Switching from a permanent role to going freelance is risky, there’s no two ways about it. You are giving up your guaranteed income and benefits without any guarantee of any income going forwards but it can also be a great opportunity.
Depending on your skillset, you could earn much more per day than you would in your salary travel, and you can also have more flexibility.
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A word on the risks
It may feel riskier than ever to go freelance at a time when many companies are cutting headcount, but it could also present an opportunity as there is more of a need for external support. At the same time, if there are suddenly more freelancers in the market, there is more competition for your services. All things to weigh up…
This is something that I’ve been looking into because while I value the security my role gives me and the relationships I have with my colleagues, I’m also attracted to the flexibility that can come with working freelance. I would love to be able to spend more time with my children while they are young, for example working during the day while they are at school only and taking more time off during the school holidays.
If I were to go freelance these are the financial steps I would take to feel more confident doing so.
Step One: Understanding Your Costs
It’s easy to think that when you’re replacing your job, you need to replace your salary. Of course, this would be great and you’re probably wanting to go freelance so that you can earn even more than your current salary. However, in reality, in the worst case scenario where you are still building a pipeline of well-paid work, you want to at least cover your costs.
So the first step would be to understand what your costs are. If you don’t already have a budget you can start with this post on how to create a budget.
Step Two: Cutting Costs
Step two is seeing if you can reduce your costs to reduce the financial pressure you will be under once you are working for yourself.
You can look at both your fixed and variable expenses. While some expenses are fixed because you commit to paying a certain amount for a certain period, you can of course bring them down by shopping around for other suppliers. I find it helpful to get a full year calendar and to plot out where my contracts expire with different suppliers. So for example in March your mortgage deal may come to an end and in September your phone contract may come to an end. Then make sure that you are calling them well in advance (about six weeks) to negotiate a better deal and also that you are shopping around to see what else is available.
For your variable expenses like your groceries budget, look at what you are currently spending, and then challenge yourself to see if he can bring this down. For example, can you switch the supermarket you go to, buy in bulk or apply another one of the 18 ideas to reduce your groceries bill?
So now you have a better idea of your costs going forward you know how much money you need to bring in as a freelancer to avoid dipping into savings.
My last suggestion for cutting costs is to consider overpaying your mortgage if you are coming to the end of its term, or have only a small balance left. In our case, we have at least 5 years left on ours, so I may well wait until we’ve paid it off to take this leap.
Step Three: Research the Market
Step three is to do some research to understand how easy or difficult it will be to bring in income to cover your “barebone budget” as well as the level you are aspiring to. You can speak to people who are currently freelancing in your field to get an idea of daily rates and volume of work available – or to people that use freelancers.
It’s also important to understand what taxes you would be paying so if you’re based in the UK you should research IR 35 and whether the work that you are doing would fall under that because that would have an impact on how the tax is calculated. It’s common to hear that freelance work “isn’t worth it” if it’s covered by IR35.
If you have an idea of a fair market value daily rate and how much tax you would pay then you have an idea of how much you would have to work to achieve this income.
For example, you might find that you need to work five days a month to cover your barebones costs but 20 days a month to achieve your current income. If this were the case for me, taking a risk to go freelance would not be worth it.
Step Four: Boosting Your Emergency Fund
If you are still interested in this route, the next step I’d recommend would be to boost your emergency fund. A guideline emergency fund that is recommended is usually 3 to 6 months of your costs, but if I were jumping into freelance I’d want at least 6 months of our costs, if not more. Different people have different situations and risk appetites. You may be on the lower end of the spectrum if you have a partner with a stable job, or higher end if you have financial commitments like a mortgage or no family to rely on if needed.
How to boost your emergency fund
There are different ways to boost your emergency fund. You could do a savings challenge like a Low Spend Year or you could put the money that you’ve saved from stripping down your budget towards it.
Another option is to start a side hustle to bring an extra income. Ideally you could start some of your freelance work on the side while you have your full-time job. If your contract allows this, this is a great way to start building a network of clients, and also seeing what skills you might need to develop to work as an entrepreneur.
