Planning to quit your day job to become a full-time freelancer can be the most exciting transition in your career. You gain control over your own schedule, and have the freedom to choose the type of projects you work on.
But with this excitement comes a lot of financial questions and planning. In order to make the leap from your day job as smooth as possible, here are five questions to ask — and answer! — before becoming a full-time freelancer.
1. How Much Should You Save?
If you have no other sources of income to pay the bills after you quit your job, how long would your savings last? Do you feel comfortable giving yourself three months to get your new freelancing career off the ground? Or is six months a more reasonable timeline? Obviously the more money you save up, the less risky your leap into freelancing will be.
There are additional factors that need to be accounted for too, like whether or not you're the breadwinner for your family. It's likely you'll have to pay for your own health insurance, taxes, and fund your own retirement account. All of these things need to be calculated before you can accurately estimate how much money you should save.
Most experts suggest that you keep at least three to six months' worth of expenses in a separate savings account to cover any emergencies or losses of income (some even suggest as much as twelve months' worth). As a freelancer you might as well double this amount to account for the added risk of being self-employed.
2. What's Your Bare Minimum Budget?
What's the bare minimum amount of money you need to make in order to pay your bills each month? Make sure you add in all of your household bills (utilities, insurance, groceries,) as well as the cost of doing business as a freelancer.
When I was in the process of quitting my day job, I calculated my bare minimum budget to be $3,000 a month. This meant that I needed at least $18,000 saved up ($3,000 a month X six month savings cushion = $18,000) in order to cover my bare expenses for six months while I built my freelancing business.
Calculate how much money you need to adequately pay your bills every month, then multiply this figure by six to eight months. This is the amount you'll need to save in a separate account to make the transition from a day job to freelancing a successful one.
3. Do You Have Passive Income Streams?
One other way to make this process much easier is creating multiple streams of income. Aside from your core freelance duties, do you have other options for creating passive income? What other assets can you leverage to bring in more money each month?
Maybe you can branch out and offer business consulting, or create an online course that teaches a specific skill based on your background and experience. Do you have investments that earn small dividends or interest?
Every little bit of income can help you save up money faster, while easing the transition of quitting your job and steady paycheck.
4. Are You Willing to Do What it Takes?
How much time do you have available to dedicate to finding work? Are you prepared to spend nights and weekends building your business? In the beginning, clients won't come to you, so you'll have to actively seek them out and build a solid network from scratch.
How much time you spend in the beginning will determine how quickly you're able to replace your day job's income. There will likely be a lot of sleepless nights and stressful days, but in the end you have to determine if the reward is worth all the effort.
Freedom is never free, and this includes financial freedom. You have to figure out if the cost is worth it.
5. Do You Have a Financial Backup Plan?
What happens if Plan A doesn't work out? Do you have a Plan B in place? In the event that you blow through all of your savings, and are still not where you can fully pay your monthly expenses, how are you going to cope?
Create a backup plan of action for this specific event. List out the possible solutions and scenarios for how you and your family will deal with this. Are you going to find another full-time job? Will you be able to move back in with your parents?
This is another reason that having a large chunk of money stashed away in savings can really help you during the process of quitting your job to freelance full time. Calculate at least six months' worth of your minimum budget expenses and then save money like crazy.
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