Squirrels are the freelancers of the animal kingdom. Nimble and constantly searching for nuts (the currency of the animal world).

Venturing off into the world of freelance might sound delightful after years spent in a stuffy corporate environment or working for a boss you hate. But what’s the flip side of the employment coin once you go off on your own to become a freelancer?

If you currently work for a corporation, there’s potentially a lot of money you won’t be getting if you work for yourself.

Healthcare

If you’re not married or on your parents’ health insurance (in the United States, that means you’re 26 or older), get ready to pay up for healthcare. Depending on your health conditions, that could be a pretty penny.

Here are 7 ways to get health insurance as a US citizen freelancer:

1. Cobra (if you are leaving a job with health insurance)
2. Obamacare
3. Local chamber or business group
4. Freelancer’s union
5. Private insurance
6. Small business healthcare
7. Healthcare sharing ministries

401(k) Retirement Plan

One of the best-underrated perks of working for a corporation is the retirement plan that most offer. With a regular IRA, you are only eligible to save $5,500 pre-tax money a year. With a 401(k), that number jumps to $18,500. Plus, some companies match your savings up to a certain percentage. When assessing your current salary vs. your expected freelancing income, it would be wise to include your employer’s 401k contribution to the equation. That could be a lot of money you’re leaving behind.

Preparing to Fly Solo

Ok, that’s enough food for thought about leaving your corporate job. Let’s break down how you can prepare your money mindset for the freelance life.

Saving Funds & Reducing Irregular Cash Flows

Before your quit your 9-5, save 3-6 months of income for an emergency fund PLUS an additional 3-6 months income for a cost of living (COL) fund.

Since your income stream will likely be less consistent when starting out, the COL fund will pay for daily expenses that your freelance income can’t cover. The emergency fund is only for real emergencies: broken foot, surgery, car accident, etc. Not only will having two nest eggs make the transition to freelancing less stressful, but it will also give your savings a nice boost if you don’t use all the COL fund money. (Perhaps the start of your investing account?!)

Once you’re making consistent income with your freelancing, the paychecks might still be irregular. Irregular paychecks make some people uncomfortable, but there’s an easy fix. Let’s say you’re averaging a monthly income of $4,500 as a freelancer. Put $5,000 in a savings account or CD (you can use your COL fund for this) and withdraw $2,250 every two weeks. When your paychecks come through, they will refill the account, leaving you with regular income despite your irregular cash flows.

Make a Budget

Woo budgeting. Even though it’s not fun, this article was titled “fiscally responsible freelancer” for a reason. To be a responsible boss to yourself, make a list of all monthly expenses. Rent, food, credit card debt payments, Netflix, gym membership, yoga classes, bike shares, plane tickets, coffee, makeup, prescription medication, health insurance, EVERYTHING. Leave nothing out. Remove some of the guesswork by looking at your credit card statements from the past 3 months and assessing your spending habits.

To make this easier, we made a budgeting spreadsheet for you.

Then, add up all these expenses and find your monthly expenditure. If you think this is your monthly income needs, think again. You also need to save some money! You have no company helping you out with retirement/house/kid’s college savings anymore. It’s all up to you. Determine how much money you need to save annually for your retirement goals (here’s a handy calculator to figure that out).

Add your savings goal to your monthly expenses. Hopefully, the number seems reasonable, because we’re not quite done.

Taxes

When you start getting paid, beware being duped into thinking you’re making loads more money than you were at your corporate job. Taxes no longer come out of your paycheck. Since you are your own boss, it’s your job to set some money aside for the tax man. Depending on where you live, this percentage could differ, but a rule of thumb is to save 25-30% of your income minus any business expenses.

The final equation: savings goal + monthly expenses – business expenses * (1 + tax rate)

Again, we made a handy spreadsheet to help you make your budget and calculate your monthly income goal. Get it here.

There you have it. Your freelance monthly income goals. If this number seems too high, go back to your monthly budget. Determine what can be removed. If the answer is nothing, look at your income goals again. Do you expect to increase your monthly income after six months? After a year? Maybe you can supplement some of the expenses with your COL fund. But a word of warning: don’t blow past your budget for several months simply assuming “the money will eventually happen.” That’s just bad planning.

RECAP

Being both a freelancer and financially successful is absolutely possible. But don’t sacrifice your savings account and ignore financial responsibilities just so you can quit the 9-5 grind. Make sure you look at the entire picture. #sorryforthelecturing #donenow #bye