If you're new to the Gig Economy, you've just found yourself initiated into some new concepts you weren't used to when working for someone else.
Suddenly, revenues can be inconsistent from month to month. Business expenses and depreciation now come out of your income. And you just found out that self-employed people pay a higher percentage of their income at tax time vs. employed people.
With volatility, it's hard to plan for the future. So you might be thinking about putting retirement planning on the backburner. But even five years of not contributing your nest egg can significantly impact your retirement goals. And the younger you are, the more of an impact it has, not less.
Fortunately, you can save for retirement on any income, even when it's unpredictable. Here's what to do.
If you have a full 3-6 months set aside for a rainy day, go you. But if you're like most people new to the Gig Economy, you may have little in savings.
It's critical to set a little money aside here to float you from month to month to account for inconsistent revenues. But 3-6 months of income sitting may seem outrageous right now, so find an amount that seems reasonable for you. Even having 1/2 of your monthly income in savings can help.
Why have this fund? In a bind, you might be tempted to pull money out of retirement accounts. And that's costly in penalties, taxes, and lost growth.
Having a little saved that you constantly replenish if you must use it, helps you leave retirement untouched.
If you say, “I'll invest $200 a month into retirement”, that may be hard to maintain during a really slow month, as you're working on increasing your Gig rates.
But you can always invest a percentage. Now, you've probably heard you should invest 15% of your income in retirement from a financial planner or accountant. This is definitely something to try to work up toward. But even if you could do 5%, that's something, especially if it's out of gross revenues.
It isn't just about money. This also turns saving into a habit that will continue to follow you throughout life. You'll experience a greater work-life balance knowing that you're setting some aside for your future.
Automate this saving for the future. Determine a date when you're most likely to have sufficient funds in your account. Then have it automatically moved to your retirement account each month.
Just like good AP automation software and accounting tools save you time and reduce your error rate, automating investing can help you stay on track to meet your financial goals.
Automation is powerful because it turns investing into a mindset. Since it's automatic, this becomes just another bill you must pay. So you don't even think about it and can't de-prioritize it.
You hustle in the Gig Economy to make sure you've got the funds to pay it along with all your other bills. The difference is, you get this money back in the future, plus returns.
Depending on your financial needs, this could be a ROTH IRA or Traditional. Both have their pros and cons you'll want to explore.
In a nutshell, if you invest in a traditional IRA, you can deduct that amount from your income to save on taxes. This is an above-the-line deduction, which means you can take this deduction even if you take the standard deduction. That can amount to significant tax savings. Your money grows tax-free, but you will pay taxes when you withdraw the money after retirement.
With a ROTH IRA, you don't get a tax deduction. But since you paid taxes on that money, you don't pay taxes when you withdraw the money plus any returns it earned. ROTH IRAs also have the unique benefit of allowing you to withdraw your contributions at any time without a penalty.
Whether you get a client bonus, tax refund, inheritance, or win the lotto, you already have it in your mind that you'll put a percentage of this in retirement. And since this is unexpected money, it's a good idea to plan for a higher percentage than you pull from your normal income.
As long as you see retirement as money you could tap into if revenues fall short, you run the risk of doing it. But if you see this as money that you must not touch at all costs, you'll hustle out there, make more money and perform better in the Gig Economy.