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70% of Freelancers Have This Serious Financial Issue

by Lyle Daly | Oct. 10, 2018

The Ascent is reader-supported: we may earn a commission from offers on this page. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation.

Young woman at home office desk using her cell phone.

Image source: Getty Images

If you're one of many Americans who has chosen freelancing over traditional employment, then you'll have some unique challenges to deal with. For 70% of freelancers, there's one glaring financial issue that stands out -- no long-term savings.

In fairness, there are people from all walks of life who aren't doing well in the savings department, but the issue is much more prevalent among freelancers. Insufficient savings are never good, and they become more of a problem the closer you get to retirement age.

By prioritizing your long-term savings, you can avoid the financial troubles that affect so many freelancers and build a nest egg for your golden years.

The challenges of saving money as a freelancer

In CNBC's story on the lack of savings among freelancers, it found the number of freelancers without any long-term savings (70%, reported by Hyperwallet) far exceeded the number of Americans overall in that situation (25%). And considering the percentage of independent workers grew from 10.1% in 2005 to 15.8% in 2015, this is a financial issue that could become more widespread.

Why saving money is so much harder for freelancers

There are two big reasons:

  • Unpredictable income
  • The extra costs involved with freelancing

With a job, you normally know how much money you'll get every pay period. As a freelancer, you could have busy months when you make all kinds of money, followed by periods when work is scarce and you need to dip into savings to make ends meet.

For all the perks of freelancing, a notable downside is the extra costs you incur for benefits that would be covered by an employer. Health insurance is your responsibility, and you'll spend more if you want dental and vision coverage. There's no paid leave, so any time off is on your dime. Since there's no employer paying half your self-employment tax, you'll pay the full 15.3% of your net earnings. All these costs cut into how much income you keep.

Save at least 25% of your income

A smart guideline for freelancers is to save at least 25% of your income, between 30% and 40% is even better. Although that may seem like a lot, it won't be nearly as much after you pay your self-employment tax.

It's equally important to increase the amount you save during your more successful periods. Don't fall into the trap of spending more because you've had a good month. By putting that extra money into your savings, you'll have a cushion if work gets slow.

Retirement plans for freelancers

Many workers save for retirement only because their employers give them the option to take the money directly out of their paychecks, which you obviously can't do when you freelance.

But there are still plenty of options if you're willing to look. Even for freelancers, the most common retirement plans are individual retirement accounts (IRAs) and solo 401(k)s. Here's more details on those:

IRAs

An IRA is an investment account you can open through an IRA broker that helps you save money on taxes. Two popular types of IRAs are:

  • Traditional IRAs
  • Roth IRAs

In a traditional IRA, you deduct any contributions you make from your income taxes that year, and then you pay taxes on your withdrawals in retirement. A Roth IRA is the opposite, as you pay taxes on the contribution and not on the withdrawal. Ideally, you should estimate whether you'll be in a higher tax bracket during your career or retirement. If it's the former, a traditional IRA will save you more. If it's the latter, you should go with a Roth IRA.

As of 2018, you can contribute up to $5,500 annually or up to $6,500 if you're older than 50 across any traditional IRA and Roth IRA accounts you have. If you want to contribute more, a SEP IRA will have a much higher annual contribution limit.

Solo 401(k)s

A solo 401(k) is another way to contribute more than $5,500/$6,500 per year to your retirement. It's only available if you're self-employed and don't have any employees other than your spouse.

The annual limits on solo 401(k) contributions are:

  • Employees - - $18,500 or $24,500 if over 50
  • Employers - - Up to 25% of net earnings

When you're self-employed, you're technically employee and employer, so you can max out both contributions. The total annual contribution limit as of 2018 is $55,000 from your employee and employer contributions, or $61,000 if you're over 50.

Like IRAs, you can start a solo 401(k) by finding an online broker offering this type of plan.

It can certainly be challenging to save money when you're a freelancer. I know that for my first couple years, I was happy just to have enough to pay my taxes. But if you're going to be freelancing for the long haul, then you need to make sure you keep up on your savings and stay on track towards retirement.

These savings accounts are FDIC insured and can earn you 12x your bank

Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you more than 12x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2021.

Two top online savings account picks

Rates as of Dec. 29, 2020 Ratings Methodology
Logo for CIT Bank Savings Builder
Logo for American Express® High Yield Savings Account
CIT Bank Savings Builder American Express® High Yield Savings Account
Member, FDIC Member, FDIC
Rating image, 5.0 out of 5 stars.
5.0 stars
ToolTip Icon for Star Rating. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. = Best
= Excellent
= Good
= Fair
= Poor
Rating image, 5.0 out of 5 stars.
5.0 stars
ToolTip Icon for Star Rating. We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
Our ratings are based on a 5 star scale. 5 stars equals Best. 4 stars equals Excellent. 3 stars equals Good. 2 stars equals Fair. 1 star equals Poor. = Best
= Excellent
= Good
= Fair
= Poor
Open Account

On CIT's Secure Website.

Open Account

On American Express' Secure Website.

Read Review Read Review

APY: Up to 0.45%

APY: 0.50%

Best For: No monthly maintenance fee

Best For: High APY

Min. to earn APY: $25k or $100 monthly deposit for highest tier

Min. to earn APY: $0

About the Author

Lyle Daly
Lyle Daly icon-button-linkedin-2x icon-button-twitter-2x

Lyle is a writer specializing in credit cards, travel rewards programs, and banking. His work has also appeared on MSN Money, USA Today, and Yahoo! Finance.

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