How to change up your savings strategy as a freelancer

Six months ago, I left my full-time corporate job to go freelance. Like many other freelancers, gig workers and contract employees, I was making a bargain with myself: in exchange for leaving the security of a more conventional nine-to-five job, I’d gain greater creative control over my projects and the freedom to set my schedule in a way that better aligned with my personal goals.

But as the weeks rolled on and my new work assignments ebbed and flowed, I learned a pretty big freelance lesson firsthand: the savings strategies I relied upon as a W-2 employee would need some serious reconfiguration. Talking to other gig workers and friends taking on contract projects, I realized we were all learning how to adjust this financial balancing act ourselves.

Making some serious adjustments

I’m not the only freelancer making these adjustments to my savings strategy as I go. Amy Schulz, co-founder of Bolder Money, a financial coaching firm, said she often talks with freelance clients who come to her realizing their original plans need some serious adjustments.

“I think a lot of people take the leap thinking, ‘I’ll have time freedom!’ but then the reality sets in,” she said. “There are more balls in the air, and they have to figure out how to juggle.”

As an employee of a large company, I knew that all I had to do to prepare for tax time was set up my withholdings and check-in with the human resources department ahead of filing time. Similarly, my 401(k) savings required only a little maintenance.

But when it comes to saving for these things — plus preparing to handle such items including emergency savings, business expenses and health insurance — freelancers are steering the ship themselves.

Changing up your savings strategy when you make the move from a full-time corporate job to freelance work can ultimately save you money on taxes, cushion your budget during months of low income and also ensure you’re staying on track for retirement.

Saving for taxes

As we make the transition from full-time, corporate work to a less consistent flow of freelance or project-based income, new freelancers such as myself should rely upon an order of operations as we shake up our savings.

“Every industry is different and the consistency of income is different, but taxes, unfortunately, are the first thing I like to talk to people about because the IRS will not forget,” said Danielle Arlotta, CFP and lead financial planner at Brooklyn Plans.

Arlotta recommends first saving for taxes, then prioritizing saving for emergencies, and then retirement. For workers who have only worked full-time W-2 work, adjusting to setting aside tax payments and preparing for quarterly payments can be challenging; but if you’re not prepared to pay come tax time, you’ve sorted your priorities all wrong.

That first year of your freelance business, err on the side of caution and set aside more than you think you might need for quarterly estimated taxes, Schulz said.

“When we get a W-2 job, we take that for granted that you’ll set your withholdings and it will be taken out,” Schulz said. “But no one is going to do it for you if you’re a freelancer.”

Research your federal, state, city and other tax rates you’ll need to keep in mind as you set aside money for that tax bill. Add the due dates for your estimated tax payments to your calendar so you know how much to save and when.

These little tax chores may seem annoying, but the consequences are dire, said Malik Lee, CFP and managing principal and investment advisor at Felton and Peel Wealth Management.

“I recently saw one client’s tax return and they paid a $7,000 underpayment penalty,” he said. “They made $600,000, a huge net profit, but they didn’t make any of their estimated taxes. We said, ‘Hey — make these payments. You’re throwing away $7,000 in penalty payments.’”

Lee recommends putting your tax savings in a separate account entirely. That way, you’re not tempted to siphon funds for a less important purchase, and keeping the money you’ve saved for taxes liquid will make it easier come due-date time.

Saving for emergencies

As a freelancer, your emergency fund isn’t only there for when your phone screen breaks or an unexpected medical expense crops up; it’s also what you’ll rely on to smooth out your cash flow as you adjust to the ebbs and flows of freelance income.

“That’s one of the biggest challenges that we hear: the inconsistent months,” Schulz said. “Most of the freelancers we hear from, they’re on a project basis. They don’t necessarily have a contract where they’re making the same amount every month.”

Working on a project basis is one of the reasons I was excited to freelance. After years of burning myself out with the seemingly endless grind of a nine-to-five media job, I liked being able to balance one high-intensity, more lucrative gig with a lower-stress job that paid less but took less time. But nailing that balance also meant getting comfortable with some pretty wild swings in my checking account. One assignment paid me nearly three times what I made in a month at my old corporate job; but the next week, I pulled in $0 of new assignments.

That’s where maintaining a solid understanding of your cash flow — and adding to your emergency savings when possible — can smooth out the inconsistencies, Arlotta said.

“Yes, we want emergency savings, but we also want to make sure we’re keeping spending consistent,” Arlotta said. “Then, in the months where your income is a little more lean, you don’t feel it as much, because the times when you were earning way more are supplementing those lean months.”

Whereas conventional financial wisdom advises people to stash three to six months’ worth of living expenses in an emergency fund, Arlotta said she pushes her freelance clients to go above and beyond that, if possible. “I tell most of my freelance clients, especially in the first couple years, we want to err on the side of caution,” she said.

But that emergency fund isn’t only there for helping with surprise bills and fluctuations in income, Schulz said. Whereas a full-time job may provide paid sick days or leave, freelancers need to set aside money for those times themselves.

As Schulz points out, “As a freelancer, what you earn is directly related to your ability to work.”

Saving for retirement

When it came to contemplating my retirement savings ahead of my move to freelance, I was fortunate. A past job offered a generous 401(k) match, and I’d taken full advantage of that benefit when previously employed there. Before leaving my more recent job, I maximized my contributions so as to feel secure going into this transition to less consistent income.

But not everyone is able to do as much, and some employees exploring freelance work may not even have their own retirement savings vehicle set up, Lee said. But before people weigh the pros and cons of different plans, he tells his freelancing clients to first carefully examine their cash flow and consider what portion of their overall savings they can contribute.

“What drives the decision making for the retirement plan vehicle is what you can commit to saving now, as of today,” he said. “And don’t think whatever you choose today, you can’t adjust later. You can adjust these plans as your business grows. You can pivot.”

Many of us transitioning from full-time jobs with 401(k) plans will be able to make a change with minimal effort, Schulz said. All freelancers have to do is roll the old 401(k) plan over to an individual retirement account (IRA), which means they then own the retirement savings vehicle going forward. Then, consider how much money you’re able to contribute every month.

“If it’s their first year, retirement savings is unfortunately the thing that gets a lower priority. But they can say, ‘This year, I won’t put as much in, but in future years, I’m accounting for the fact that I used to be able to put in 10 or 20% of my paycheck,’” Schulz said. “No one else is doing it for you. There isn’t a match anymore, there isn’t an automatic deposit from your paycheck anymore.”

Bottom line

Saving as a freelancer requires a little more self-management. But if you’re watching out for those estimated tax payment due dates, adding extra cushion to your emergency fund and rethinking your approach to retirement savings vehicles, you can enjoy the benefits of being your own boss without sacrificing financial security.