How to Invest money on an Irregular income – The Freelance Lifestyle Part 2
How to Invest money on an Irregular income –
The Freelance Lifestyle Part 2
This is a 2-part finance mastery series for entrepreneurs
Next to building the lifestyle of your dreams and enjoying more time and location freedom, an abundant financial future depends on mastering the six principles for a financially stable business. Financial management is more essential than ever in today’s economy, especially if you live the freelance lifestyle on an irregular income.
In Part I of the Finance Mastery Series, we’ve discussed the first 3 essential steps “How to Crack The Wealth Code” on an irregular income. Go here for Part I.
Especially as a freelancer, the goal is to grow multiple sources of cash flow that will increase your income, perhaps along with a young family, and looking beyond accumulated debt from the past. In the next part we’re moving forward to building wealth through investment while protecting yourself and loved ones against a potential loss of income in the future. While an emergency fund may protect your short-term, it won’t protect wealth long-term.
In part II of the Finance Mastery Series, we will discuss steps #4 thru #6 that completes your wealth blueprint, even with an irregular income.
The goal of strategic financial planning is gaining financial independence, and achieving financial freedom, and then becoming wealthy so you can start to design your dream life.
In part I, we discussed these core fundamentals; generating more cash flow and additional income, developing a step-by-step financial strategy that you can follow, and building an emergency fund, setting aside at least 3 months worth of expenses. As a freelancer, it’s vital that you accept and understand that becoming wealthy is achieved by “doing things in a certain way” laying the bricks, step by step of your financial foundation and long-term wealth. Now that you’ve successfully created a strong financial foundation, let’s dive into steps #4 through #6 to scale your cash flow and long-term wealth.
Step #4: Proper protection – protect yourself against a loss of income
Life for the most part is unpredictable, especially on an irregular income. Life does not move in a straight line, which means everything from your income to your investments to your retirement plan will likely experience a setback at some point. Perhaps, it’s taking longer to pay off revolving debt due to high interest rates that you racked up from a student loan from a degree that you’re no longer using, you could run out of clients, the market could crash, you could face a health crisis and more – sounds familiar? The key with all of this is to not panic and stick to the plan.
As you are in the process of eliminating debt and increasing disposable income, your full focus should now shift towards building wealth and then protecting it from losing it all over again. Research shows that falling back financially is a significant fear among most freelancers.
The impact of financial losses in the near future (like a temporary or permanent disability, or terminal illness) can be offset by insuring yourself in case the unexpected happens. At this stage in life, potential losses are magnified because you have less time to recover from financial fallbacks, but it also stalled your financial progress in life.
So you’ve got your home and auto insurance set up and you might even have insured your brand new iPhone. But what about insurancing your life? If you haven’t gotten around to it yet, you’re not alone: In 2020, the global pandemic affected millions of American families and business owners, but only 60% of people had some form of life insurance in place that could temporarily or permanently replace their income. The primary purpose of insurance is to transfer the risk of financial loss from you to the insurance company. An insurance policy covers large, unexpected expenses that could otherwise destroy your financial future. It’s why they call it “coverage”.
As a freelancer, how do you protect yourself when you can no longer produce?
Almost everybody needs life insurance. Even on an irregular income, life insurance makes up an important part of your wealth blueprint.
But having the right type of protection in place can do a lot more. Let’s consider other factors that can impact wealth creation. I call them the “speed bumps” in life that will slow down your financial growth.
Risk of financial losses, increased income taxes and annual inflation.
We have already addressed how you can protect your health, but did you know that the right type of insurance policy can also protect you from losing money in the financial markets and shelter your money from annual inflation and income taxes?
Investing in the stock markets and betting on capital gains from stocks, shares or crypto currencies have a 50% chance you’d lose it all if the markets go down. Historically we have seen massive market fluctuations, more recently in the crash in 2009, 2016, and 2020, that illustrate the dangers of investments based on supply-and-demand. More recently, with the rise of Crypto Currency, investing became extremely volatile, making it hard to predict financial gains.
Always remember the number #1 rule when it comes to building long term wealth: if there is a significant “risk” involved with the investment opportunity, it will decrease your chances to become wealthy. Ask yourself; are you ok if you lost it all today? Statistics show a 50% market loss requires a 100% gain just to break-even.
