More and more people are becoming self-employed due to the flexibility freelancing can provide along with the ability to help others fulfill a career passion. Have you ever wanted to work for yourself? Have you asked yourself any financial questions before you quit your day job so you can prepare? Even if you are just side hustling with no date in mind to walk away from your job, this is still important to get a head start on.
Popular freelancing niches like freelance writing, virtual assistant work, and graphic design (just to name a few) can help you earn a full-time income if you commit to consistently growing your clientele. When your freelance income starts to get close to the income you make at your full-time job, it’s often a good time to consider leaving your 9-5 if you enjoy your freelance work more. But before you make that leap, ask yourself these six financial questions before you quit your day job.
1. Am I Making Enough Money to Pay Taxes and Meet My Monthly Expenses?
Earning enough money to meet regular monthly expenses is a concern some freelancers have regularly. Since you set your own rates and hours, how much or how little you earn is up to you. With freelancing, if you don’t work, you don’t get paid, so it’s important to draft up a budget so you know how much you need to earn each month.
Another factor you need to consider is taxes. Freelancers tend to pay a lot of taxes since they don’t have an employer to help cover a portion of their taxes. Sometimes, you may be expected to pay as much as 30 percent of what you earn each month when it’s time to make a quarterly tax payment.
If you’re earning $5,000 per month freelancing, you may need to set aside $1,500 per month for taxes which leaves you with only $3,500 left to actually use.
2. Do I Have An Emergency Fund?
Having an emergency fund is extremely important if you are a freelancer. Since your income can fluctuate from month to month, you may have some months where it dips lower than you’d like. This is why it’s best to have a fully stocked emergency fund to help you stay calm during these times so you can still meet your expenses.
For freelancers, it’s best to set aside anywhere from 6-12 months’ worth of expenses to be safe.
3. What Type of Insurance Will I Have?
When you’re self-employed full-time, that not only means you have to pay you own taxes, but you also have to pay for your own medical and dental insurance along with any other benefits a traditional employer would offer.
Insurance can be costly depending on your needs, so you can always check with the Marketplace to see if you qualify for any tax credits or discounts on certain plans or see if you can continue with the plan you had with your day job but just pay it on your own. If you are married and your spouse’s employer provides insurance, you may be able to take advantage of your spouse’s plan. Insurance premiums are something you need to carefully think about and start budgeting for before you walk away from your job.
4. How Will I Contribute to Retirement?
Investing in retirement is another important subject you’ll need to look into before you leave your job. Since you’ll no longer have the option of contributing to a 401(k), you’ll need to explore other options.
A Roth IRA is a good start. It’s an individual retirement account that allows you to set aside after-tax income up to a specified amount each year that can be withdrawn after age 59 ½ tax free. There are certain eligibility guidelines you must meet in order to open an account, and the annual contribution limit is $5,500 and $6,500 if you are over the age of 50.
Another option is a SEP IRA which is a traditional IRA but for people who are self-employed. With a SEP IRA, freelancers can contribute more than with a Roth IRA by investing 25 percent of their annual income or $53,000 per year (whichever is greater).
5. Have I Tracked My Income and Expenses for Several Months?
One of the best ways to make sure your freelance income is somewhat consistent is to track it for several months and see how it fluctuates.
Write out a bare bones budget of your basic expenses and make sure your freelance income can cover them while allowing you to set aside the proper amount for taxes, save for your emergency fund and invest in retirement. You may even want to try living solely off your freelance income for a month.
Another factor you want to consider is your business expenses. You can write most business expenses off, but you still have to pay for them upfront. Equipment and materials, courses and educational tools, and contractors and other hired help are all expenses you should consider and budget for before leaving your job.
You might want to set up a separate business savings account so you can cover these expenses stress-free whenever they come up.
6. What’s My Financial Backup Plan?
Quitting your job to freelance should never be a rushed decision. You should lay out brief steps to take should you ever need to consider plan B. Determine what you would do if you lost a large portion of your freelance income and how would you support yourself.
Would you rely on your emergency fund for a few months? Would you apply for another job? Have you talked to your spouse about how they could help support you and the family temporarily? Would you apply for a personal loan?
No one ever likes to think about these things, but it’s important to consider what would happen if a situation ever prevented you from being able to earn money.
Once you’ve been able to thoroughly and confidently answer these six questions, you’ll be just about ready to turn in your notice and walk away from your 9-5 with no regrets.