Step Five: Consider Boosting your Pension
When you go freelance, for some time you may not have the additional income to be able to contribute to a pension. If you’re already feeling like you don’t have enough in your pension, you can use your salary sacrifice to boost it before you go freelance. You can look at some Coast FI calculators (like the one you can download for free here) to see if you already have “enough” in your pension fund to be able to pause or stop contributing. If you’re not at the Coast FI number already, you can use salary sacrifice to boost your pension.
If this is your strategy and you receive a bonus at work then it’s worth timing your “leap” for after your bonus is paid, and choose for this to go straight into your pension. You need to decide this in advance, before you know what your bonus is going to be.
Step Six: Look Into Setting Up Passive Income Sources
This requires investment of time or money upfront, but can give you some financial cushion and reduce the pressure on you once you are working freelance.
Some examples of this are creating a blog that has some ad revenue (although believe me trust me this usually takes some time to come to fruition).
Another option is to look into property investment. If you are doing this, then you need to be mindful that different strategies have different impacts on cash flow. So for example, an HMO or a holiday let will typically have a much higher yield than a normal buy-to-let so this will mean that you will have better cash flow, but potentially lower long-term capital growth. This requires some level of savings to invest, or the ability to pull equity from a current property.
A holiday let that is something that we have been looking at. We already have a normal buy-to-let, but are conscious that a holiday let would offer us a higher yield and really help with the cash flow if one or both of us went freelance. Of course it’s higher risk as you could have long periods of not being occupied if the location is very seasonal or another lockdown strikes. Of course there are costs associated with maintaining the property as well.
For more hands-off property investing you could look into a real estate investment trust. This is not financial advice or a recommendation by any means, but I’ve been looking into the Property Hub Investment Trust which holds a number of properties and then a proportion of the rent from those properties is paid as dividends, and you can also benefit from the capital growth on those properties. They have launched an app which works as the investment platform. It’s not clear yet whether you can invest through an ISA, but I’ll update this as soon as I know.
Step Seven: Talk to an Accountant or Financial Advisor
The final step, before making any major financial decisions, would be to talk to an accountant or a financial advisor, which I am not!
They should be able to help you to understand whether and how to set yourself up as a limited company, how you could continue to make pension contributions once going freelance and tax efficient ways of drawing money out of your company.
Other Ways to Prepare
So far I’ve focussed on the financial steps you need to take before going freelance, but there are many other steps you can take to boost your likelihood of success.
For example, you can make the most of and build your current network. Think about who your clients will be even if you’re not ready to tell them that you’re going freelance. Make sure that you’re keeping in touch with them and have an idea of what they might need help with.
Another step is to connect with other people who are already freelance as they can be part of your support system to go to if you need help with ideas. They could be in your industry or others so that they’re not direct competitors. They might give you some interesting insights into freelance work that you might not have realised. For example, one thing that puts me off is that freelancers are often given the jobs that nobody else wants to do, not necessarily the more exciting or stimulating ones.
I would also make sure that I have a solid well-being plan. Get into good habits now like making time for exercise and early bedtimes. You will need energy to be creative and to stay upbeat when you are facing the new challenges of going freelance.
Have a think about what other things and other ways that you could bring in money if you are struggling to get clients for your higher-paid services. For example, one thing that I did during Covid was a TEFL (Teaching English as a Foreign Language) qualification so that I could teach English online if I needed to make quick money. This would be a much lower rate of pay than using my specialist skills, but it’s another source of income that I could turn to if I needed to.
Finally I would experiment and practice this new lifestyle as much as possible. If your freelance work involves developing a new skill on your product, then test this out as much as you can. You can poll your community of friends or join a mastermind to get input on developing your idea. You can also develop skills in your current job and practice them in a “safer environment”.
I said at the beginning going freelance can be very risky and this is certainly what has been holding me back. This blog is intended to show ways that you can reduce the risk but is not trying to pretend that you can eliminate them.
If you’re still on the fence, all of the ideas on this blog are things that should benefit you anyway even if you decide not to take the leap. So for example having a bigger emergency fund, boosting your pension and reducing your costs will all help you even if you decide to stay in your current job.
Sometimes if you’re not satisfied it’s important to be taking action. It’s also important to really understand the value of what you have right now as well as the level of risk you’re comfortable with and the kind of lifestyle that you want to have.
So I would love to hear from any freelancers out there – what did you do to prepare for taking the leap? Or, are you thinking of going freelance? What are you doing to make it a bit less scary?