7 Steps To Building A Financial Safety Net For Freelancers

7 Steps To Building A Financial Safety Net For Freelancers

Who doesn’t want to be their own boss? According to the Employees Provident Fund (EPF), about 50% of the Malaysian workforce ply their trade in informal sector, which encompasses a wide range of jobs, from pasar malam hawkers to freelance writers.

A survey conducted by INTI International University and College found that 68% of freelancers in Malaysia chose the freelance route despite the availability of the full-time jobs.

Some, such as the EPF, believe there is a level of distrust among Malaysians towards the formal institutions – in government and corporates – which could be partly fuelling that growth.

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Regardless of the reasons, what’s certain is the Malaysian freelancing economy has grown by 31% and is the third largest freelancing market in the region, on the backdrop of digital platforms such as Freelancer.com and Upwork.

But the life of a hustler means fending for yourself and to do that, you need a financial safety net. The good news is, setting that up is easy and we’ll show you how to build it. Step by step.

Step 1: Build out your emergency fund

Also known as a “rainy day” fund, this amount of money stashed away in a liquid savings account is set aside for unexpected events that carry some financial impact. In the case of a freelancer that’s basically your reserves to carry you through during the lean times.

Some of the products you can consider to park your emergency money in are fixed deposit accounts, unit trust funds and Amanah Saham Bumiputera/Nasional, as these products offer higher interest rates than a regular savings account to protect your fund from being eroded by inflation, and yet still offer liquidity.

The objective is to have this money easily accessible during emergencies and help you and your family avoid high-interest credit card debt.

Some financial advisors suggest having enough to cover living expenses across three to six months. If you were a staffed employee, that would be an easy exercise to navigate and achieve.

But where do you start as a freelancer? One way to do this is set aside 45% of every pay cheque into savings. This allows you to do three things: earmark 30% for taxes, 5% for re-investing in your business, and 10% to build your proper emergency savings fund.

That 10% might be a small start but being realistic is the goal here. The key is to have some form of loose money to tide you over.

Step 2: Contribute to EPF monthly

Freelancers are not required under the EPF Act 1991 to mandatorily set aside a certain amount of their earnings for forced savings.

But voluntary participation is encouraged and for good reason: you need a retirement fund. Roughly three out four Malaysians can’t raise RM1,000 for a rainy day.

More than two-thirds of EPF members aged 54 have less than RM50,000 in EPF savings. It’s believed that with the household poverty line at RM930 monthly, that amount will only last you 4.5 years.

So it’s not that easy to rest on your laurels when you reach those golden years, and while things are much more challenging for a freelancer, you could certainly do yourself a favour by ensuring that you contribute monthly to EPF by being a member.

For freelancers, the minimum monthly payment is RM50 for every transaction, and a maximum of RM60,000 yearly.

If you put away RM10,000 every year in your EPF account, you would have accumulated RM150,200 in your EPF savings in 10 years. This is assuming a 6% annual dividend rate, with the contribution split equally over 12 months.

Also aside from retiring, your EPF funds, especially those in your Account 2, can come in handy in the event of an emergency, or if you want to further your studies but can’t afford a dent in your cash flow.

Step 3: Consider life insurance

This is a necessity if you have financial dependents, such as a spouse and children and it’s an altruistic effort on your part, the policyholder: in the event of your death or permanent disability, your family gets to move on without absorbing financial shocks.

The rule of thumb is to secure coverage that equals 10 times your annual income. But remember before signing up for one, educate yourself about the pros and cons of the policy and also do some research before committing to one.

And always avoid falling to the underinsured trap where you do pay for life insurance coverage, only to find that it is not sufficient to tide you over in the event something untoward happens to you.

Step 4: And maybe a critical illness plan

This is not the same as having a medical card which deals with hospitalisation and surgical coverage. A critical illness policy gives you a lump-sum benefit upon diagnosis of any of the 36 critical illnesses.

And how much do you need? Well since money is your ceiling, the rule of thumb for minimum coverage is at least three years’ worth your annual income, and your contribution should not exceed 10% of your annual income.

So for example, if you are earning RM60,000 a year, you should be contributing roughly RM6,000 per annum. And you should buy RM180,000 worth of critical illness coverage.

To put this in perspective, if you buy three years of your income coverage, you can afford to take some time off work for medical treatment. The lump sum from your critical illness policy should be able to cover some of your out-of-pocket expenses while you concentrate on recovery.

Given that 73% of deaths among Malaysians are caused by non-communicable diseases, a critical illness plan needs to be on your list, if not now, at least in the near future.

Step 5: File your taxes properly

Being in the informal sector doesn’t mean you could dodge taxes. Even Uber and Grab drivers are required to file in their taxes.

That said, there are a few ways to cushion yourself from paying the full amount: you have to know your tax exemptions and deductions.

The former reduces or entirely eliminates your obligation to pay tax; the latter is similar but a deduction reduces your chargeable income and is a result of gifts and donations.

For example, if your chargeable income is RM55,000, and you’ve donated RM2,500 to an approved charitable organisation, you are allowed to deduct 7% of your aggregate income to reduce your chargeable income.

The former reduces or entirely eliminates your obligation to pay tax; the latter is similar but a deduction reduces your chargeable income and is a result of gifts and donations.

For example, if your chargeable income is RM55,000, and you’ve donated RM2,500 to an approved charitable organisation, you are allowed to deduct 7% of your aggregate income to reduce your chargeable income.

So all these deductions will help you save and therefore increase your monthly cash flow.

Step 6: Aim for retainers

As its name suggests, freelance work is usually associated with being project-based, but it is not unheard of for independent these days to treat it more like a solo-run agency. If you are a freelance writer, for instance, you could ask your clients if they need to produce a whitepaper on a monthly basis.

But remember it’s all about empathising and communicating the benefits of this structure in the context of your clients’ own challenges.

Retainers can be much easier for clients to manage since they remove the need to have consultancy costs approved internally with each task and help build an ongoing support resource that can be budgeted over time.

Clients also need not worry about added costs involved in hiring a full-time employee, such as EPF contributions or insurance, granting them more savings.

For you, the freelancer, the benefit is obvious: a steady source of guaranteed income that can be contracted on a monthly basis.

Step 7: Plan and think ahead

The life of a freelancer is akin to managing your own business: the learning curve is steep with a 50-50 chance of failure and success. But that shouldn’t put a damper on your dreams.

Maybe the first thing to do is prove yourself: take up a few gigs while holding down your full-time job. That might be exhausting but it’s the safest way to hedge your bets in the event going independent does not bear fruit.

And while you are negotiating that, you might want to think about best practices for budgeting. You might also want to tweak your lifestyle and learn to be frugal as quickly as possible. Debt? That has to go, too.

And if you have those big-ticket items such as a mortgage, you might want to really take your time in transitioning to the freelance world. Defaulting on your home loan payments can bring serious consequences.

But the rewards of being your own boss is indescribable. No one said it was easy, but impossible? Not quite.

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