Five financial strategies for freelancers

For some, freelancing conjures up images of working in sunny cafes all day, with no boss to answer to; for others, it represents a last resort, a life of tirelessly hustling from one gig to another while you wait for stable employment.

Personal feelings aside, the reality is that over 40% of Canadian millennials have participated in the gig economy, and while working at a startup is a promising option in the shifting workforce, 96% of small businesses in Canada fold within the year. The lack of stability in today’s labour market means that traditional money management advice isn’t always practical.

“Every entrepreneur, whether they’re someone who starts a large startup or someone who works for themselves as an independent contractor, is trading a degree of risk and uncertainty for freedom,” says David Sax, author of The Soul of an Entrepreneur: Work and Life Beyond the Startup Myth.

That freedom—to set your own hours, do what you love, and avoid making small talk at the water cooler—is often eclipsed by the sometimes scary, administrative day to day realities of working for yourself. The good news is, you can make it way easier on yourself by developing some smart financial habits now.

Take a deep breath, get comfortable, and read on about how some freelance and finance experts have figured out how to make money work for them.

1. Create a salary for yourself

One of the largest sources of stress that freelancers and contractors face is a wildly variable income. Certain months you might be flush with projects, with so many cheques coming in you almost lose track, only to later be hit with a drought that can last weeks—or months. Worse, you might find yourself chasing down a client who is taking months to pay you the money that you are legally owed.

Instead, start looking at what you make on a long term basis to get a realistic idea of what your regular income can look like. Financial counsellor Jessica Moorhouse recommends averaging how much you made in the last couple of years and budgeting on a monthly or quarterly basis based on those estimations.

“When you’re doing those estimations, be conservative,” says Jessica. “You never want to spend more than you actually earn. When you’re self-employed, you are your own accountant and payroll department.” (KOHO with its spending, savings, and direct deposit functions can make it dead simple to manage your spending and savings behaviour to fit your goals.)

Gloria Dickie, a freelance science and environmental journalist based in Victoria, agrees. Her work has taken her around the world—for two and a half years, she kept her possessions in a storage unit while reporting for newspapers and magazines from the Arctic, Asia, and South America. Currently, she’s at work on a book about bears for W.W. Norton, which means less time to work on her regular writing projects, and fewer regular paycheques coming in the mail. So she gives herself a monthly salary, which she pays herself out of her savings and book advance.

“I try to keep my monthly costs below my budgeted income,” she says. “If I’m going to have more expenses that month, then it’s like, okay, I’ll have to sell a magazine piece to make up that difference so I’m not dipping into my savings beyond what I planned.”

Setting a steady budget empowers Gloria to sustainably live the life she wants, even with a highly variable monthly income. (A KOHO prepaid Mastercard can seamlessly help you manage your spending, just saying.)

“You never want to spend more than you actually earn. When you’re self-employed, you are your own accountant and payroll department.”

2. Know what you want, whether you’re joining a startup or doing independent contract work

Vass Bednar works as head of public policy at Delphia, a relatively new data-driven investment company based in Toronto. She came to Delphia in January 2019, about a year after it was founded. She’d previously worked at a much more established company, Airbnb.

When negotiating her salary, Vass did a lot of Googling to find out what positions in cities with similar tech scenes such as Chicago and Boston were going for. “I found that citing research built my own confidence because instead of putting forward a random number I had in my mind, I could substantiate it.”

She prioritized what she wanted going in, in terms of flexibility and mobility, and decided how much of her salary she was willing to give up in exchange and, importantly, rehearsed the conversation before going in. A tip she got from Kathryn Meisner’s salary negotiation course for women in business.

Vass has some equity in the company, which she personally considers a kind of bonus; she still covers herself with savings and expenses coming out of her regular salary.

Equity—partial ownership in a company, often in exchange for a lower salary—can be an alluring but potentially risky option, especially with young startups. “You might be earning less now, but maybe there's potential that this company will be sold and your stocks will be worth a ton and you'll get a buyout and something like that, or it'll tank like a lot of startups do,” Jessica Moorhouse advises. Bigger corporations with company stock options will obviously have more security. “It's up to you to decide if this is worth it.”

3. Keep a cushion

An unpredictable income means requiring extra savings. Are you prepared for a slow quarter? Do you have a slush fund or safety net if you get suddenly ill or injured and are unable to work for a couple of months? What if you suddenly need to replace a broken computer or expensive equipment required to get your work done?

“Typically, if you’re an employee, you want to have three to six months of your living expenses saved up for an emergency,” says Jessica. “If you are a freelancer, I would up that to nine or twelve months.”

Once you have a few years of experience as a freelancer, you will know when your busy and slow seasons are, so you’ll be able to anticipate ebbs and flows in income (and save accordingly!). Likewise, allow for some flexibility in your budget between these seasons, especially since unpredictable costs will likely come up regularly when you’re self-employed. Living conservatively during your flush months will help you prepare.

Vass has autopayments set up that transfer money into her savings accounts. (You can, of course, do this super easily with KOHO Goals.) She and her partner contribute equal amounts monthly into short term accounts ($300 into their vacation fund, $230 into a child care fund, to be accessed when they have kids), on top of her Tax Free Savings Account and RRSP. “I never compromise on these amounts,” she says. “I’ll scrimp if I’ve overspent instead of dipping into them.”

How much you should be putting in longer term savings accounts will depend on your goals, where you’re at in life, and your income. David, the author of  The Soul of an Entrepreneur, works with an accountant every year come tax season to figure out how much to invest for longer term goals. He and his wife, who is also self-employed, have put away enough money to keep their family of four living comfortably for at least a year should something happen.

“Typically, if you’re an employee, you want to have three to six months of your living expenses saved up for an emergency,” says Jessica. “If you are a freelancer, I would up that to nine or twelve months.”

4. Plan to quit one day

“A lot of freelance journalists think, ‘I'll just keep working forever!’” Gloria Dickie says. “We love our jobs, and the thought of retirement is kind of depressing.” (Gloria, remember, travels the world for work and is currently thinking a lot about bears.)

If you do what you love, it can be scary to imagine giving it up one day. But what’s scarier still is having no backup plan as you get older.

The amount you should be saving again depends on your situation. “If you're self-employed, obviously you don't have a pension and you need to save probably more than the average employee,” says Jessica. “They probably have some kind of employer RRSP matching program or pension to coincide with their investments to pay for retirement.” Jessica advises working backwards. First, figure out the age you plan to retire, and then make a fake budget for yourself including inflation. Retirement calculators like the one on the Canadian government’s website make doing this easier. Imagining what your ideal retirement looks like and then working backwards will help give you a starting point on how much to stash away.

5. Keep your eye on the prize

Yes, freelancing means dealing with uncertainty. It means living frugally, and spending more time than your traditionally employed peers on managing your finances. It can be easy to get bogged down by all of this and forget about your actual work.

“There's very little overnight stability and success, especially in this business or anything where you're working for yourself. There's this illusion that you'll make it and you'll be set and it rarely ever happens that way,” says David. “But if you stick with it you find your people. You find the work that you like to do and are good for and you get rewarded for it. It’s all about that persistence.”

Planning for persistence in the face of uncertainty can be stressful, but there are simple ways to make it easier on yourself. Spreading out your income so you can pay yourself a salary, and using automatic banking functions (like KOHO Goals) to do your own payroll— including saving for retirement and next year’s taxes —can take some of the pressure off.

Anna Fitzpatrick is a freelance journalist, and previously worked as a millennial finance correspondent for Canadian Business Magazine.