If you are a full-time freelancer or do freelance work as a side hustle, you may have thought about how much you should put away toward retirement. When you are a freelancer, you won’t have any taxes or deductions automatically taken out of your paycheck, so you need to think about and save for these things on your own. But where should you put your money, how much should you save, and what should you prioritize? This article will discuss how freelancers or gig workers should save for retirement and what makes it challenging to do so.
Why is it Difficult for Gig Workers to Save for Retirement?
In a traditional full-time job, your employer will likely outline how you should save for retirement, whether through a traditional IRA, Roth IRA, 401k, or something else. Many of these retirement plans take money directly from your paycheck, and while they do result in lower net pay each week, you don’t need to think as much about the money you are contributing to your retirement plan. Additionally, you probably won’t be as tempted to pull it out. However, gig workers and freelancers don’t have this option. Instead, they must actively choose to save for retirement and find their own plans, which can be harder to do in the moment.
Emergency Fund Comes First
The most crucial tip for freelancers and gig workers saving for retirement is to build an emergency savings fund. That should be your first order of business. Most freelancers and gig workers operate on contract work and don’t necessarily have steady income throughout the year. So they must have a hefty emergency fund in case a period of unemployment arises. Emergencies and unexpected circumstances happen. So you should always contribute to your immediate emergency fund before moving on to other long-term investments. Plus, if you maintain a solid emergency fund for times of unemployment, you won’t need to dip into your retirement balance.
Understand What Assets You Have
One of the keys to consistently contributing to your retirement fund is understanding your finances and what assets you already have. For example, if you commit to an arbitrary monthly number to contribute to your retirement, it could be too much or too little, depending on your budget. If it’s too much, you’ll probably resort to spending money on credit cards or pulling out of other savings accounts, which defeats the purpose of saving. If it’s too little, you won’t notice the money leaving your accounts, and it will take quite a long time for your retirement fund to build interest. So take some time to understand your finances and how much you can realistically contribute to your goals.
Open an IRA
An IRA (individual retirement account) is one of the most common and popular ways to save for retirement. IRAs are essentially tax-advantaged savings plans, meaning that when it comes time to pay your taxes, the funds in your IRA are deducted from your overall income, and you will pay less in income tax. The interest rates on these accounts vary depending on the bank you open one with, but opening an IRA and consistently contributing to it means you will be paying your older, retired self. There are a few different types of IRAs, so make sure you talk with a banker you trust about your options.
Minimize Investment Fees
If you invest in something like portfolio management, there will be fees associated with your investment choices. No one likes to have fees taken out of their investment funds, but it can be especially bad for gig workers or freelancers because they often already have less money to invest. Fees can take a significant chunk of money each month. Rather than spending money on a portfolio manager or similar service, you handle your investments yourself using new online investment programs such as Robinhood or Public. Fees to invest in mutual funds like the S&P 500 are extremely minimal, and you will likely get a small but consistent return.
Set Up Automatic Transfers
No matter what bank you use, there will likely be some form of online banking management that you can use to set up transfers. However, you may not realize that there are almost always options to set up automatic transfers to other accounts. For example, suppose you have a savings account that goes solely toward your investment toward retirement. In that case, you can set up automatic transfers every week or other week so that a certain amount of your paycheck goes directly to that account. That way, you won’t even think about it and will be less likely to miss that money.
Found Money? Invest It!
Found money could come from a variety of places. Whether it’s money that you literally found on the street or in your home, money gifted to you by friends and family, or an unexpected refund/rebate from a company, an unexpected windfall occasionally happens. When you receive this “found money,” the most tempting thing to do is spend it on something you want. However, the smartest thing for gig workers and freelancers is investing that money into your retirement fund. Not only does it put extra money toward your future self, but it also prevents you from wasting that money on stupid things.
Learn About the Stock Market
If you want to try a riskier approach to investing, try learning about the stock market on your own. There are plenty of beginner’s resources to learn how to invest extra income in stocks, primarily through free online resources like YouTube. Be aware that you could lose a little money while learning the stock market. So be sure to invest modestly, to begin with. However, if you know how to manage your portfolio effectively, you could come out making much more money than you ever anticipated. Some stocks will be higher-risk, while some will be very low-risk, so do some research to see what will work for you.
Hire A Professional
It’s never a bad idea to try and get some help, especially from a financial professional who knows the market and your personal assets. For freelancers, you may not have someone currently advising you on what to do with your money. But one of the smartest things you can do is get guidance from someone who knows more than you. For example, a financial advisor can tell you how much you should invest, where to invest, and how much you can expect once you retire.
Freelancing While Saving to Retire is Possible
Many people see freelance as unstable, short-term work. However, many people freelance or do gig work throughout their entire careers and earn a great living doing so. Setting yourself up for success in retirement while freelancing is extremely possible. You just need to have the right resources to do so. Hopefully, by following some of the tips on this list, you will feel more confident about saving for retirement as a freelancer.