How Much Should I Have in Savings Before Going Freelance?

Freelancing and working remotely have become more attractive to Americans, in part because of the pandemic and in part because of the freedoms that come with it. It also may become necessary because of a job loss. However, working as a freelancer also means that you have to take responsibility for all your personal finances. Your income can take wild swings, and no one is going to pay your health insurance premiums or make a company match to your retirement account.

Setting up a savings account as an emergency fund to meet unexpected expenses is just one piece of the puzzle. Freelancers must also set long-term financial goals, create a budget, set aside funds for retirement and, not to be overlooked, pay taxes.

Let's go through this guide for financial planning as a freelancer.

Financial goals give you benchmarks to aim for. Short-term goals tell you the amount of money you need to bring in to cover your basic expenses. This is the minimum annual salary you need to earn.

Examples of longer-term goals are committing to save money for vacations, putting aside funds to attend college or for repaying student loans, saving up for a down payment on a house and building a retirement fund. Your financial goals form the backbone of your plan for how you intend to develop as a freelancer.

Financial goals, along with budgeting and marketing plans, will define your pathways to growth and make you less vulnerable to setbacks, such as losing a client or economic downturns.

​Read More:​ Going Freelance: 7 Things You Need to Know

Start out by creating a budget. This will give you an idea of how much money you need to bring in every month to cover your essential expenses. At a minimum, your budget should include the following:

• Living expenses
• Taxes
• Emergency fund
• Retirement and other long-term savings goals
  
• Loan payments
• Paycheck for yourself

This total budget figure gives you a target income you need to generate each month. Depending on what type of freelance business you're in and your hourly rate, you can translate this budget figure into the number of sales calls or pitches you need to make, the number of sales you expect to close and the revenue you expect to make from each sale.

After you've determined these production figures, you can identify the physical activities, such as calling prospects or sending email pitches, you need to make each day or week to reach these objectives.

​Read More:​ Set Your Freelance Rate

Nothing can confuse your finances any more than using the same account for your personal expenses and your business expenses. Open a separate checking account and use it only to deposit your revenues and pay your expenses. In addition to the separate bank account, consider using one credit card exclusively for business expenses. Also, consider putting excess funds into an investment account at a brokerage or in a high-yield savings account that is FDIC insured.

This will make it much easier to keep track of your earnings and have the information ready to file your tax return.

Freelancers have no guarantee of income. Some months you will have extra cash after paying all your expenses, but in other months, you will fall short and have a cash flow deficit. When this happens, you'll be glad you have that emergency savings account.

Generally, most financial planners recommend you have at least three months' worth in reserve for your essential expenses, but a more comfortable level is to have six months. Others recommend up to nine months in savings.

The actual number of months of expenses that you keep in reserve is up to you. It’s whatever level makes you feel secure enough to cover several months of low income.

​Read More​: Emergency Savings Funds: Preparing for the Unexpected

As a freelancer, there is nothing that will do more damage to your enthusiasm for having gotten through the first year of freelancing than getting a huge bill from the IRS. There is no escape from paying taxes. You can either pay as you go through the year or get a bill from the IRS and wind up paying more in penalties and interest.

A good rule of thumb to follow is to put aside ​20 percent to 30 percent​ of your revenue in a separate money market account for taxes. Then file your quarterly estimated taxes and send in the amount due. You will be pleased to find at the end of the year that you either owe very little in taxes or nothing at all.

If you think the ​30 percent​ figure is too high, don't forget that you must also now pay your own self-employment taxes and FICA taxes. When you have an employer, you pay ​7.65 percent​ in Social Security and Medicare taxes and your employer pays ​7.65 percent.​ As a freelancer, you must make both contributions, so your total payment for Social Security and Medicare is ​15.3 percent.​

​Read More:​ How Do I File Taxes if I Work as a Freelance Artist?

Always be prospecting. Even though it may seem that you have an established and steady flow of work, freelance jobs can disappear in a heartbeat. Clients change their plans, veer off in different directions or hire new people. Any of these events can lead to a loss of work for you.

Always be on the hunt for new clients to have something to fall back on when you lose business because it will eventually happen. Aim to have a portfolio of several clients to spread your risks so losing one client won't be devastating.

As a freelancer, you no longer have the benefit of participating in your employer's 401(k) retirement plan. You have the full responsibility of preparing for your retirement.

Just like budgeting for essential living expenses and paying taxes, you should include a fixed contribution to your retirement savings account. If you take the attitude that you will put money aside if you have anything left over at the end of every month, you can rest assured that very little will ever be left over. Contributions to your retirement savings should be considered mandatory and part of your fixed obligations every month.

Depending on your age and your retirement goals, a good figure is to put aside ​10 percent​ of your gross revenue for retirement. This could be a combination of a regular IRA, a Roth IRA or even making steady purchases of mutual funds, just to make your financial decisions easy.

Social Security income will make up a good portion of your retirement income, but it may not be enough to live the lifestyle you want. Your retirement savings will have to make up the difference.