Freelancing offers flexibility. It’s a way to fit in the necessity of generating an income, with the other things you want to achieve in life.

Recently I heard someone reflect on the standard 9 to 5 working day. It came about in the industrial era to align with day light hours. The factories had little or poor lighting, and so they needed the workers to be there during the hours when the natural light streaming in through the windows was at its best.

Given the wonders of electricity mean that most of us are no longer tied to having to work when the sun shines, why persist with this ridged allocation of our daily hours?

After all, freelancing provides us with the opportunity to fit work around raising children, contributing to a social cause, or pursuing another interest that brings joy.

But for all this potential happiness, freelancing does have its drawbacks which shouldn’t be ignored. Loneliness and the importance of managing your mental health are important issues to address.

There’s also a definite and undeniable loss of security that comes from transitioning from the employee world into freelancing, and the strategies you can deploy to mitigate these very real negatives. In essence, what we want to achieve is the freedom of freelancing, with the security that comes from being an employee.

So what are the things you lose when you make the jump out of the employee world, and into freelancing? Here are 5:

  1. Predictability of cash flow
  2. Sick leave
  3. Protection from being sued if you make a mistake
  4. Retirement savings
  5. Professional development

Let’s step through how you can be a freelancer, but still gain access to these benefits.

  1. Predictability of cash flow

As an employee, a significant comfort comes in the knowledge that every second week, a predictable lump of money will be dropped into your bank account. As a freelancer, especially early on, it’s very feast and famine – lumps of money come in on an irregular schedule. This can be stress inducing, and is often a key reason talented people don’t make the leap to freelancing. So how to defeat this problem? I call it Bucket Strategy+ .

In an employee situation, it entails having typically 3 bank accounts, with money automatically allocated across each to provide for savings, bills, and livings costs.

As a freelancer you need version 1.1 of the standard strategy, what I call Bucket Strategy+. Over the top of the normal bucket strategy, you first need a business account, where all of your business revenue comes in, and all of your business expenses go out. You need a bit of a float in this account in order to manage the natural lumpiness of your freelancing income. You could even need a small overdraft facility attached to this account.

With your separate business account set up, and a comfortable float, you are then able to pay yourself a wage, just like you were an employee. So you set up an automated fortnightly transfer into your main personal bank account, and then run the traditional bucket strategy, as you would have as an employee.

The Bucket Strategy+ can solve your personal predictability of cash flow problem, but of course for it to work, you need to ensure that the amount you are drawing out of the business account as wages is something that’s affordable to your business. For this reason you need to monitor cash flow. I use Xero for this and find it excellent. Myob and Quickbooks are other popular alternatives. My advice would be to chat with your accountant and see which package they prefer, as it will save you accounting fees if they can just grab the data from the likes of Xero and get your taxes done, rather than having to re-input things.

From whichever package you use, check your profit and loss each month to see that what you’re taking out isn’t excessive. Check your business bank account balance more regularly, perhaps every 3rd day or so depending on how much activity you have, to hold a general sense of where you cash position is sitting.

  • Sick Leave

It is a comfort as an employee to know that if you can’t work for a period, your fortnightly pay will still drop into your bank account. Most employees have 10 days paid sick leave available per year. Some generous employers allow this to accumulate if you don’t use your available days, so that one day if you have something serious crop up and need an extended period off you are covered.

So how to replicate this as a freelancer?

Short term sick leave needs to be provided from your business account. This highlights a reason why you need a good float or buffer sitting in this account. With your Bucket Strategy+ in place, every fortnight your wage will come out of your business account, and into your personal account, whether you are fit and productive, or laid up in bed with the flu. So in this regards, it’s just like being an employee.

But of course, as a freelancer, if you’re not working, then money’s not going to flow into your business account, so eventually this arrangement will breakdown.

The solution here is Income Protection insurance. Income Protection insurance replaces 75% of normal income if unable to work due to illness or injury. Most commonly it comes with a 30 day waiting period, though it is possible to get 14 day waiting periods, and longer periods too. The waiting period is the length of time you need to be unable to work, before you can start claiming a benefit.

So as a freelancer, with the Bucket Strategy+ and Income Protection in place, short term illness will be covered from your business account float, and longer term illnesses will be covered by your Income Protection policy. Most Income Protection policies pay benefits through until age 65, so it is potentially very long term cover if that ever became needed. Having it in place certainly provides peace of mind – you know you have that safety net.

  • Protection from being sued if you make a mistake

This is something that I find those making the move to freelancing often don’t consider. In some roles, this risk is more obvious. We have a freelancer working from one of our spare offices who is a fire engineer. When he was an employee, if he made a mistake with some calculations and catastrophe later struck, his home and other personal assets were not at risk. But as a self-employed freelancer, they could be.

Now most freelancers don’t have such obvious potential for being sued, but what about the IT consultant who crashes a customer’s server causing them to lose valuable data?  Or the conference attendee who trips over your cables whilst you’re videoing the event, and sues for her injuries and lost income?

As an employee, your employer acts as a protective shield, but as a freelancer, you are exposed.

Professional indemnity insurance, and general indemnity insurance provide the answer here. Indeed these are almost certainly what your employer would have held.

It may be worth contacting an insurance broker for these covers. They can provide advice as to the best structure and the options available. Cover for issues such as cyber-attack, can be added to these policies if they are relevant to your activities.

  • Retirement savings

We live in a world where we need to provide for ourselves in our old age. Government pensions become less generous with each passing year, and the demographic reality of an increasingly aging population mean that trend is irreversible. We need only look at the collapse of the Greek economy in 2010 to see what an unsustainable government pension system leads to.

There will come a time when you are no longer willing or able to continue doing income producing activities. It is crucial that freelancers don’t neglect the importance of continuing to build savings for their retirement, whenever that might be.

Automation is your friend here. Set up an automatic transfer from your business account across to your retirement savings account, so that this happens without you having to think about it.

What many of my clients do is have a certain base amount transfer across each month, and then close to the end of the financial year, they contribute a top-up amount depending on what sort of year they have had financially. Some do these top-ups quarterly.

You should be aiming to get around 10% of your normal income across into your retirement savings account.

  • Professional development

The final component to plug into your freelancing safety net plan is professional development. One advantage of being an employee is that you often get opportunities to attend training sessions, or learn other team member’s roles.

As a freelancer, there is the potential to stagnate.

The late, Peter Drucker, US management consultant expert, observed that knowledge has an expiry date. “A knowledge worker becomes obsolescent if he or she does not go back to school every three or four years.”

So how can you overcome this potential for obsolescence as a freelancer? Firstly, have in your business budget an allowance for professional development. Almost anything you want to do will cost money, so the first thing is to ensure that funds are available, and lack of money isn’t a barrier.

Next, look for industry conferences, professional meet-up groups, or industry publications, which you can engage in. Take your professional development seriously – investing in your skills likely has a very positive long term payoff, so it’s not something to be ignored.

Freelancing can be a fantastic way to gain choice. I hope these ideas help you realise its full potential.

Paul Benson

Paul Benson

Financial planner at Guidance Financial Services
Paul Benson is the producer of the Financial Autonomy podcast.
He helps Australians are looking to gain choice in life, to embrace the amazing possibilities that now exist for a varied working life, including establishing as a freelance creative.
Paul Benson

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