If you're asking me why I am choosing to be a freelancer, then my answer is that this job offers flexibility in working hours. And I believe you're attracted to this job because of its freedom too.
But honestly, being a freelancer isn't always about the freedom itself. There is a chance for us to feel under a tight budget, living paycheck to paycheck, or perhaps relying on government aid.
And when you see your white-collar friends living peacefully, knowing their lives have been guaranteed by company insurance, you have to make it on your own. You want to live happily in your old age, so you have to save for your retirement expenses.
For all these reasons, it is very important for freelancers to have health insurance and emergency funds. Having these two protections, we can be more assured when facing unexpected financial situations, such as:
- Your project has been completed, and no other projects have been received.
- Your last invoice has not yet been paid, while all the bills need to be paid immediately.
- Lower income.
- Illness or accident.
- Replacing or repairing working devices.
- Natural disasters, and so forth.
Steps to prepare an emergency fund as a freelancer
Setting up an emergency fund is an important step for freelancers. So, we should do it with proper planning to maintain our financial stability. Here are the steps to set up an emergency fund:
#1. Determine the amount of emergency funds
Even though an emergency fund is important, it doesn't mean we need to prepare as much as possible or even follow the principle "the most important thing is just being prepared, no matter how small it is."
Well, that advice may work at the beginning when you're entering the realm of freelancers. But soon, you'll find out it is important to set aside an emergency fund in a sufficient amount.
Thus, assess your current expenses first. This method will help you determine the amount of emergency funds and the percentage you need to allocate.
We all have different amounts of emergency funds depending on the following factors:
- Cost of living: Those who live in big cities and rented houses/rooms certainly need a larger amount of emergency funds than those who live in areas with a lower cost of living.
- Family responsibilities: Freelancers who have family responsibilities, such as children or parents, need a larger emergency fund than single freelancers.
- Income: Freelancers with high incomes can build emergency funds more quickly than freelancers with low incomes. So if they want to prepare a larger emergency fund, high-income earners will not have a problem.
- Job risk: Freelancers with high-risk jobs, such as freelancers working in the construction sector, need larger emergency funds than freelancers with low-risk jobs.
There are several guidelines that financial planners usually recommend:
- Minimum three times monthly expenses: This is the minimum amount recommended for all freelancers.
- Six to twelve times monthly expenses: This is the recommended amount for freelancers with family responsibilities or high-risk jobs.
Freelancers are considered high risk if they:
- Have family responsibilities that depend entirely on their income.
- Work in high-risk areas such as the medical, construction, or industrial sectors that involve physical risks or accidents.
- Work in industries or fields such as arts, entertainment, or freelance journalism, which tend to be more volatile and susceptible to income fluctuations.
- Still have or incur debt, such as student loans, mortgages, or credit card debt.
- More than twelve times monthly expenses: Freelancers with high incomes who want to have more financial security may choose to build a larger emergency fund.
Considering the current high level of competition, in my opinion, it is best to choose to prepare an emergency fund of up to twelve times your expenses. This amount helps us overcome financial problems and is more than sufficient for just 6 months.
#2. Conduct regular reviews
To ensure that you always have sufficient emergency funds, don't forget to do these three things:
- Calculate your monthly expenses to get an average spending figure. If your spending has been erratic, check your financial records for the last 6 months and calculate the average spending.
- Consider the factors mentioned above to determine the ideal emergency fund amount.
- Regularly review your calculations to ensure your emergency funds are still relevant to current needs.
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| Asses your daily expenses first before building an Emergency Funds |
8 Strategies to build emergency funds
Building emergency funds can present a challenge, but I have found the following strategies to be effective so far.
#1. Create a budget
Start by creating a comprehensive budget that outlines your income and expenses. I found this step very helpful to identify areas where I can cut back on expenses and allocate more funds towards my emergency savings.
#2. Set savings goals
Utilize the aforementioned calculation to establish a monthly savings plan and set clear savings objectives. You have the option to save a fixed percentage of your income or a specific amount each month.
With hindsight from my past lessons, considering the variability of my monthly income, I have made the decision to allocate a fixed 20% of my earnings towards building an emergency fund. Regardless of the amount I receive, I am committed to setting aside that 20%.
Although it may seem like a substantial portion, I have learned from my past mistakes that the quicker I am able to accumulate emergency funds, the greater sense of security I will have.
#3. Automate savings
You may put to use this strategy if you have a fixed income every month. By automating your savings, you ensure that a portion of your earnings is consistently allocated towards your emergency funds.
#4. Track your expenses
I know it is an inconvenient strategy. No one loves to track their expenses because, apart from being boring and complicated, tracking expenses requires precision. However, tracking your spending habits can help you identify areas where you can reduce unnecessary expenses.
This will free up more money to put towards your emergency fund.
Make use of expense tracking applications or other expense management software to make this strategy more manageable for you.
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| Creating digital products can help you increase your income |
#5. Increase your income
There are some ways to increase your income, those are:
- Creating digital products
- Selling unused goods
- Seek for higher income
- Find additional projects
- Raising your rates
- Diversify your services.
#6. Reduce debt
Prioritize paying off high-interest debt, such as credit cards or loans. Doing so, you will have more disposable income to allocate towards your emergency funds.
#7. Take advantage of windfalls
If you receive any unexpected income, such as a tax refund or a bonus, consider putting a portion or all of it directly into your emergency fund. Windfalls can provide a significant boost to your savings.
#8. Stay committed and disciplined
Building an emergency fund takes time and discipline. Stay committed to your savings goals, even during periods of financial stability, as having a fully funded emergency fund provides peace of mind and financial security.
Conclusion
Building and maintaining emergency funds as a freelancer is crucial for financial stability and peace of mind. By implementing strategies such as setting aside a fixed percentage of income, establishing specific savings goals, and utilizing expense tracking tools, freelancers can accelerate the growth of their emergency funds.
Remember, financial protection extends beyond health insurance and emergency funds; considering additional forms of coverage such as disability insurance and liability insurance can provide further security. With careful planning, diligence, and a proactive mindset, freelancers can fortify their financial well-being and navigate unforeseen challenges with greater confidence.
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