3 Ways to Approach Investing When You're a Freelancer or Gig Worker

Investing is an important habit no matter what type of job you have. But as a freelancer or gig worker, it can be harder to invest consistently. When you have a regular salary, you can base the amount you invest on that. Many employers also offer retirement plans, such as 401(k)s, that employees can contribute to directly from their paychecks.

When you're a freelancer or a member of the gig economy, it's more complicated. Your income could fluctuate heavily from one month to the next. You also may not be able to make investing automatic, like you could with an employer-sponsored retirement plan.

That's why it helps to know the investing strategies that work well for freelancers. Here are three ways to approach investing so you can build wealth and ensure you have enough for retirement.

1. Invest a percentage of your income

One popular way to invest is dollar-cost averaging, where you invest a specific amount on a set schedule. This works well for salaried employees, since their income is the same each pay period. For example, an employee who makes $4,000 each pay period could decide to set aside $600 of each paycheck for investing through their 401(k).

That doesn't work if you're a freelancer who might make $6,000 one pay period and $3,000 the next. The best option is to invest a percentage of your income.

For example, you could decide to invest 15% of your income. If you make $6,000, then invest $900 of it. If you make $3,000, then invest $450. This way, you're always investing a reasonable amount commensurate with what you're making.

2. Stick to passive investments

There are two basic types of investing:

• Active: Choosing individual investments yourself. Active investors usually pick stocks in an attempt to beat the market.
• Passive: Choosing investments that do the work for you. For example, many investment funds will invest your money across a large number of stocks.

Passive investing is the easier and better choice for most investors. Research has found that only about 1% of active investors outperform the S&P 500, which is an index with 500 of the largest publicly traded companies on U.S. stock exchanges.

For freelancers in particular, passive investing is typically a better option. Actively picking investments isn't just hard work, it's time-consuming. In all likelihood, you could get a much greater return on your time focusing on your freelance business.

Here are a few of the best passive investment options.

• Index funds: These aim to track a specific market index. They generally have low fees and perform well, depending on which type of index fund you pick. S&P 500 and total stock market index funds are both smart choices.
• Target-date funds: These set up a portfolio for you based on the retirement year you choose. If you know you want to retire in 2055, then you can pick a 2055 target-date fund, and that's the only investment you need to make.
• Robo-advisors: These allow you to answer a few questions about your goals and risk tolerance, and then they invest your money for you. Many of the best online stock brokers now offer robo-advisors, which are a great way to put investing on autopilot.

3. Use retirement accounts to save on taxes

Many Americans set money aside for retirement and save on taxes through 401(k) plans. Even though you won't have access to an employer-sponsored 401(k) as a freelancer, there are still retirement account options available.

One that often makes sense for freelancers and gig workers is a solo 401(k). This is a 401(k) you can open if you're self-employed with no employees other than your spouse. Contribution limits are high ($67,000 in 2023, plus a $7,500 catch-up contribution if you're 50 or older), because you're able to contribute as both employee and employer.

Individual retirement accounts (IRAs) are available to anyone, including freelancers. With a traditional IRA, contributions are tax deductible. There are also Roth IRAs, where you pay regular income taxes on contributions, but withdrawals in retirement are tax-free. The total IRA contribution limit is $6,500 in 2023, plus a $1,000 catch-up contribution if you're 50 or older.

Another IRA option is a SEP-IRA (Simplified Employee Pension IRA). Self-employed individuals and business owners can set up this type of IRA. It's easy to manage and has high contribution limits (these vary depending on whether you're a business owner or self-employed).

LEARN MORE: Retirement Plan Options for the Self-Employed

The most important part of investing as a freelancer is consistency. Even if you don't have a stable income, you can be consistent about the portion of your income that you invest. If you do that, choose one or more quality passive investments, and take advantage of retirement account options, you'll be well on your way to building wealth.