Financial Considerations If You Want to Go Freelance or Become a Consultant

Are you tempted to quit your job and go freelance or become a consultant, providing the same services that you currently do you at your job?

I’ve noticed this trend in the women-in-tech community over the last year, and it intrigued me, so I asked a couple women who made this change. Why did they give up their good-paying, reliable(ish) full-time job for the uncertainty of self-employment? To only somewhat paraphrase: “Because I was sick of the bullshit I encountered at work as a woman. Now, I’ll be hired back in as the expert, so I should get a lot more respect.”

As you might know, I started my own financial planning firm, so I understand the desire to strike out on your own. And I fear that too many women are not thinking enough about the financial realities of this change. Sure, there are many other considerations (autonomy, career ambition, workplace culture, etc.), but I’m not an expert in those. (Opinionated? Yes. Expert? No.) So, I’m going to walk through the financial things you need to think about before turning in your letter of resignation.

The more honest you are with yourself about the financial realities of going freelance, the more likely you are to succeed. And don’t you owe that to yourself?

You Are Running a Business, Not Providing a Service

I just got back from a conference in Dallas, TX. (Rockin’ aquarium.) It was me and about 500 other owners or aspiring owners of fee-only, fiduciary-lovin’ financial-planning firms. In my many conversations with colleagues, I noticed the tendency for men to think about running a business, and women to think about providing financial planning.

Though I run a financial planning business now, years ago I went freelance (as a technical writer) and didn’t appreciate this distinction. Though there was a ton of demand for technical writing work, it didn’t work. I just exchanged my hours of technical writing work for an hourly rate that sounded good to me. I didn’t think much about pricing, marketing, bookkeeping, outsourcing, etc. That’s a haaaaard way to earn money over the long term. And in my case, impossible. Now that I’m running an actual business, things are going much much better.

So, if you’re going freelance,

Perhaps the most important thing you need to do is change your mindset:

You are no longer a doer of things, a provider of services, a haver of skills. You are running a business, which just so happens to be providing those services.

You are an employee of this business, but you are also the CEO, CFO, COO, and CMO. As they say, you need to work on the business (as CxO) as much or more than you work in the business (as a marketer, UX designer, or copy writer).

If you have no idea how to run a business (been there!), start by reading some books on the topic: The Lean Startup, The E-Myth Revisited, Profit First, etc.

Tally the Additional Costs

Your employer spends a lot of money on you in addition to your salary. Before you go out on your own, figure out what new expenses you’re going to have to cover.  You’ll need to earn enough money not only to replace your salary, but also to cover all the expenses your employer is no longer covering.

Employee Benefits

Look at your employee benefits booklet or website to figure out just what benefits your company is currently providing to you, which ones you’ll want going forward, and how much they’ll cost.

Here are the biggies:

  • First and foremost, health insurance. Healthcare can cost hundreds of dollars a month (or 4 figures, if you have a family). Some ideas to replace it without breaking the bank:
    1. When you’re just starting off and have no income, investigate Medicaid, which is a state-specific, income-based program.
    2. High-deductible health plans. In return for a higher deductible, the monthly premiums should be much lower. If you’re young and healthy, such low coverage is more appropriate than if you’re older, in poorer health, or have lots of kiddos around. And you can pair a HDHP with a Health Savings Account (HSA) to at least help save on taxes.
    3. Do you belong to a professional group that offers a group policy? Group policies can be much much cheaper.
  • Disability insurance: In the tech industry, especially at larger firms, most companies provide some level of disability insurance. Most employer policies are okay, not great. I usually see policies that replace 60% of your income in the event you become disabled, and that 60% is still subject to income tax. You need disability insurance. Disability is scary common. But individual policies are crazy expensive. Again, maybe one of your professional groups offers a group policy.
  • 401(k) match: I guess you could consider this as lost income instead of an additional cost, but either way, this is money (equivalent) you used to get from your employer that now you’ll have to make up for out of your own pocket.
  • Taxes: Currently your company pays half of your Social Security and Medicare taxes (total tax is 15.3%; your employer pays 7.65%). Now you have to pay all 15.3%. For $100k of income, that means paying $15,300 in taxes, instead of $7650.
Stuff You Need to Do Your Job

Then take a look around your office and figure out what equipment your employer is currently providing that you’ll have to have for yourself. A few possibilities:

