Personal Finance for Freelancers, Part 3

This article was written by Sara Freitas-Maltaverne, a French to English translator. She specializes in high-quality translating, training and copywriting and works with a team of translators to provide the same service in the major European languages. You can find her blog here. This is part three, of a four part series.

Assess Need, Know Yourself, and Allocate Assets Accordingly

Assessing retirement needs may seem complicated, but it is really just based on your current income, current retirement savings, years until retirement, anticipated length of retirement, estimated pension or other benefits, the standard of living you wish to maintain in retirement (as a percentage of your current income), and inflation. There are a number of online calculators that can help you with this. Again, they are geared towards employees and I feel that the answers they spit out are not enough for freelance professionals, but they will at least give you a basic idea of the bare minimum that you should be saving.

Again, I would encourage you to see a qualified financial advisor in your country (an independent advisor, accountant, or contact one through your bank) for a detailed assessment of your current situation.

You will also need to get to know yourself a bit better as a potential investor. This means determining the level of involvement you are willing to take on in terms of managing your portfolio (if you want low involvement, a mutual fund might be better than trading stocks directly yourself, for instance) as well as the level of risk you can tolerate (this depends on your personality as well as other factors such as the number of years until retirement). This will determine the asset classes and types of investment products that are right for you. Here is an extremely simple interactive investor profile tool that will give you sample asset allocations for different levels of tolerance for risk.

All of the major investment firms (Fidelity, Vanguard, etc.) have online tools and more extensive questionnaires designed to help you determine your profile and allocate your assets accordingly. As a general rule, diversifying your portfolio is the key. You must also re-allocate your assets to more secure investments as retirement approaches. It is a good idea to review your allocation every year.

Investing Basics: Types of Assets and Investing vs. Speculating

Stocks, bonds, and short-term or cash reserves are the three main asset classes (I am not going to talk about real estate here). Fidelity provides a clear explanation of the different asset classes and possible asset allocations.

If you are still afraid to invest, it is probably because you are confusing investing with speculating, which is something you should be afraid of (according to Vanguard, speculating is akin to gambling). Investing is something you simply cannot afford not to do. Merely saving (in bank accounts, for example) is safe (especially in countries where the government insures regular bank accounts) but it is not enough to ensure a comfortable future as inflation will eat away at any returns you make. Historically, investing (meaning adopting a long-term strategy and sticking with it) in the stock market outperforms most other forms of investment, with average returns of around 8% per year, and is an important part of any long-term personal financial strategy.

So, after reading this, you probably think I have it all figured out. Well, you’re right, but not entirely! In addition to the basic concepts listed at the top of this page, if there is one thing I would like you to take away from this article, it is that planning for your financial future is an ongoing process and it does have its ups and downs. The important thing is to never throw the baby out with the bath water. Life is unpredictable. If you get off track, simply revise your plan and make the necessary adjustments. Never lose sight of your end goals, even when you experience financial setbacks.