The way Americans work is changing. Today a significant percentage of people are earning at least a portion of their income through freelancing or by working short-term jobs in what many are calling the 'gig economy'. Although the government doesn't have an exact number of those who are earning a living through the gig economy, according to the Federal Reserve definition of a gig worker, the number may be as high as 75 million.1
As a gig economy worker you enjoy a lot of freedom in when and how you work, however it is also important to be aware of the added risk and responsibility. Preparing for an unexpected and possibly prolonged reduction in income due to a lousy economy is vital for everyone, but with less secure employment than many full-time jobs, a gig economy worker should take extra steps ahead of time to prepare for an economic slowdown. If you work in the gig economy, you can help protect your finances with these four tips.
1. Save More Money
Everyone should save for future emergencies, but if you can't depend on a steady paycheck or unemployment insurance, having a substantial cushion of cash is essential. While a typical suggestion of keeping four to six months of your current living expenses on hand may work for people with full-time jobs, gig workers should try to set aside six to nine months of cash reserves. This money should be invested in risk-free savings accounts or certificates of deposit (CD's) and not in the stock market. While this investment won't make you rich, it will provide peace of mind and security when it is needed.
2. Review and Lower Your Monthly Expenses
How much money did you spend last month on eating out, the internet bill, or buying gas for your car? If you don't know, it is probably time to take a look at where all your money is going. Taking a look at your cash flow is the best way to identify ways you can cut back on your spending. Once you know where you are spending your money, you can find ways to eliminate or reduce excessive expenses to help you reach your overall financial goals. Several budgeting tools are available that can help you establish a budget. Mint is one of the more popular ones and is completely free. Other budgeting apps are available for a price, but Mint is a great choice if you're looking for a free way to get started establishing a budget.
3. Create a Bare-Bones Budget
After identifying how you spend your money, think about creating a budget which focuses on only the essential living expenses you need to survive during a recession or period when you are out of work. Your bare-bones budget needs to take into consideration the cost for items such as mortgage or rent payments, groceries, insurance policy payments, minimum loan repayments, and medical costs. Creating a bare-bones budget before you need it will give you a good idea of your essential expenses if you ever need to reduce your spending unexpectedly. This exercise will also allow you to establish a reasonable estimate for money to set aside in your six to nine months of cash reserves savings.
4. Reduce Your Debts
While avoiding high-interest loan payments at any time is advisable, it can be especially stressful trying to make these payments when your income is reduced or temporarily eliminated. Take steps to reduce your outstanding debts by increasing the amount of your current repayments now while you are still earning. You may also want to consider consolidating all of your debts if it will lower your interest rate, or asking your creditors if you can renegotiate your loans. But most importantly, avoid taking on new debts by creating and sticking to a budget, and always paying your entire credit card balance every month.
The earlier you face the challenge of preparing for the next economic downturn or interruption in your income, the more prepared you will be when it happens - and it will inevitably happen. It may seem like a daunting and tedious task, but it will pay benefits down the road. If it is not something you want to do on your own, seeking out the advice of a financial planner is a great way to safeguard the future for you and your family.
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This content is developed from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.