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Becoming your own boss can be incredibly rewarding, but pursuing a career in freelancing has unique challenges.
Unlike regular jobs where you receive a steady paycheck, freelancing often comes with irregular income. This inconsistent cash flow makes it challenging to budget effectively and save consistently.
You’ll also need to cover certain expenses yourself, including health insurance and retirement savings. These financial responsibilities can take a significant bite out of your earnings, leaving less room for saving.
Despite these challenges, finding financial stability — and even thriving — is possible. Here are seven tips to save money while freelancing.
1. Embrace the power of automation
While you may not earn a fixed income, you can still set the habit of regularly contributing to your savings. Automating the process is one of the most effective ways to do this.
Set up automatic transfers from your freelance income to a separate savings account. This ensures a portion of your money is set aside for savings without you having to think about it.
Consider using a high-yield savings account for your savings. Many of these accounts have high interest rates and don’t require a minimum initial deposit.
Automating your savings will help you build a nest egg and avoid the temptation to spend all of your income.
2. Plan for the feast and famine cycle
Freelancing often brings unpredictable income fluctuations, known as the “feast and famine cycle.” To overcome this, create a financial plan that accounts for high- and low-earning periods. During prosperous times, save more aggressively to prepare for leaner periods. This proactive approach will help you weather financial storms and maintain stability when work is scarce.
You’ll also need to budget differently than most, says Sean Lovison, certified financial planner and founder of Purpose Built.
“Instead of a monthly budget, consider creating a three-month rolling budget. This allows you to smooth out the highs and lows, making it easier to plan for essentials,” he says.
Sticking to your budget is essential, especially if you have irregular income. Use tools like budgeting apps and spreadsheets to help you stay disciplined. Regardless of the method, make sure you can stick to your budget from month to month.
3. Optimize your expenses
It’s generally a good idea to keep your expenses low, but as a freelancer, you may face some unavoidable added costs.
Analyze your monthly bills and subscriptions to identify any unnecessary expenses. Review your business and personal expenses to determine where to cut costs.
Can you find cheaper alternatives or negotiate better rates? For example, some freelancers use paid accounting software, but many free, high-quality options exist. The same goes for other tools.
Keep tracking your spending habits and cut back on discretionary expenses where possible. Being mindful of your expenses will free up more money for savings.
4. Diversify your income streams
Remember the adage “Don’t put all your eggs in one basket?” Relying on a single client or job can leave you vulnerable to income fluctuations if that client decides to make cuts.
Diversify your income streams by exploring additional opportunities, side gigs, or income sources. This diversity will provide a safety net and help buffer against potential income loss from a particular client or industry. It can also increase your overall earning potential.
5. Prioritize retirement savings
As a freelancer, you’re responsible for contributing to and maintaining your retirement accounts. That makes saving for retirement just as important — if not more important — if you work for yourself.
Open an individual retirement account or a solo 401(k) and contribute regularly. Take advantage of any tax benefits associated with retirement savings to secure your financial future. Start early, even with small contributions, and watch your savings grow.
For example, Eric Roberge, certified financial planner and founder of Beyond Your Hammock, contributes at least 30% of his gross income to growing his wealth (which includes retirement).
“When I sit down for my quarterly budgeting, the first thing I do is allocate 30% to various investment accounts, including a 401(k), HSA, and taxable brokerage account,” he says.
Each of these accounts has its benefits and drawbacks, but they can all be helpful when saving for retirement. You don’t necessarily need to open all three, but you do need to develop a plan for how you’ll save.
6. Avoid debt if possible
Using credit cards or personal loans to bridge income gaps can be tempting, but this can lead to more debt. High-interest debts can eat into your income and hinder your ability to save.
Freelancers should minimize debt as much as possible. Prioritize paying off existing debts, such as credit cards or student loans, and avoid taking on new ones whenever possible. Staying debt-free will give you more financial freedom and flexibility in the long run.
Still, there might be times when using credit is unavoidable. In these cases, pay it off as soon as possible to avoid interest charges. Reduce your discretionary spending as much as possible until you’ve paid off your credit cards.
7. Grow your savings the right way
As you accumulate savings, ensure they are growing effectively. There are many places you can keep your savings, but some are better than others.
The average savings account interest rate is 0.58% as of October 2023. You can often do better by opening a high-yield savings account or money market account, both offering rates as high as 5%.
Suppose you have $10,000 in a regular savings account, earning a 0.58% rate. After one year, you’d earn $58 in interest. But if you put that money in an account earning 5%, you’d earn $500 in one year.
The bottom line
Becoming a gig worker or freelancer can be a fantastic career decision but also challenging. Having irregular income can make expenses difficult to predict. Plus, you’ll have to manage your retirement savings and benefits alone.
By optimizing your expenses, creating a budget, and avoiding lifestyle inflation, you can make sure you’re saving enough.
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