How to handle finances if you’re a member of the gig economy

Young businesswoman working on laptop from home

I think I’m one of those people who was destined to be an entrepreneur. At a very early age, I figured out that I have a big imagination and like to come up with business ideas. At 19, I started the first national student film festival, Hometown Cinema, as a way to build a bridge between the entertainment industry and college students. I had no idea how to run a business but quickly learned how to make magic out of small budgets. I also found out how vital it is to your staying power as an entrepreneur to account for every penny you spend.

As an entrepreneur, I’ve been through every kind of up and down. I’ve developed an understanding of the very specific financial concerns for freelancers. I build my financial planning career around helping other freelancers and entrepreneurs figure out how to take the cash they’ve got and create a sustainable lifestyle.

How to budget as a freelancer

Learning how to budget as a freelancer is a trial and error process. If you’re one of those people who hate the word budget, I’m going to encourage you to change the word, change how you feel about the word and anything you need to do to get in a better relationship with your budget and your finances.

Why? Your income and expenses are going to ebb and flow as a freelancer, so that means you’re going to need to stay on top of your finances.

One of the smartest money steps you can take as a freelancer is to track every single penny that flows from your personal and business accounts. While this may seem like a formidable task at first, tracking your expenses puts you in the driver’s seat to make decisions about how you want to spend or save your money.

You can track your money easily. Here are a few ways:

  • Use a budget app like You Need a Budget or Mint for your personal finances
  • Use a bookkeeping software like FreshBooks for your business finances
  • Use an Excel spreadsheet to manage both your personal and business finances
  • You can even print off your bank statements at the end of the month and categorize your spending with highlighters

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How to build your budgeting system

You might have to try a few different apps or spreadsheets until you figure out what method works best for you.

As you build your monthly budgeting system, here are things to consider:

  • A money system can be simple and straightforward and require just 10-30 minutes a week
  • Figure out all of your fixed monthly expenses (both personal and business). This is your starting number – the foundation number that you need to cover each month. Hint – this is a crucial number to know when you pitch yourself for projects.
  • Look at all of your variable expenses for last month. Categorize those expenses if you aren’t using an app that does that for you. Then figure out what changes you need to make.
  • In months when you have excess income, consider saving it in a high-yield savings account like Ally Bank or Marcus by Goldman Sachs for use in leaner months.

For most of us, business and personal finances tend to bleed together. The ideal situation is to keep them separate with different bank accounts and credit cards.

Once you have a firm grasp on your business and personal finances, you can make calculated decisions about your income and future goals.

How to build an emergency fund as a freelancer

Yes, you can establish an emergency fund as a freelancer. In fact, I might argue that it’s even more important to have a safety net fund as a freelancer than it is for a traditional salaried employee because of the ebbs and flows of freelancer income and expenses.

The traditional advice is to build an emergency fund that is equivalent to three to six months’ worth of expense (focusing primarily on your fixed expenses that you have to pay). As a freelancer, you should challenge yourself to save more than that. Aim for somewhere in the six to 12 months range. By doing so, you’ll have the leg up on months where your income is low, and your expenses remain level, and you won’t have to risk turning to debt like credit cards to cover your rent.

Here are some tips to beef up your emergency fund:

  • Save over time. Build your savings goal into your monthly budget as a fixed expense, so you’re more likely to save.
  • Think about your freelancer income in buckets – (1) income that goes towards your expenses, (2) savings for your emergency fund and for taxes, (3) profit that you reinvest into your business.
  • Set up a separate freelancer high-yield savings account for your emergency fund.
  • Pay attention to any fees such as a monthly maintenance fee or minimum required balance (hint – most online banks offer $0 fees as a perk).

How to think about insurance as a freelancer

Insurance is one of those head scratchers when you’re a freelancer. You’re the CEO of your business and you’re also own Human Resources department. It’s up to you to sort through health insurance options and cover other financial risks that exist with life insurance, disability insurance, an umbrella policy and more.

As current law exists, the open enrollment period to select a health insurance plan runs from early November until mid-December, and lots of potential healthcare options for freelancers are available, depending on your budget and needs. If you’re starting your freelancing career and are leaving the healthcare plan that you’re company offered, you may be able to apply for a special enrollment period outside of the normal open enrollment.

