When I started freelancing more than 10 years ago, I didn’t really think about how I would make things work, or what needed to happen to become a freelancer. For the most part, I just jumped in. Fresh out of journalism school, I didn’t have a job, and my then-husband was working on a Ph.D., so we didn’t have any real income to replace.
When you decide to become a freelancer, there is a good chance that you have a job and financial obligations already in place. Before you give up everything and attempt to make it as a freelancer, here are 3 financial realities that you need to address:
What will you do about income? Once you become a freelancer, your income will fluctuate to some degree each month. You need to know how to budget when you don’t know exactly how much you will make every month.
Pay attention to what you make, and start figuring out how you can replace your income. Do you have a partner that has a “real” job you can rely on? At the very least, does your partner have his or her own side gig to bring in money? What sort of income diversity do you have?
Before you become a freelancer, build an emergency fund or cash cushion. Set aside money to help your transition. Even if you make a good amount right now, if you experience a big set back one month after you quit your job to freelance, you will be in trouble if you don’t have cash reserves to draw on. Plan ahead and figure out how you will manage your cash flow, and what you will do if you have income challenges as you transition into full-time freelance work.
2. Health Insurance
One of your biggest surprises as a freelancer will be the cost of self-employed health insurance. All of those insurance benefits you receive as an employee disappear when you become a freelancer. Health insurance can be a big cost to you, and you need to be prepared, especially since the requirement to carry health coverage is the law of the land.
My ex has great benefits with his work, and my son is on his health plan. This makes things a little easier for my. I remember the days when my entire family was on my self-employed health insurance plan. It cost twice what it does now, with me on my own plan. I choose a high-deductible plan and contribute to a Health Savings Account, but that might not work for everyone.
Before you quit to become a freelancer, research your health insurance coverage options and be realistic about what it will cost you to cover it yourself.
3. Retirement Plan
Don’t neglect your retirement. When you work for “the man,” you have access to a subsidized retirement plan — and maybe even a match. As you strike out on your own to become a freelancer, you’ll have to take a greater initiative in your retirement planning. Before you quit your job, research retirement plan options and find one that works for you. Make sure you have a plan to save for your future before you quit your job to become a freelancer.