  • Computer
  • Standing desk (Varidesk for the win!…no, no affiliate deals here, just a fan)
  • Scanner or copier
  • Business phone
  • Special chair for your tweaky back
  • Software
  • Better internet connection
  • Co-working space
Other Extra Costs

And maybe you’ll also have to pay:

  • Legal costs: if you want to form and maintain an LLC, or get your client contracts drafted or reviewed
  • Bookkeeping and taxes: Business taxes and books are a heck of a lot more complicated than personal taxes and no books. And it’s imperative you get them right. I remember the moment when, having recently hired a bookkeeper for my firm, I looked at the first set of professionally done books and thought to myself, “oooooh, that’s how I was supposed to be doing my books. Whoops.”
  • Business insurance: This could be business liability insurance or something profession-specific. In my world, for example, I need Errors and Omissions insurance.
2 x Salary

To recreate the income you have at your job, the rule of thumb is you need to earn 2 x your salary in self-employment income. What’s the number for you? Does it change your thinking about going freelance?

Tally the Additional Work and Inconveniences

Most of what I want to get across in this blog post is “Going out on your own is expensive!” but there are also a couple significant inconveniences that you’ll take on if you go freelance.

Paying Taxes

Right now, your employer conveniently withholds all the necessary taxes from your paycheck and remits them to wherever the money needs to go. Now you’ll be on the hook for paying quarterly estimated taxes. You gotta remember to do it, you gotta know how much to pay, and you gotta have the money to pay it. Simplest, most effective way of doing this?

  1. Create a calendar reminder for the estimated tax due dates.
  2. Create a separate, dedicated bank account you label “Taxes.”
  3. Save (through automatic transfer if possible…automation in your friend!) 30% of each paycheck you get to this account. No cheating. If you don’t save 30%-ish, next April is likely going to be pretty painful.
  4. When calendar date arrives, pay here. How much to pay is up to you (or your accountant if you hire one).
Retirement Plan

Your employer’s 401(k)s is a huge benefit of working for a tech company (with exceptions made for the rare incredibly sucky 401(k)). Even if you get no match. The ease and convenience of saving to the 401(k) are the only reasons some people save any money at all. (Studies to prove that people with 401ks save more?)

Now it’s all on you. The easiest substitute is an IRA at a custodian like Schwab or Vanguard. You have to remember to contribute to it, and then actually make yourself do it. Another inconvenience is that you can only save $5500 to an IRA, whereas you can save $18,000 to a 401(k) (which itself might not even be enough!).

Once you get a little more income, or want to get a little fancier, you could set up an SEP IRA or a solo 401(k), both of which can enable you to save much more. Again, provided you have the extra income to save!

Make Sure You Can Pay Your Bills While You Grow

Unless you’re stepping out of your job into a ready-to-go contract that’ll give you all the money you need, you’re going to need some other source of income to cover all your personal expenses. In fact, more likely than not, your personal expenses will be a much bigger financial drain than your business expenses.

So, step #1 is to know what your personal expenses are.  If you can reduce them, all the better. Then think about how you’re going to pay them. Here are some possibilities:

  • A partner’s income
  • Loan from your parents

and perhaps my favorite:

  • Your own war chest. And this, this is what I’m always talking about! If you’re in the tech industry, you likely have the opportunity to save a lot of money. And not just for retirement. You can also save for that 5 to 10 years down the road, where maybe your vision of the future isn’t crystal clear yet, but you know you’re going to want to do something big. Move, go back to school, stay home with the kids, strike out on your own. The fuller your war chest, the more flexibility you’re going to have in making your new business work.

No Plan Survives a First Encounter with the Enemy. But Plan Anyway.

The reality is that no matter how much planning you do, reality will turn out differently. And you still need to plan. You can always adapt a plan to changing circumstances. Without some sort of plan, you won’t even be able to (intelligently) answer the very basic question of “Should I stick this out or go get another job?”

If you do decide to quit your job and go freelance, I wish you the best of luck. If it works, it can be life changing. To feel the sense of agency, self-determination, respect (and self-respect), and confidence that comes from starting and growing your own business is some kind of wonderful.

Do you want to start building your war chest now to start your own thing later? Reach out to me at meg@flowfp.com or schedule a free consultation.

Sign up for Flow’s Monthly Newsletter to stay on top of my blog posts (and the occasional video), and also receive my guide How to Start a New Job (and Impress Yourself and Everyone Else) for free!

 

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.

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