Maridav / Shutterstock.com
For millions of Americans, the COVID-19 pandemic has been a wake-up call that has prompted many to quit their jobs for new roles, become entrepreneurs, or join the gig economy as than freelancers.
Learn: 6 household staples that are a waste of money
Check Out: 10 Dollar Store Items That Aren’t Even Worth The Price
Choosing the entrepreneurial route or entering the gig economy means trading in the security of a regular salary. Although it can be a difficult transition to navigate at first, the rewards often outweigh the risks, successful construction workers enjoy flexibility in the way they work, pursue their dreams and potentially earn more as their own boss without hitting the corporate ceiling.
However, before you give up your regular paycheck to explore life as a freelancer, get these key financial foundations in place.
Lindsay Harvey and her husband Christopher live in an RV full time. The couple have been on the road since March 2018 and quit their jobs to start a business on the road. Together they run two websites, including Called To Wander, which make money through advertisements and affiliate links. In addition to their sites, they generate additional income through vlogging on YouTube, where their channel has over 8,500 subscribers.
While the couple have experienced several financial ebbs and flows over the years, Harvey said starting out debt-free allowed them to continue pursuing their dream of building their brand and business down the road. In addition to starting debt-free, they also credit their financial foundations — including emergency funds and six months of short-term funding — as additional support in the event of a financial disaster.
Having little or no debt is a key step that facilitates the transition to a career without regular pay. Blaine Thiederman, CFP and founder of Progress Wealth Management, recommends setting aside a significant amount in savings. Pay off all outstanding debts and collect 12 months of your fixed expenses before leaving a position in which you receive a stable income.
Take the GOBankingRates survey: Do you think student loan debt should be forgiven?
Create an emergency fund
Whether you have a stable income or work as a full-time freelancer, one of the most common money management tips is to create and contribute to an emergency fund.
Those who do not have a regular salary need a considerably large emergency account. “For most founders, I recommend 12 months, minimum, because it’s not at all unlikely that you’ll spend most of that fund,” Thiederman said.
The larger the fund, the better prepared you will be for whatever comes your way. Janelle “Jash” Cooper is a Travel Content Creator at Joyriding With Jash. Cooper transitioned to remote work in 2021 after teaching overseas for three years and moved to Mexico in January 2022 as a full-time digital nomad.
As a freelancer, Cooper said there were times when bills didn’t get paid or there were fewer projects to work on. Times like these require having an emergency fund that allows freelancers and digital nomads to continue saving and maintaining their personal financial safety net to stay comfortably afloat.
Keep track of your expenses
Even if you dive into life as a freelancer or gig worker with immediate success, Danielle Miura, CFP and founder of Spark Financials, recommends keeping track of your income and expenses. Understand how much money is coming in each month, the source of that income and where you spend your money.
Similar to budgeting, tracking your expenses means making all necessary payments on time, submitting bills in a timely manner, and using a tracking method, like a dedicated app or spreadsheet to better calculate your income and expenses.
Invest in health insurance
In addition to forgoing a regular salary, contractors and self-employed people no longer receive company-provided health care. You are now responsible for providing your own health insurance.
Rami Borsheh, vice president of consumer loans at First Entertainment Credit Union, said there are insurance options for different income levels. Borsheh recommends workers shop around for the best health, vision and dental plans for their circumstances.
Have a backup plan
Miura said a backup plan can mean having savings you can draw on or taking on a part-time job or a hustler to make ends meet. If you’re not sure where to start in establishing this type of plan, Miura recommends asking these questions to determine what your backup plan looks like.
- How can you market yourself to earn extra income?
- Which part of my savings should I go to first if I need it?
- Do I need to take out credit card debt or a loan to pay for my expenses?
“The most important part of your backup plan is understanding what you can do if things don’t go well,” Miura said.
Surround yourself with a strong support system
Another critical aspect of your backup plan involves your support system.
“My parents have been extremely supportive of me on my nomadic journey,” Cooper said. “If things were ever to get really bad, I know I will have a home to return to and open my arms waiting for me. My parents give me the space and the opportunity to always come home when preparing of my next move or simply to reset myself.
Giving up a regular salary and taking a risk as an entrepreneur or freelancer means there is a risk of not having a stable income when you start. You may experience a wide range of emotions such as despair, uncertainty, fear, excitement, sadness, and joy. Don’t ignore these emotions. Find people, such as family, friends or another support group, who will be there for you.
“Having a group of people as your support system during difficult months can be key to your success. Find a support group that’s willing to be there for you through the good and bad times of your journey,” Miura said.
You might even be able to find and connect with other digital nomads or freelancers who have similar backgrounds to yours. Ask them about their experiences and ask about the resources they used that helped them succeed.
More from GOBankingRates