Thursday, 7 May 2015
One in three American workers, or 53 million people, are freelancers, according to a 2014 study by the Freelancers Union and independent jobs marketplace Elance-oDesk.1
And many 9-to-5ers hope to join their ranks, with 36% of those who moonlight saying that they've thought about quitting to freelance full-time.
But as alluring as it may seem to become your own boss, letting go of a steady paycheck isn't easy. Stepping into self-employment takes preparation. "Freelancing can be liberating and empowering, but it's also a lot of responsibility," says Dan Lavoie, director of strategy at Freelancers Union.
Here's how you can make what may seem like a scary move safely and confidently.
Pick up side gigs while you're still full-time employed. "This preparation helps you make sure you like freelancing, can sustain yourself in the first three to six months, and builds confidence so you know how to charge and how to handle clients," says Lavoie.
The extra income will also help you pay down any debt you have or build the income you need to become independent, says Sophia Bera, a certified financial planner and founder of Gen Y Planning.
"Credit card debt is hard to get out of when you have inconsistent income," says Bera, so as much as possible, pay that off while you're full-time employed.
Additionally, save three to six month's worth of basic living expenses for emergencies, and begin to cut your costs as much as you can. That will make the transition much easier, help ensure you aren't going into debt to pay for your regular living expenses, and make it much more likely that you won't have to head back to full-time work.
"If you can build up a little bit of side recurring income before you quit that full-time job, that's going to help with the transition," says Berea. "Let's say you have three or four recurring monthly freelance gigs that pay $1,500, and your expenses are $2,000 a month. Now you just have to earn $500 in other freelance gigs a month."
If your full-time schedule doesn't permit you enough time to take on so much freelance work, then set aside savings to cover the initial months when you'll be drumming up work. Project how long it will take to generate enough work that you can cover your expenses each month, and keep a stash of money, separate from your emergency account, to cover those months, plus two more.
Know your bare-bones budget and your target budget. Working backward, figure out the bare minimum you need to charge per hour to make it work, and the ideal you'd like to charge. For both figures, add in 30% overhead, since you likely won't be working on billable projects eight hours a day. But don't set your rate at the bare minimum, says Lavoie: "Price your services based on your value, not just on costs or what you're currently making."
As you strike out on your own, tell your former colleagues, family, friends and classmates that you'll be freelancing full-time and ask them to refer gigs your way, or contact people in your network who might give you projects to let them know of your services. Make sure you update your LinkedIn profile too, and join groups related to your specialty.
Additionally, connect with other freelancers in your industry both in-person and through social media. Some of the more established ones may have too much work and will be looking for someone to whom they can refer to clients.
Recognize that freelancing is the equivalent of running a small business. Figure out an accounting and invoicing method that works for you. Make sure to sign a contract with every client. (Freelancers Union provides this contract creator.) Talk with a lawyer to determine the best legal setup for your business.
Set up a system to pay your estimated taxes quarterly – start by setting aside 25% to 33% of every paycheck. Find an accountant with whom you have a good rapport, says Bera. "It doesn't necessarily have to be someone who specializes in freelancers, but someone you should feel comfortable emailing throughout the year."
Get the health insurance you need, taking advantage of a Health Savings Account (HSA) if you have a high-deductible health plan, and get disability insurance to a percentage of your income if you become unable to work.
As soon as you can, get on a retirement plan and contribute to your Roth IRA and another retirement account, such as a SEP IRA or a solo 401(k).
Being on your own is incredibly rewarding, but to ensure a smooth transition, prepare in advance. That will leave you the mental energy to focus on getting your new business off the ground.
The content provided is for informational purposes only. Neither BBVA USA, nor any of its affiliates, is providing legal, tax, or investment advice. You should consult your legal, tax, or financial advisor about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA USA or any of its affiliates.
Links to third party sites are provided for your convenience and do not constitute an endorsement. BBVA USA does not provide, is not responsible for, and does not guarantee the products, services or overall content available at third party sites. These sites may not have the same privacy, security or accessibility standards.
From finding side gigs to participating in medical studies, there are countless ways to earn more money now.
Most people avoid talking about money but sometimes that's impossible. Find out how to navigate seven common situations when money comes up.