Have you ever dreamed about quitting your job and freelancing full time? It’s a goal for many people who are doing work on the side of their day jobs and are ready to make the leap and do something they love.
But before you make any jump into self-employment, there are some financial considerations to take into account. Freelancing sounds fun, but your income will suddenly be variable and it’s up to you to make the money you need to get by. That’s a lot of pressure, and it’s much different than having an employer with benefits and steady income.
So how do you know you -- and your finances -- are prepared for quitting your job and freelancing full-time? Use this checklist to guide you!
Create a Big Emergency Fund
Having enough cash in an emergency savings fund is important no matter what. But you’ll want to boost your reserves before quitting your job because self-employment income can be much more volatile than when you’re an employee.
That same flexibility that full time freelancing provides you with your time also means your income might be flexible from month to month. Some months, that will be great; you’ll make more than you anticipate.
But what will you do in a month where you make less than expected, and in that same month your car breaks down, you take a trip to the ER, and your hot water heater gives out? This may sound extreme, but we all know life happens.
A big emergency fund will protect you, and the more volatile your income the bigger your reserves should be.
Create a Bare Bones Budget
Do you know how much money you need to meet your basic required expenses each month? A “bare bones” budget can help you understand this number. This is what you need to survive, and knowing this amount can also help you on the flipside: it gives you a mark to target for your minimum viable income.
Expenses like groceries, rent or your mortgage payment, utility bills, and minimum debt payments should all be included in your budget while extra expenses like entertainment spending or your vacation savings fund don’t need to be included.
Develop a Sustainable Income
Your emergency fund covers you in case the cash stops flowing for a bit. A bare bones budget can help you manage extremely low levels of spending to help you through lean months -- so getting into your emergency fund becomes a last resort.
Let’s talk more about the income side of the equation.
Before quitting your job, you need to develop a sustainable income. This doesn’t mean you need to make exactly the same amount every single month before you can freelance or work as a self-employed individual. But you should understand what average numbers are, and you’ve been freelancing long enough to see a trend in your earnings.
Know How to Manage Self-Employment Earnings
You need to do a little bit more than just deposit your checks as a full time freelancer to make sure all your bases are covered. Make sure you account for taxes, since you’re responsible for your own withholding.
Estimating about 30% and setting aside that amount of your gross income for taxes should give you a good starting point. Remember to talk to a financial advisor or tax professional to get the specific numbers for your situation, since there are so many variables in figuring out specifics around what you owe Uncle Sam.
You’ll also want to account for things like what you want to save for retirement, since there’s no employer to give you a 401(k) and a match. Remember your business expenses, too.
In short, your net income could look a lot different than your gross. Subtract taxes, retirement savings, and expenses from your gross, and that gives you your net. Be sure to budget off the net number, and be able to manage your personal costs once your business expenses are accounted for.
Obtain the Proper Insurance
When you’re self-employed, the task of obtaining the proper insurance is solely up to you. If your employer currently provides you with medical, life, dental, or any other type of insurance, you’ll have to secure new insurance policies to begin when you quit.
Research and compare your options with dental and life insurance to see what will best fit your needs and budget. For medical insurance, if you lose or quit your job for any reason, you will most likely qualify for a special enrollment period that allows you to enroll in a health plan even if it’s outside of the annual open enrollment period. You may even be able to continue with your current plan but pay a slightly higher premium.
Being Prepared Before Quitting Your Job Goes a Long Way!
Right now -- before you quit your job to try your hand at freelancing for a living -- is the perfect time to get prepared since you know what your goals are and have a timeline set. While choosing self-employment can certainly seem like a leap of faith, you can help build a foundation to land on by working down this financial checklist.
About the Author: Chonce is a freelance writer who's passionate about helping others get out of debt and work toward financial stability. You can connect with her on her blog, MyDebtEpiphany.com.