Are You a Freelancer? Here Are 5 Reasons Why You Need Savings

Freelancers without savings are standing on a financial cliff.

With any unplanned expense or slow month, you’ll be scrambling to pay the bills. It’s an unenviable position.

While everyone should save money, it’s especially important for freelancers. With an unpredictable flow of income, it’s essential to have a healthy amount of savings on hand. Lean times will happen — it’s just a matter of when you experience them. What you do to prepare for those lean times will determine how well you survive the situation.

Here are just some of the reasons why freelancers need to keep a stockpile of savings, as well as a couple of tips on how to get started.

No. 1: Slow Months

First and foremost, expect dry months.

In freelancing, work often comes in waves. Some seasons, you will have so much work that you can barely handle the load. In other seasons, you’ll have too much time on your hands, wondering how you will pay the bills.

Any healthy economy naturally rises and falls and, with it, the earnings of freelancers. You won’t always have a steady rotation of clients. Sometimes, you’ll hear crickets. During these quiet seasons, a hearty amount of savings will get you through the rough patches.

Instead of worrying about these slow months, start preparing now to avoid financial stress in the future. While it’s generally recommended that people keep enough in savings to cover three to six months of expenses, it’s smart to double this amount as a freelancer. Better to be safe than sorry.

Take advantage of busy months to set aside a portion of your earnings. It will likely come in handy later. In time, you may learn to embrace the slow months and use this time as an opportunity to focus on personal projects that often fall to the wayside.

No. 2: Greater Flexibility

On its own, freelancing offers great flexibility with your time and earning potential. Savings can boost this flexibility even further by giving you more control over the work you take on. A sizable amount of savings can open you to more options than you would have as a cash-strapped freelancer.

For example, let's suppose you received a new assignment, which — after some time — you discovered does not align with your schedule or maybe even your principles. Without savings, you might feel obligated to take on this work — after all, your bills need to be paid somehow. After putting so much time and energy into honing your skills, it would be frustrating to use them on projects that brought you undue stress.

But with a hearty amount of savings, you have the freedom to say no. If you disagree with a client’s ethics or don’t get along with a company’s staff, you can simply say, “No, thank you” and move on.

No. 3: Taxes

One common mistake that new freelancers make is forgetting to save enough money for taxes. On top of your federal and state income taxes, you may need to pay a self-employment tax. Currently, the self-employment tax rate is 15.3%, but it is subject to change over time.

Be sure to set aside a portion of your earnings for taxes — a good rule of thumb is to save 30%. You might have money left over, but extra cushion is never a bad thing. Also, it may be a good idea to pay your taxes on a quarterly basis. If you wait until the end of the year, you’ll need to write a much larger check to Uncle Sam.

Some freelancers like to spend their earnings as soon as the money hits their bank accounts. If this describes you, consider opening a separate savings account for your taxes. As soon as you get paid, transfer your tax savings into the separate account. Remember — don’t touch it until tax time!

No. 4: Time Off

The flexibility of freelancing is great, but it comes with a price. The simple fact is this — when you’re not working, you’re not earning money. Unlike many W2 employees, you don’t have the luxury of paid time off. Instead, your PTO is the money you set aside for your own vacation and sick leave.

Now, to be clear — this doesn’t mean that you should work 24/7. Doing so will quickly lead to exhaustion and burnout. Instead, it’s important to rest, recharge, and enjoy your life fully. Start saving money now so you can take time off in the future. With enough money saved, you can cover vacations and the lost earnings from these vacations.

In addition to planning for vacations, you also need to plan for unexpected sick leave. No one expects to get sick, but it happens. With savings, you can avoid feeling sick and stressed out because of money. When you’re ill, your focus should be getting better, not struggling to pay your bills.

No. 5: Retirement

Building an emergency fund is important, but don’t stop there. You also need to think long term. Unlike many employees, you don’t have the luxury of a company 401k with matching contributions. As a freelancer, you must take charge of your own retirement planning.

Luckily, you have several retirement account options to choose from. This includes a Roth IRA, traditional IRA, and Self-Employed Pension IRA (SEP-IRA). While IRAs are available to many savers, a SEP-IRA is only available to self-employed individuals. Each of these options has its own advantages and disadvantages — do your homework to find the best option for your needs.

Regardless of which option you choose, the key is to start saving early and often. By saving early, you allow your savings to compound over time. Even if you are only able to contribute a small amount each month, it’s important to make the effort.

UFB Direct offers savings accounts with competitive interest rates. Open a high-yield savings account today.