Consider this example: you invested a lump sum of $7,500; however, with a 50% market loss, your investment went down to $3,500. Even if the market recovered back a 50% gain, it still wouldn’t recoup your original investment of $7,500, but only rose back up to $5000. It’d require a 100% capital gain. Realistically, what are the chances the markets go up a full 100%?
At this stage in life, you need an investment vehicle that can replace your income in case you can no longer produce temporarily or permanently, but that can also protect your investments from the risk of losing money when the markets are volatile, and sheltering it from income tax.
Think with the end in mind.
You are working today so that you are able to retire you and your family without the risk of outliving your money. Especially as a freelancer, you are responsible to plan your own retirement. However, many people in the U.S. aren’t investing nearly enough to reach their financial retirement goal—and the retirement income it brings.
If you don’t protect yourself from financial risk, and shelter your money from financial inflation and income taxes, it will significantly reduce your chances of becoming wealthy.
Do you want help building your own personalized wealth blueprint? I invite you to take advantage and schedule a financial success call with one of our licensed financial professionals. We currently offer a Personalized Wealth Assessment completely free, because we believe that Freedom Demands Attention.
Step #5: Building Wealth is striving to outpace inflation & reduce income taxes
After years of careful planning and commitment to your financial goals, in steps #1 through #4, you have laid the groundwork. You have increased cash flow, worked on virtually eliminating all debt, and started investing, putting your hard earned money to work while avoiding financial risk You’ve started building wealth – but how can you preserve it and build a financial legacy?
In step 5 of your wealth blueprint, you’ll discover that financial independence still requires work in the form of outpacing annual inflation and reducing or eliminating income taxes once you retire.
Consider this scenario: instead of saving or investing $1000 in fear of inflation, you would stack it under the mattress. By doing so, inflation will devalue that $1000 because the cost of living is increasing.
For example: A gallon of milk cost 39 cents in 1913, while in 2020 the average price was $3.59.
However, if you’re using specific investments that can outpace inflation by leveraging compounded interest, now you’re on your way to build wealth despite inflation by the time you are ready to retire.
Take the Rule of 72 – The Rule of 72 is an estimation of the time it takes for your money to double. Hereby, you divide the number 72 by the rate of return, and the result is the approximate number of years it will take for money to double.
The Rule of 72 estimates compounding periods.
Take this example of investing $1000 at the age of 29 with an annual average rate of return of 5%.
Doubling time (number of years) = 72 / 5 % = 14.4 years
– it’d take 14.4 years to double your $1000.
However, The Rule of 72 can also work against you just as powerfully as it can work for you, think of your credit card with an APR rate of 24% or higher. Using the Rule of 72, considering you have $5000 in credit card debt and you don’t make any payments.
Doubling time = 72/24% = 3 years – it’d only take 3 years to double your debt from $5,000 to $10,000 because the debt interest rate is usually much higher than compounded interest.
If you’re looking for a qualified investment, even with an irregular income, that can help you double your investment while eliminating downside risk that can outpace inflation, I invite you to grab a complimentary seat at my next “Cracking the Wealth Code” Live Masterclass. Register for a complimentary seat here.
Step #6 Preserve Wealth – Reduce taxation and build a family legacy
Finally, after following the wealth building principles rigorously, and assuming you have accumulated more than $1 million dollars in retirement money. Now it’s time that you build a strategy that can preserve wealth because life is and can be unpredictable.
In a traditional job, you’re usually given the opportunity to invest in a company 401(k), and they may even match you dollar for dollar (if you’re lucky). However, as a freelancer, how do you take your own initiative to prepare for future retirement in ways that will continuously build wealth?
Therefore the last step in building wealth for retirement, is preserving wealth, even when you want to retire early – with the right plan the choice is yours.
Traditionally, the Three-Legged Stool resembles an old retirement income model consisting of a Social Security Check, a Company Pension, and your Personal Savings.
However, America’s retirement crisis leaves most people wondering what will happen at a later age. Reports have shown that Social Security’s reserves will run out in 2035; here’s why:
The Social Security Program collects tax money from the current working population. Intending that once you’ve reached the minimum age of 62, you can become eligible for social security benefits. This pay-as-you-go system promises a secure pension for when you retire.
