Why You Need a Savings Account as a Freelancer | Axos Bank

Are You a Freelancer? Here Are 7 Reasons Why You Need Savings


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Freelancers without savings are standing on a financial cliff.

With any unplanned expense or slow month, you’ll be scrambling to pay the bills. And, that is not an enjoyable position to be in.

While everyone should save money, this is especially true for freelancers. With an unpredictable flow of income, it is essential to have a healthy amount of savings on hand. Lean times will happen – it is just a matter of time. What you do to prepare for those lean times will determine how well you survive the situation. 

If you are a freelancer, we’ll explain why you need to keep a stockpile of savings, plus provide a couple of tips on how to get started.

Reason #1: Slow Months

First and foremost, you need to expect dry months.

In freelancing, work often comes in waves. Some seasons, you will have so much work that you can barely handle the load. In other seasons, however, you’ll have too much time on your hands, wondering how you will pay the bills. 

Any healthy economy naturally rises and falls and, with it, the earnings of freelancers. You won’t always have a steady rotation of clients. Sometimes, you’ll hear crickets. During these quiet seasons, a hearty amount of savings will smooth the bumpy ride of your freelancing career. 

Instead of worrying about these slow months, start preparing now to avoid financial stress in the future. While we generally recommend keeping three to six months of expenses on hand, it’s a good idea to double this amount as a freelancer. Remember, it’s far better to be safe than sorry.

Take advantage of busy months to set aside a portion of your earnings. It will likely come in handy later. In time, you may learn to embrace the slow months and use this time as an opportunity to focus on personal projects that often get left to the wayside. 

Reason #2: Greater Flexibility

On its own, freelancing offers great flexibility with your time and earning potential. Savings can boost this flexibility even further by granting more control over the work you take on. A sizeable amount of savings can open you to more options than you would have as a cash-strapped freelancer.

For example, let's suppose that you received a new assignment, which – after some time – you discovered does not align with your schedule or maybe even your principles. Without savings, you would feel obligated to take on this work – after all, your bills would need to be paid somehow. After putting so much time and energy into honing your skills, it would be frustrating to use them on projects that brought you undue stress.

But, with a hearty amount of savings, you have the freedom to say no. If you disagree with a client’s ethics or don’t get along with a company’s staff, you can simply say, “No, thank you” and move on.

Reason #3: Taxes

One common mistake that new freelancers make is forgetting to save enough money for taxes. On top of your federal and state income taxes, you may need to pay a self-employment tax. Currently, the self-employment tax rate is 15.3%, but it is subject to change over time. 

Be sure to set aside a portion of your earnings for taxes – a good rule of thumb is to save 30%. You might have money left over, but extra cushion is never a bad thing. If you aren’t sure of what to expect, use this calculator to get an idea of how much money you’ll need to save.  Also, it may be a good idea to pay your taxes on a quarterly basis. If you wait until the end of the year, you’ll need to write a much larger check to Uncle Sam. 

Some freelancers like to spend their earnings as soon as the money hits their bank accounts. If this describes you, consider opening a separate savings account for your taxes. As soon as you get paid, transfer your tax savings into the separate account. Remember - don’t touch it until tax time!

Reason #4: Time Off

Freelancing’s flexibility is great, but it comes with a price. The simple fact is this - when you’re not working, you’re not earning money. (Unless, of course, you have passive income.) Unlike many W2 employees, you don’t have the luxury of paid time off. Instead, your “PTO” is the money you set aside for your own vacation and sick leave.

Now, to be clear – this doesn’t mean that you should work 24/7. Doing so will quickly lead to exhaustion and burnout. Instead, it’s important to rest, recharge, and enjoy your life fully. This means that you should start saving money now so you can take time off in the future. With enough money saved, you can cover vacations and the lost earnings from these vacations. Make the effort to plan ahead and save for vacations far in advance. 

In addition to planning for vacations, you will also need to plan for unexpected sick leave. No one plans to get sick, but it happens. With savings, you can avoid feeling sick and stressed out because of money. When you are feeling under the weather, your main focus should be getting better – not struggling to pay your bills.

Don’t just prepare for the minor colds and aches – prepare for serious health problems too. If you were to get sick for an extended period of time, think about your financial circumstances. Would you be able to cover two weeks of expenses? How about two months? Unfortunately, the reality of being a human being means we can be out of commission for longer than we ever anticipate. Consider saving money into a tax-advantaged account, such as an HSA (if you have a high-deductible plan). This account will allow you to maximize your savings for healthcare expenses as a freelancer. 

Reason #5: Retirement

Building an emergency fund is important, but you can’t stop there. You also need to think long-term. Unlike many employees, you do not have the luxury of a company 401k with matching contributions. As a freelancer, you must take charge of your own retirement planning. 

Luckily, you have several retirement account options to choose from. This includes a Roth IRA, traditional IRA, or Self-Employed Pension IRA (SEP-IRA). While IRAs are available to many savers, a SEP-IRA is only available to self-employed individuals. Each of these options has its own advantages and disadvantages – be sure to do your research to find the best option for your needs. (Our article, How to Save For Retirement as a Freelancer, discusses your options in further detail.)

Regardless of which option you choose, the key is to start saving as early and as often as possible. By saving early, you allow your savings to compound over time. Even if you are only able to contribute a small amount each month, it is important to make the effort. 

Reason #6: Reinvesting in Your Business

As a freelancer, you are – in essential terms – a business owner. And, as a business owner, you will have business expenses.

Whether you need to attend a conference to network with potential clients or need a new website to better showcase your work, these expenses can add up quickly. But, don’t hold yourself back by refusing to shell out for these necessary expenses. Build your savings so that, when the need arises to reinvest in your business, you have the funds to cover them. With a healthy savings account, you can make important investments without taking out a credit line or business loan. This, in turn, will only improve your finances.

Reason #7: Your Escape Route

At some point, you might get tired of freelancing – it happens! When you feel that burnout careening toward you, the change in mood can be depressing without any savings to fall back on. If you don’t have a safety net, a dramatic career change could be financially impossible. But, with a comfortable nest egg in place, you can avoid feeling trapped in your current freelancing situation. If necessary, you can switch things up without worrying about the financial fallout of losing clients. 

Main Takeaways

Freelancing can allow you to take greater control of your career. But, although there may be no more 9 to 5 at the office, you may have less stability in your income. To deal with the ups and downs of your income, it is important to set aside savings whenever you can. Make savings a priority in your budget to ensure that you never have to worry about a slow month again. 

As a digital bank, Axos Bank can offer savings accounts with competitive interest rates. Open a High Yield Savings Account today.

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Are You a Freelancer? Here Are 7 Reasons Why You Need Savings