Gig workers and freelancers often find themselves managing an unstable income stream, where some months can be more successful than others. For many, that makes it more challenging to save and invest consistently for the future. However, experts say consistency can be achieved with a slight change of perspective.
Budgeting for unexpected paydays
Woodfield recommended starting with building a nest egg for tough times. Freelancers may want to have anywhere from six months to a year in some form of short-term, liquid investment at any time, Woodfield said. That’s different from a salaried employee, who can survive on three months’ worth of emergency funds.
Gig workers often don’t have the workplace benefits or long-term protections enjoyed by salaried workers, such as pensions or severance, said David McVay, president of McVay and Associates Ltd. “It’s very important that people in that space build their own wealth to be protected, not counting on anything beyond the Canada Pension Plan and Senior Security,” he said. “It’s something you have to start as young as possible.”
Along with freelancers and gig workers, real estate agents and brokers are among those who often have unpredictable or inconsistent income. “They really don’t know when they’re going to get the next one [paycheque]” Woodfield said: “I always said to them, ‘Take a third of that money and put it in something safe, something liquid.’”
Once there’s enough of a buffer built up, Woodfield said that’s your first clue to invest consistently, much like a salaried employee. That means breaking up your paycheck into smaller chunks, dedicated to specific purposes. For example, a third goes into short-term savings, a third goes into long-term savings and the rest goes into debt payments, he said.
But the consistency of those with a fixed paycheck may require a different approach, said Brooke Dean, Calgary-based senior wealth manager at BMD Financial Ltd. He said it may help to invest a percentage of your income, instead of a fixed amount. It can be less than 10% on every paycheque, whenever it arrives. That way, he said, you can stay consistent even if the actual amount invested varies.
Balancing growth and stability
McVay said independents should consider what their financial goals are. If buying a home is on the list, start investing in a savings account first. But if a home isn’t on the horizon, stick with a tax-free savings account instead.
“If you don’t have much of a tax burden, investing in a tax-free savings account at least protects any big growth you might get from taxes,” he said.
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McVay said young investors may choose to invest in growth-oriented ETFs, which tend to be risk-averse, if there is no immediate need for capital. “When it comes to aggressive investment, how long you can hold on to it. That’s what matters,” he said. But it’s important to know how much risk is too dangerous, he added.
For example, appetite is low when there is a need for cash quickly, McVay said. “But once you accumulate six months of security blanket, you can have more freedom (to be) aggressive or improve your investment portfolio.”
Woodfield warned gig workers to be careful with their investments, even if they are young and ambitious. “They have to really plan and be diligent and make sure they spend that money,” he said.
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