Here are a few things to keep in mind when choosing health insurance:

  • Knowing your expenses will help you select a health insurance plan that will also fit in your budget
  • Pay attention to the (1) deductible – how much you need to spend out of pocket before the insurance plan pays, (2) co-insurance and co-pays – the percentage of costs that you’ll be responsible for once you hit your deductible, and (3) the out-of-pocket max – the maximum amount you would spend in any given year
  • Calculate how much you spent on healthcare last year to evaluate which plan might fit your needs
  • Check and make sure your current doctors take the health care plan you’re interested in if you want to keep seeing the same practitioners

Now that you’ve checked the health insurance box, there are other risks to think about covering as a freelancer. Life insurance is inexpensive when you’re young and healthy and a great way to provide cash to your beneficiaries if something were to happen to you. You can shop for a quick quote in a matter of minutes online and check that off your to-do list.

Another risk you should think about covering is your ability to earn an income. As a freelancer, protecting your income with even a minimal disability insurance policy can provide peace of mind, a disability income insurance policy will pay you a percentage of your income (the percentage varies by policy) while you are too sick or injured to work. You may be exposed to other financial risks, too. Is your car insurance up to par? Do you have homeowner’s or renter’s insurance? Do you have business liability insurance? These are all questions you should think through as a freelancer.

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How to build your money team as a freelancer

Building a money team as a freelancer is critical to your success. No, your money team doesn’t always mean you’ll land bigger contracts, or that your bank account will suddenly soar. However, building a money team can help you avoid potential business pitfalls, and on the flip side, your team can also help you grow your business. Having a team in place can help you plan ahead for any changes in your upcoming income and expenses, help you know when it’s time to incorporate and help you avoid any nasty legal minefields that might be lurking.

Who you may want to have on your money team:

  • An accountant or CPA who regularly works with freelance and entrepreneur clients and can help you set up a tax plan based on your income
  • A business attorney to review contracts and to avoid any potential lawsuits
  • A financial planner — this person might move on and off your team, but they can help you create a financial plan, debt payoff plan, retirement plan and more as you build your business and your personal financial plan
  • A bookkeeper —  this could be someone at your accountant’s office or an online service

Freelancers often push back against hiring an accountant. I understand. Hiring an accountant can be expensive. However, think of an accountant like your business BFF and a worthy expense. An accountant can help you figure out what expenses you can deduct from your taxes, which can save you a lot of money in the long run. An accountant can also help advise you on the pros and cons of moving from self-employed Schedule C status to an S or C corporation or an LLC.

You are “the person in accounting”

When you’re working 80+ hours a week to get a business off the ground, or working overtime to try to please a client, it can be easy to let finances slide and assume you can catch up later. But carving out time to have a system in place now can make things simpler in the future, and can also help you keep a firm handle on your personal and professional expenses.

I’ve lived the freelancer/entrepreneur life for almost my entire career, so I know firsthand the struggles and triumphs of running your own business.

While there are some specific financial to-do’s that freelancers need to be aware of, it’s entirely possible to have a great career and lifestyle running your own business. Sure, the ebbs and flows of income can be exhausting, but they don’t have to defeat you. That’s why it’s critical to set up a good money system, stay on top of your expenses, build up a strong emergency fund, and get a good team in place that has your back.

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Shannah Compton Game is a CERTIFIED FINANCIAL PLANNER®  professional with an MBA and is the host of the award-winning podcast, Millennial Money, where she shares totally relatable and easy to understand financial advice that will actually make you want to talk about money. Opinions expressed by the author are their own.

Haven Life doesn’t provide tax, legal or investment advice. This discussion is intended as general education only. We encourage you to work with your own personal tax or legal professionals and your financial advisor.

Haven Life does not endorse the companies or offer the products, services and/or strategies discussed here.

Haven Term is a Term Life Insurance Policy (ICC15DTC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111 and offered exclusively through Haven Life Insurance Agency, LLC. Not all riders are available in all states. Our Agency license number in California is 0K71922 and in Arkansas, 100139527.

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