In the getting started stage of freelancing (and throughout the first year, if we’re being honest), income is inconsistent. The odds of you deciding to start a career in freelance and bringing in a steady income off the rip are slim. But hey, if you can make it happen, more power to you, and let me know if you’d like to write an article for this site!
Even the best budgeters and planners struggle to create a spending plan in the face of volatile income. That’s why freelancers need a fully-funded emergency fund more than the average person.
What is an emergency fund?
An emergency fund, which is also known as a rainy day or reserve fund, is an amount of money kept independent of regular savings meant to be available in an emergency. This extra cushion keeps your financial posture secure without worrying about not being able to afford an unanticipated expense.
Why do I need one?
Freelancers need an emergency fund to protect life from interfering with your bigger financial plans. Without the buffer of an emergency fund, life will continue to knock you back as you try to pursue the career change into freelance or freedom from living in a paycheck to paycheck cycle if you’re still at a 9 to 5.
It took an unexpected car repair for me to appreciate why I really needed an emergency fund. I remember it was my now husband’s birthday (and luckily, after I went through Dave Ramsey’s Financial Peace University course and had put away my first $1,000 in an emergency fund).
We had gone for a run and were on the way home to change and head to dinner. And wouldn’t you know it, I hit a massive pothole, flattening my tire and leaving us waiting on a tow.
It could have been a much more stressful situation if I didn’t know that I already had the cash on hand to cover it. The next day, the tire was patched. I paid for it using my emergency fund, then I moved on with my life.
It almost seemed too easy. But needless to say, after relying on my emergency fund that first time, I became hooked on the feeling of stability. I loved not needing to fret over life’s minor inconveniences and knew that I could handle anything that came my way.
How big does my emergency fund need to be?
The amount of money to keep in an emergency fund is a personal decision based on your unique financial situation. Base the amount on your monthly expenses, aversion to risk, and job stability. To come up with an amount, try answering the below questions.
- What are your monthly living expenses? (Be sure to include all of your recurring debt payments, bills, utilities, transportation, housing, and food costs)
- What are your monthly business expenses? Do you have recurring monthly bills to support your freelance business?
- How long would it take you to replace income if you lost a client? What if you lost all of your clients?
- What amount of money would it take to give you warm fuzzies when you think about being prepared for an emergency?
If you think about the purpose of this fund, it will help you determine what is right for you. The purpose of the fund is to absorb risk, so the riskier your situation, the greater the emergency fund you should have.Dave Ramsey
In our family, household expenses are around $2,500/month. If I lost all my clients today, I feel confident saying I could fully replace the income in 2-3 months. For these reasons, we decided on a $30,000 emergency fund as the goal amount, primarily due to my risk-averse nature and unstable income.
For me, having ten-plus months of living expenses in the bank is the amount that lets me sleep well at night. This is enough of a buffer for me to know we can afford to handle whatever comes our way. Your number might be a lot lower or even slightly higher than mine, and that’s okay. Your number should be what you know in your heart is going to give you peace of mind.
The most important thing to remember about an emergency fund is that you have to start somewhere. $50 in your emergency fund is better than $0!
Where should I keep it?
There are a few options for keeping your cash, depending on how much you trust yourself. Below are a few places to stash your fund:
- Your existing savings account – Do you have the ability to withhold spending the earmarked money on non-emergencies if it’s somewhere you can see? This option takes a lot of willpower. You will have to mentally segment your emergency fund savings from any other savings you have. This is difficult to do and was never an approach I took.
- New savings account with your primary institution – When I started my emergency fund, I chose this option as I knew that if I saw the money in with my regular savings or checking, it would be too appealing to use it right then.
- Separate savings account with a new institution – After I had built up several thousand dollars in my emergency fund, it started to look quite tempting to use for a big purchase. I decided to move the fund to a different, online-only bank for safekeeping. Having the money in another bank makes it so much easier to keep it out of mind.
How do I build up my emergency fund?
Now that you know where you’ll be keeping your emergency fund, there are a few ways to siphon off your money to where it needs to be:
- Manually move the money at set intervals – Consistency is key. I recommend moving money right after you pay yourself to ensure you won’t use it for something else.
- Set up a separate direct deposit straight to your emergency fund – When I was employed full-time, I found success in setting up two direct deposits from my employer. I signed up to have $250 from each check routed directly into my emergency fund. The remainder went into my regular checking account. Since the money never hit the light of day in my checking account, I didn’t feel the temptation to use it. I also liked knowing that my emergency stash was always building in the background without me having to touch it.
- Transfer anything left in your checking account when you pay yourself– When I was first starting my emergency fund, I would take the balance in my checking account on payday and transfer that once my deposit hit. Starting fresh with a new paycheck made it easier to budget. It also allowed me to move small amounts into my emergency fund. Otherwise, those small amounts get absorbed into the available funds in checking. Sometimes it was $42, and sometimes it was $242, but every little bit helped to build the fund quicker.
No matter which method you choose to get money into your emergency fund, the most important thing is to stay consistent. From the start, it’s critical to know that this could be a multi-year process. I started my emergency fund in 2016, and it was 2020 before I began to see the light at the end of the tunnel. Most importantly, refrain from using the money for anything that doesn’t qualify as an emergency.
When can I use it?
Now that you have your emergency cash nestled away nicely in a savings account, the question becomes, how do I know what qualifies as an emergency? My husband used to say he had an “Emergency Vacation Fund,” which I explained repeatedly is not a real thing. What constitutes an emergency is going to be subjective and a personal decision.
Several commonly agreed-upon situations qualify as emergencies.
- Job/Client Loss – Replacing income while you’re out of work is a great use of the fund. And unfortunately, we freelancers are more inclined to experience this than others. But we can also pick up more work easier.
- Car Repair – This means keeping your existing car running or replacing it with a used vehicle if yours has completely bit the dust. This does not mean buying that new car you’ve had your eye on or getting the new truck bumper you want.
- Medical Expenses – Unexpected medical expenses are a great use of emergency funds. Especially since we freelancers are probably using an alternative health care policy that might have way higher deductibles than an employer’s plan.
- Home Repairs – If the furnace goes up in the middle of winter or the AC breaks in the heat of summer, you’ve got an emergency on your hands. Since the home office is the office for most freelancers, keeping the business open by taking care of these repairs is critical.
What are the benefits of having an emergency fund?
- Less Stress – A whole new world opens up where you are no longer sweating the small stuff. Financial stress levels significantly decrease once you realize that you’ll be okay in the event of job loss or a car breakdown. It’s a kind of internal calm that you have to feel to believe.
- Ability to take some financial risks – Once you’ve funded your emergency fund and you are no longer putting money towards it, cash flow will increase, which equates to more freedom. Maybe you’d like to expand your small business, invest in that “risky” stock you’ve been eyeing for the last year, or try out a new kind of investment altogether, like art or farmland.
- You can leave your job and try something new – I don’t know that I would have been able to leave full-time employment without my emergency fund. Although I had very low expenses, I was still super wary about cash flow. Luckily my emergency fund gave me a cushion and enabled me to pull from it the few times I needed to as I pursued my dreams. (Follow this series to track my progress as I wade through the trials of the Gig Economy.)
The Bottom Line
All freelancers need an emergency fund. Being able to support yourself in times of turmoil will enable you to go full-speed ahead into your career. You owe it to your future self to start planning now. Building an emergency fund will enable you to live your best, less stressed life, whatever that might look like for you.
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Disclaimer: The above is my own opinion and is for informational purposes only. Views expressed above are not intended to be investment advice. While I might have some great ideas, seek a duly licensed professional for investment advice.