If you're unemployed, find a freelance gig
We know that a lot of jobs have been lost in this recession — around 8.4 million and counting. The question is, will they come back?
Tina Brown recently coined the phrase the "Gig Economy" on her blog, The Daily Beast, in reference to the fact that we are largely moving into temporary — freelance and contract — work, a change that may become permanent.
Sara Horowitz, founder of the Freelancers Union, agrees with her.
"It's not that traditional jobs are going to go away completely, but it's like an archeological dig, and this is the new level."
She said that the Freelancers Union's membership is up 60 percent in the last year and half.
If these predictions are right, how do we cope? I know from experience that this is a tough transition, so I rounded up a few tips to help you prepare:
• Get the coverage you need.Your insurance needs are now on your shoulders. The Freelancers Union offers group insurance coverage for members, so that's an option. If you prefer to go at it yourself, as long as you're in relatively good health, you should be able to find an affordable medical plan on ehealthinsurance.com. The exception? If you live in a state that requires insurers to extend a policy to everyone, regardless of health status — New York falls under this category, as does Washington, Vermont, New Jersey, Massachusetts and Maine — you'll automatically get coverage, but it will be pricey. Tone down the cost with a Health Savings Account, says Drew Tignanelli, a financial planner in Maryland. These accounts are linked to a high-deductible insurance plan with a lower premium; money you save on premiums gets deposited into the savings account, then you can use that cash to meet your deductible.
As for replacing life and disability policies, a term-life insurance policy is generally inexpensive. Disability policies are pricey but necessary. You can get a quote for both life and disability at insure.com.
• Retool your retirement.If you had a 401(k) at work, your best bet, in most cases, is to roll the cash you've saved into an independent account. Then think about where you want to stash future contributions because as a self-employed individual, you have a wide range of options. If you're eligible to make a full contribution to a Roth IRA — you earn less than $105,000 as a single filer or $167,000 as joint — that's a good start because your cash will grow tax-free. You can contribute up to $5,000 to that in 2010 ($6,000 if you're 50 or older). Once you max that out, you should consider opening an SEP IRA or Solo 401(k). Remember, if you were receiving matching dollars from your employer before, you now need to pick up that slack.
• Budget like you've never budgeted before.Unfortunately, when the money isn't rolling in on a regular basis — and as a freelancer, sometimes it doesn't roll in at all — you need to take a more strict approach to your finances. That means figuring out how much you think you'll make in a year, rounding down a bit to cover your losses, then dividing that amount by how often you want to pay yourself (so if you're used to a check every two weeks, divide by 26). When you get paid, that money goes into a savings account, and then every two weeks, you transfer your paycheck into your checking account to cover bills and other expenses. Make sure you have a healthy emergency fund — at least nine months' worth of expenses, in case you hit a drought.
• Take your deductions.If you work in a home office, you can likely write that space off, provided you use it only for work. You can deduct any medical insurance premiums you paid for yourself, your spouse or your dependents. Remember that you're going to have to pay a 15.3 percent Social Security tax.
"When you're an employee of someone else, you pay 7.65 percent, half of the Social Security tax, out of your paycheck, and your employer pays the other half. The extra half that a self-employed person pays is deductible. My suggestion? Work with an accountant the first time you file after becoming a freelancer. The extra expense will be worth it.
• Get out.You likely don't realize how much the social interaction of an office adds to your life until it's gone, but having somewhere to go every day and people to talk to can be incredibly motivating. If you can afford it, you might consider renting office space — this is called co-working, and the expense is likely tax-deductible. If that's not an option, at least get out once or twice a day, says Horowitz.
"If you're not connected to people, you will fail. The most successful freelancers are the ones who get out of the house, go to networking events and meet people," she said.
Finding and joining a few professional organizations that host regular events will be good for your mental health and your business.