Are freelancers and independents preparing for the future?

You just can’t trust the future. That’s certainly been clear over the last couple of years. We seem to be contemplating the previously unthinkable, every day.

An accidental No Deal Brexit in the UK? A prolonged government shutdown in the US? Those things could be hard on a freelancer, contractor or other independents.

Traditional employment offers an illusion. Maybe that’s part of the deal: the regular pay cheque implies continuity, that the future is someone else’s concern. But, if you work for yourself, the future comes into sharper focus. Self-employment requires a more active engagement with tomorrow.

So, are sovereign professionals doing enough to defend against near-inevitable changes in fortune?

Let’s look at a couple of areas.

Having adequate financial reserves is critical

Financial agility is important. Can you weather an unexpectedly dry period, when all your clients decide to leverage the cost-flexibility you offer? As a sovereign professional, you are easily turn-on-and-off-able.

That means you need reserves of ready cash, but are independents saving? The picture is mixed.

According to the Office of National Statistics, 77% of the self-employed (aged 35 to 54) have cash assets of less than £20,000.

A government report last year (The Experiences of Individuals in the Gig Economy) found a distinct age split, though I wonder how different this is from those in traditional employment:

“For younger respondents, aged 18-29, overall, the prospect of being able to save money was more uncertain compared to their older peers … For many, feelings towards savings were generally characterised by uncertainty and unease, whereby the ability to save was highly contingent upon how many hours they could work or the contract on which they were working.

By contrast, those aged 30-49 were more likely to express that they were actively saving. Although respondents were generally more positive, with two even investing in a second property, the majority were far from expressing feelings of being affluent.”

One caveat, here. I wonder about the research sample for the Gig Economy report. It set the following definition: “The gig economy involves the exchange of labour for money between individuals or companies via digital platforms that actively facilitate matching between providers and customers, on a short-term and payment-by-task basis.”

As seemed apparent from the recent US report from JP Morgan Chase, I think that, in the main, digital platforms tend to offer lower skilled gigs (think Uber or Deliveroo rather than, say, senior interim executives or highly skilled consultants). Also, independents on these platforms may be looking for short-term “filler” or seasonal work (a finding of the Chase report) and/or be relatively early in their independent careers. There are exceptions, of course, but I wonder if those independents that command higher fees rely on closer, deeper relationships with clients and agencies and hence don’t appear in these research reports.

Either way, the point is this: if all your clients dried up at once, how long would your cash last?

Will FIRE keep you warm?

The FIRE movement (Financial Independence, Retire Early) in growing in popularity and, as the name suggests, its goal is quite simple: live frugally (and work hard) in the early part of your life so that you amass sufficient capital to live off the income for the rest of your life.

A commonly used rule-of-thumb (quoted from a recent Times article), is that you need a net worth of 25 times your annual spending invested prudently, at low risk. The rule assumes that your investment will yield an annual return of 4%, enabling you to live off the yield forever more.

The goal of financial independence is admirable, but there are inherent dangers in using such a simplistic formula, not least – as we said at the outset – you can’t trust the future. Is it wise to rely on the savings of 20 years’ work to see you through the next 40?

Here are just a few risks:

• The cost of healthcare is increasing.
• Funding of public healthcare (through tax or insurance) will inevitably increase and the quality (and/or scope of coverage) may well decrease.
• Taxes may increase.
• The basis of taxation may change, perhaps in response to increased numbers of independent workers. Your planning may be knocked sideways if the burden of taxation shifted towards land value or consumption taxes.
• The political landscape may change dramatically and unexpectedly. Think of the UK ex-pats who retired to sunny Spain and are now wondering if Brexit will put an end to free healthcare. And, then think about the cost of returning to the expensive and chilly UK.

In summary, your costs may rise and your interest-income may not.

FI is an admirable goal, but be cautious of RE.

The College Investor blog has a great overview of FIRE and its different flavours: FIRE for non-frugal people. Ideal if a life on lentils doesn’t appeal.

The key point though, is to work towards financial independence – and the freedom it delivers – without losing your sellable skills. That way, you can focus on doing the work that gives your life purpose (after all, sovereign professionals are usually not in it solely for the money) and can easily supplement your passive income when necessary.

Investing in your sellable skills

Maintaining and building your sellable skills is another way to reduce your risk. By being the best at what you do, you become the one your clients can’t do without.

That means keeping abreast of developments in your field. It means using your expertise and experience to see through the inevitable hype of the shiny new toy to discern where real business value will lie in the future. And then training to be the best at what will be needed.

Investing in yourself might seem obvious but, in recent research, Oracle found that only 11% of gig workers believe they should bear the cost and responsibility of training.

The UK Gig Economy report mentioned above found that “Training was consistently sourced and paid for by interviewees themselves, and carried out during what would normally be paid working time.”

Planning is painful … but necessary

Planning for the future doesn’t come easily for many people, but it comes with the territory for sovereign professionals. Sovereignty means being your own boss, enjoying the freedom, the flexibility and the perks of answering to no-one. It also means being responsible for your long-term security.

It can be painful and onerous to start thinking that way but, ultimately, it’s good for the soul.

Image: Albany Colley at Pixabay.