Being self-employed comes with many freedoms, but there’s also inherently less stability. Sure, there’s no limit to how much money you can make when you work for yourself, but your income will likely ebb and flow with market demand, your personal performance, and a little bit of luck.
This presents a cruel kind of irony when planning for your future. Not only will you have no access to employer-sponsored programs like 401k and 403b plans, you also won’t have the financial stability necessary to count on a steady long-term future. Accordingly, you’ll need to take proactive action to secure your own financial future, including saving for retirement, planning for emergencies, and compensating for your inconsistent income
Strategies for Securing Your Financial Future
These are some of the best ways to prepare for your financial future:
1. Create a budget (and plan for taxes).
Your first goal should be to set a strict budget for your daily life. How much money do you make in a month, on average? How does that total change? You should set a budget for necessities that costs you less than even the smallest amount of money you make. Cut unnecessary expenditures wherever possible by seeking cheaper alternatives, and confronting what you do and don’t need. You can use part of what’s leftover for discretionary spending. Make sure your budget also includes money set aside for estimated tax payments; if you need help, this guide from TurboTax covers the basics.
2. Set up an emergency fund.
With a formal budget in place, you should know about how much it costs to maintain your current lifestyle. But what will you do if you lose a major client or find yourself unable to work for a period of time? Your next goal should be to prepare for this by creating an emergency fund. Save up a little each month until you have a pocket to cover at least three months of expenses—preferably six months, just to be safe.
3. Diversify an investment portfolio.
With your emergency fund in place, it’s a good idea to start investing. There are many potential areas of investment, including stocks, bonds, futures, and mutual funds, all of which offering varying returns and varying levels of risk. As RJO Futures explains, no single type of investment is likely to secure steady, long-term gains. Instead, you’ll need to diversify your portfolio by investing in lots of different areas.
4. Set up an IRA.
Just because you don’t have a full-time employer doesn’t mean you have no access to retirement plans. You can set up your own individual retirement account (IRA) even if you’re self-employed; in fact, there are 11 types of IRAs available, each with different advantages and conditions for pursuing them. Traditional IRAs and Roth IRAs are somewhat straightforward, and available to anyone, but SEP IRAs may also be worthwhile for you to pursue.
5. Have a long-term savings plan.
Opening an IRA, or an individual brokerage account to manage your investments is a good start, but if you want your investments to grow at a steady rate, you’ll need a long-term plan for regular savings. For example, you may wish to set aside $500 a month, or target a goal to invest $6,000 by the end of the year. There’s no right or wrong way to do this, but you should have some “main” goal to motivate you to save more money and provide a blueprint for how to do it.
6. Invest in real estate.
If stocks and bonds aren’t for you, you could also choose to invest in a rental property. With a strong neighborhood choice, real estate investing yields reliable returns, and you’ll likely see positive cash flow as long as you have a tenant. Just be aware this will likely eat up much of your time.
7. Have a backup plan.
Finally, whatever your career path is, consider investing in a career “backup plan.” In case your business falters, or if demand for your line of work drops, you should have an idea of what to do next. Investing in more training or education, or spending time learning a new skill set is a great way to hedge your bets.
The most important piece of this puzzle is starting as early as possible. Creating good financial habits early will help you reap the greatest benefits from your actions—and will also give you more time to enjoy the power of compound interest. Rather than making any more excuses, take an hour out of your day and get started—even if it’s just a preliminary round of research to set a foundation for your next major decisions.