Forging The Right Path: How Freelancers Can Create A Personalized Financial Wellness Plan
September 2018
As automation becomes a more endemic part of life—including robo-advisors doling out algorithmic investment portfolios—individuals are increasingly being pressed to fit into formulas made for the masses. For artists and other freelance professionals, whose lives usually fit well outside a typical work pattern and often vary widely even compared to one another, this can be particularly perplexing. When attempting to wrangle their financial well-being into a useful state, they are faced with a two-fold process: First, understanding the concepts of investing and building a balanced portfolio and second, determining how to apply that knowledge to their own unique circumstances.
Creating a personalized financial-wellness mosaic specific to their circumstances is critical for artists and other freelancers. Determining the financial steps most applicable at any given moment can help to provide them with both customized support and confidence in the suitability of their evolving plan. While there may be elements of the developing financial picture that are common to most people, the sequence in which they are added and the variety of assets will be specific to each freelancer. By examining areas in which traditional financial planning steps can deviate for those with a freelance work environment, one can shed light on forging a path forward that is unique to his or her circumstances.
One of the first steps in building a financial wellness plan, which may be approached differently by freelancers, is saving and creating an emergency cash reserve. For those experiencing a standard full-time work path, a common suggestion would be to accrue four to six months of cash in this emergency reserve. For artists and other freelancers, however, it may be prudent to beef up their cash stash so that it is comprised of ten months or more. The reality of the ebb and flow of income encountered while engaged in a freelance lifestyle makes it likely that the first month or two of this emergency cash stash will be used to weather through times when income falls below monthly expenditures. Ensuring a more robust emergency cash reserve provides a stronger cushion for lean months—which can reduce anxiety while supporting their vocational trajectory.
Another common strategy suggested to traditional workers is investment in assets other than cash—such as stocks and bonds—primarily within tax-protected retirement vehicles. A benefit of this game plan is that throughout the years that a regular paycheck is being earned, any income from investment assets would be protected from taxes within the retirement vehicles—such as IRAs, 401(k)s and 403(b)s. Investing in non-cash assets outside of retirement, however, may provide valuable potential revenue resources for those with fluctuating levels of income that may help offset any tax consequences incurred. For artists and other freelancers, concurrently building assets both within retirement vehicles and outside of them helps to build protected resources to be used in retirement. Furthermore, it can serve as a pool of readily accessible assets that could be tapped without the potential early withdrawal penalties from retirement accounts, if necessary.
The investments held outside of protected retirement accounts might also be approached differently for artists and other freelancers. Individuals who are expected to bring in consistent earned income over the course of their professional lives are often steered towards assets that defer investment income—such as dividends and capital gains—until a time when earned income is lower. This is a strategy to minimize tax implications to whatever extent possible. By concentrating on investments that emphasize capital gains potential over income potential, they are sheltering investment income during their wage-producing years while still building assets that can be tapped in their post-working years.
For freelancers with varying levels of income, however, the advantages of owning assets outside of retirement accounts that produce regular income can be profound. Investment income produced can provide an important source of funds to help bridge the gaps created by fluctuating earned income, without necessarily reducing the underlying asset.
Embracing the uniqueness that exists in the professional reality of every artist and freelancer is important to his or her livelihood and financial-wellness planning. Examining the specific needs of an individual at any given moment helps to determine the best financially strategic move for them to make at that particular time. Attempting to mold a freelance lifestyle into the financial planning model of more conventional workers fails to address the person's individualistic needs—and can ultimately lead to discouragement and lack of a supportive financial safety net. Instead, they can discover the individuality—and help it shine—by forging the right path forward.