Sounds good in theory, but not so much in reality.
The problem is, Americans have fewer children than in the past but live longer lives. This results in a distorted worker-to-beneficiary ratio since more money comes out than in due to a declining work population. The system needs an overhaul, and someone in their 40s or 50s might not receive a full social Security paycheck anymore.
With Social Security fading out and pensions being a thing of the past, it only leaves personal savings. The 3-Legged Stool of retirement is crumbled, which now fully relies on personal responsibility instead of government guarantees by the time you’re retiring.
Unless you take self-initiative early on, you won’t be able to retire in the near future.
The “American Dream” used to be $1 Million in retirement money by the age of 65, however in a recent study in 2020 by Charles Schwab found that the average 401(k) participant thinks they’ll need $1.9 million to retire, that’s a 12% increase from the previous year’s survey due to inflation, and rising cost of healthcare, cost of living and increased income taxes.
Think of the following scenario: if you want to retire with $1.9 Million in 2021 and live “your golden years”, how much would you actually need to save to outpace annual inflation, and being able to pay taxes over that money by the time you are ready to take it out from your investments and distribute a monthly income?
Shockingly that number is closer to $3.2 Million depending on your tax bracket. Keep in mind that this scenario doesn’t include any management fees.
It doesn’t matter where you are today in your financial journey, but with an irregular income, it’s important that you manage your finances in a certain way, that creates certainty and predictability in life.
Part of long-term wealth management is creating a family legacy. Hereby, it’s not only about whether you have enough money to live from until the day you’ll pass, but also about the money you will leave behind for the next generation.
Since nobody can outlive their wealth, create a wealth strategy that ensures the proper legacy and distributes your wealth with the right beneficiaries. On average, someone’s legacy is heavenly impacted by many communication challenges and financial errors within the capital distribution period. This can be avoided by proper legacy planning.
It’s essential to maintain the right balance between what you spend now and what you save and invest for later. By investing money in the right vehicles you can leverage compounded interest, and therefore, offset annual inflation. Learning how to protect your money from income tax and from unexpected medical expenses ensures stability and a safety net even with an irregular income.
In today’s society, we are accustomed to believe that becoming wealthy is unattainable for the average person, no matter how hard you work. No doubt, the right financial mindset makes a significant difference because if you think you can’t – why would you even try?
However, living on your own terms and building wealth on an irregular income is possible for anyone. Despite today’s global challenges with a freelance lifestyle, the work-from-home economy, future tax increases, and inflation, it’s possible to achieve your financial goals.
Cracking the “Wealth Code” by applying the 6 principles outlined in the Financial Mastery Series is more than just principles, it’s a strategy – and they’re proof that it’s possible to achieve your financial dreams, even with an irregular income.
You have more control over your financial future than you think.
Let’s revisit the Six Wealth Principles “How to Crack the Wealth Code”:
#1 Generating More Cash Flow and Additional Income
#2 Follow A Financial Strategy When Managing your Expenses
#3 Building up a Emergency Fund
#4 Proper protection – Protect Yourself Against Loss of Income
#5 Build Wealth – Strive to Outpace Inflation & Reduce Taxes
#6 Preserve Wealth – Reduce Taxation and Build a Family Legacy
While this 2-Part Financial Mastery Series explains the 6 core principles that teach “How to Invest Money Even on an Irregular Income”, choosing the right investment vehicle still depends on your individual financial situation. There’s not one financial strategy that applies to everyone; therefore, I want to invite you to take advantage and schedule a Complimentary Wealth Assessment here. One of our licensed Wealth Strategist will help you personalize the six core principles outlined in these series during a 1-on-1 clarity session.
If you want to learn how these six core wealth building principles are applied in practice, I invite you to grab a complimentary seat at my next “Cracking the Wealth Code” Live Masterclass. Register for a complimentary seat here.
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ABOUT THE AUTHOR
Team Rob N. Zweerman
Rob Zweerman has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their financial well-being through his online webinars, podcast, training events, coaching, and mastermind programs. He is the founder of various media and education companies. Rob Zweerman continuously seeks out to elevate his own performance by surrounding himself with the industry’s best teachers and mentors that in turn, drives the results of his clients and audiences.