When you work for an employer, one of the most common benefits you are offered is a retirement plan. Typically this is a 401(k) and, if you are very lucky, it will be offered with “employer matching.” This helps you save twice as much. For those of us in the freelance and self-employed sectors, however, we have to find our own ways. We don’t have employers automatically deducting money for retirement or automatically depositing a portion of every paycheck into a savings account so we won’t be tempted to spend it. We have to do all of that ourselves.
Here are the four basic ways that you can invest in your short and long-term financial health:
Long Term Saving Via Investment Portfolios
Investing in stocks, bonds, mutual funds, commodities, etc. is one of the most important parts of setting up a stable financial future. There is no doubt that investing can be risky. It is definitely riskier than a straightforward savings plan. Still it is the single best way for your money to make more money.
If you’re new to trading and this type of investing, it is important to go slowly and to get accustomed to how trading works and to get a feel for how the market behaves before investing large sums. One of the best ways to do this is to learn from professionals and emulate their actions. You might choose to do this via professional financial management firms or a highly regarded broker. If you feel you can learn better on your own, there are plenty of books to read and websites like 24Option that will help you on your investing journey. Click here to check out their blog.
Long-Term Saving Via Retirement Accounts
Just because you don’t have an employer matched 401(k) doesn’t mean you can’t set up a retirement account for yourself. You can do this via a regular savings account, but the better option is to set up your own Individual Retirement Account (IRA). There are several different types of IRAs to choose from. The one you use will be determined by how much you make, how much you want to save, whether you want to pay taxes on it now or later, etc. IRAs are better than “plain” savings accounts because their interest rates are higher and they offer better rates and terms.
Short Term Savings Plans
In addition to your IRA, there are three types of savings that you need to do as a freelancer if you want to stay financially solvent.
Saving for Taxes: as a freelancer or self-employed person, your taxes are more complicated than the traditional employee’s. One of the biggest differences is that you need to pay your taxes in advance via estimated tax payments. Typically these add up to 25% of your gross income, but you’ll want to check current tax tables for an accurate number. Make sure that you set this amount aside into it’s own account every time you get paid. If you save it a little at a time, writing that check every quarter won’t feel like such a burden because you’ll already have the money on hand.
Six Months Living Expenses: It is important that you keep at least six months of living expenses tucked away in a (hopefully high interest) savings account. This way, if you lose a client or want to change fields, you won’t have to worry about making ends meet while you find a replacement client or set up your new business. The best way to save for this is to tuck away 5-10% of every payment you receive until you’ve reached the amount you think you’ll need. Then reduce that amount to 3-5% to pad the account and give yourself some breathing room.
Emergency Fund: It’s good to always have at least a few thousand in the bank in case an emergency hits. Unexpected car repairs, medical bills, equipment replacement–nobody likes having to figure out how they’ll fund a huge expense on the fly. To do this, like with your living expenses savings account, set aside 5-10% of every payment until you’ve got at least a few thousand set aside then reduce your savings to 3-5% so you can continue to grow the account’s breathing room.
It takes a lot of discipline to do this much saving and investing. It can be difficult to put that money aside when your budget is already tight. Trust us when we tell you though that saving now will save you potentially years of grief later.