before you, keeping it in the market presents too much risk,” he says.

Some freelancers have a client or clients who pay a relatively predictable amount on a predictable timeframe—which many freelancers refer to as an “anchor client” whose payments can cover your major expenses (housing, monthly loans, utilities, food), allowing less-predictable clients’ pay to go toward longer-term savings goals that need to be funded but not on a specific date (a child’s college savings plan, set-asides for quarterly tax payments, etc.).

Regardless of the presence of such clients, Fellows recommends a multi-month savings stash—because even anchor clients can vanish.

Sole proprietors have a wide array of retirement savings choices, but the most common are SEP IRA plans, Roth IRA, and Single(k) plans. These plans allow for a worker to set aside up to 25% of their income (in the $50,000 ballpark) for retirement.


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Know your retirement plan options

“Percentage-wise, you can save a lot more as a freelancer than as a staffer,” Fellows notes, although, this assumes you are a higher earner.

Self-employed workers can also invest in Roth IRAs as long as your income qualifies.  With the tax law changing for 2018, you should know how much you can make in order to contribute to a Roth IRA..

Know when you need to shift business structure

Many freelancers begin their self-employment journey as so-called sole proprietors—a simple form of business structure. However, there are other options, including LLCs, S-Corps, and other incorporation choices.

Sole proprietors are typically hit hard with self-employment taxes, but those who segue into other business structures may be able to reduce that form of tax—albeit facing other forms. Often, a change in business structure makes sense as a self-employed person begins to see an upward jump in income that triggers an ascent into ever-higher tax brackets.

“With self-employment, there’s a constant budget fluctuation, you have to know what’s coming in and going out all the time.”

– Brett Fellows

“Whether you should change business structure is really a CPA question,” Fellows says. “It depends upon your net profitability.”

Of course, the less you sacrifice to a tax bill, the more you have to invest for retirement, so financial planners are attuned and sensitive to the fact that their self-employed clients have to model their business structure with an accounting advisor.

But ultimately, advisors know that self-employment is the wave of the future. With more and more clients earning some or all of their money from gigs, each client needs to become more versed in what their personal balance sheet looks like.

“With self-employment, there’s a constant budget fluctuation,” he says. “You have to know what’s coming in and going out all the time.”

It’s a detail-oriented way to live—but for those who structure their businesses intelligently, it’s quite possible to thrive and save successfully as solopreneurs.


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Jane Hodges

Jane Hodges

Jane Hodges is the author of Rent Vs. Own (Chronicle Books) and has written about real estate and personal finance for The Wall Street Journal, New York Times, Seattle Times, Fortune and many other publications. Follow Jane on Twitter and Google+