The freelance revolution—what The Atlantic has dubbed the “Gig Economy”—has changed the way Gen Y thinks about work and career. No longer are we relying on an HR manager in an office somewhere to make our dreams happen—we’re taking them into our own hands. We’re working for ourselves and finding our own clients. More than any other generation, we’re pursuing our passions and crafting the careers we want. It’s freeing, exhilarating, and, quite frankly, a little frightening.
Yes, leaving the corporate world to do your own thing is clearly tempting. But it’s risky and uncertain, too. So, if you’re thinking about it, the best favor you can do yourself is to prepare yourself in advance—emotionally and fiscally. Here are the most important things to consider when you’re preparing financially for a freelance career:
The old adage goes that you should have three months’ living expenses (including rent, bills, food, and other essentials) saved before you quit your job. But in this economy, that’s evolved: You should be stocked up for the better part of a year. For young professionals on entry-level salaries, this may be a stretch, but try to hit as close to that goal as possible. You never know when you might be out of freelance work—or for how long—and you can never have too much in savings.
The benefits of having health insurance when you need it (e.g., not having to fork out $10K when you fall at the ice-skating rink) far outweigh the monthly costs—for a healthy young adult, private insurance can be as little as $70 per month. But do your research on insurance options several months before you take the plunge, as many providers have a 30-day application approval process. Plus, keeping continual coverage is easier (and less risky) than letting your insurance lapse.
You’ll never make ends meet—let alone make an income—if your product or service is priced too low. Even if it makes you a little uncomfortable, be prepared to ask for a competitive rate. Consider how much your time is worth, how much the product is worth to your client, what your competitors are charging, and—most importantly—how much you need to live on (including making a profit). There are a slew of factors to consider when setting pricing, so it’s wise to invest some time in deciding your rates beforehand (FreelanceSwitch offers several good resources).
You never knew how easy you had it being employed until tax season rolls around. All that money you thought was yours? Yeah—the government wants a good chunk of it back. Check out Anti 9-to-5 Guide’s freelance tax FAQ for helpful links and resources, and meet with a tax advisor at least once to get customized advice. When you do start freelancing, keep in mind that filing estimated taxes quarterly will prevent you from getting hit with interest and penalties in April.
It may seem far into the future, but it’s never too early to start saving for retirement. If you have a 401(k) or 403(b) (or any combination of numbers and letters that you can’t touch until you’re much older) from a former employer, consider rolling it over to an IRA or mutual fund, which offer a variety of investment options that let you take more control of your money. Most financial institutions don’t charge fees for rollovers, but double-check.
In addition to covering your cost of living, you’ll need to plan for your business expenses, too. This includes a business license (costs vary by state and business type), liability insurance, set-up costs like website development, business cards, networking events, and training and professional development. Plus, anything you actually need to do your work—a computer, printer, and other office equipment and software.
In the freelance world, one thing is for certain: there will be a time when you’re not making much (or any) money. So, long before it happens, think about how you’ll address it: Are you willing to pick up a part-time job to fill in gaps in income, or would you rather scrimp and save from the get-go so you can pour as much time as possible into your new gig? Having a plan for the hard times will also keep you from giving up and running back to the office lifestyle the minute things get tough.
The more research you do ahead of time, the fewer surprises there’ll be when you lose the comfort of your paycheck. And if you’re not quite financially ready to dive in, don’t give up—there are many things you can do beforehand to make your transition easier. Network and build relationships with potential clients before you turn in your two weeks’ notice, start your freelance work on the side, or even broach the topic of contracting with your previous employers.
And once you’ve done your planning, stocked your savings, and laid the ground work for your business, why not just go for it? The risk may be high, but the reward? Phenomenal.