Click on the finance tab of any news site, and you’re bound to find ample investment advice. But for the growing sector of freelancers and self-employed people who make up the gig economy, the picture is a little different. Unlike salaried employees, these informal workers have to contend with a fluctuating income, little or no support in the way of benefits or paid time off, and tax responsibilities, like collecting and remitting GST/HST.
Despite the complexities, the trend is growing. According to Statistics Canada, the gig economy, characterized by self-employed workers who hire out for on-demand work, jumped from 5.5% in 2005 to 8.2%—or 1.7 million workers—in 2016, driven in some large part by the proliferation of online platforms like Uber, TaskRabbit, and Fiverr. And without more recent census data, there’s no evidence that the trend is waning. In fact, the COVID-19 pandemic may be causing the numbers to rise even higher.
The good news is that freelancers can be just as financially ambitious as those who draw a regular paycheque. Read on to learn how—and how much—to save and invest while contending with a variable income and other challenges of being a gig worker.
Sort out your savings
When you’re working gig to gig it’s easy to let your savings slide. Many freelancers feel like they’re always surviving from one job to another and the idea of putting any money away seems impossible. However, savings aren’t negotiable. No matter how fluctuating your work and pay schedule, you need to put money aside. Otherwise, you won’t have an emergency fund, money to pay your taxes, or money to invest. It’s really as simple as that.
When it comes to putting money away, it’s smart to aim high. That said, smaller but regular deposits can also yield results. Colleen Ciccozzi, Senior Manager, Wealth Programs, at Coast Capital, agrees. “Financial planners suggest regularly saving 10% of your gross invoices,” she says, adding that a budget calculator will help you identify where you can save. “You can look at investing once you have enough socked away to cover at least three months of expenses—though six months is even better,” she continues.
Choose the right investment vehicle for you
One of the most popular investment vehicles in Canada is the RRSP—registered retirement savings plan. But it’s not usually the best choice for freelancers. Here’s why. “Generally, RRSPs are of limited use to lower-income workers,” says Ciccozzi. “Small contributions in low tax brackets return small refunds but don’t do much to reduce your tax bill,” she continues. “It makes more sense to save up so you can contribute to an RRSP and take advantage of the tax reduction when your annual income is higher, like $50,000 or more.”
For freelancers making less who don’t need the tax break, a tax-free savings account (TFSA) is the better choice. Contrary to its name, TFSAs come not only in the form of savings accounts but also Guaranteed Investment Certificates (GICs), mutual funds, ETFs, and even stock trading accounts. In other words, as long as you have the contribution room, you can invest your money in a wide variety of products with varying degrees of risk and potential, without getting taxed on your gains. That’s right: Whatever interest or increase in assets you yield in a TFSA is not taxed.
Introduced in 2009, the TFSA is a relatively new investment vehicle. Through 2012, every Canadian aged 18 and older had $5,000 in annual contribution room. This increased to $5,500 for the following two years and then up to $10,000 in 2015. It continues to fluctuate. The number is always changing according to various budgets and because these amounts accumulate over the years. But, to give you an idea of the amount of room you could have in a TFSA if you haven’t yet invested —it’s about $75,000. And, unlike with RRSPs, if you withdraw from an account the room returns to you for future investment. To find out how much TFSA space you have, log in to your CRA account.
A deeper look at TFSAs for freelancers
Flexible and roomy, TFSAs can be a solid investment choice for freelancers. But one TFSA does not fit all. Here’s how workers with variable incomes and expenditures could use a TFSA to achieve three popular goals:
1. Emergency fund: Everybody needs an emergency fund—especially gig workers, who often have less income stability. Ideally, your money is safe and accessible in a TFSA, but that doesn’t mean you can’t use it to earn interest. Just like with other savings accounts, you can withdraw at any time, without penalty, and because it’s a TFSA, all gains are tax-free. Better yet, if you have an emergency and need to withdraw funds, the amount taken rolls back into your overall contribution room to use again.
2. Large purchase or expense: Maybe you’re saving up for a car, or perhaps you need to renovate to add a new home office. It can take a while to save up for larger, one-time spends. But with a TFSA you can actually put that time to good use. GICs are no-risk investments that can offer a higher-than-average rate of return. Typically, you’ll get a higher interest rate the longer you leave a deposit with the bank. So they’re a good option to stash money while you save.
3. Retirement: If you’re saving for retirement, you likely have a longer forecast between now and when you’ll need the money. Investing in a TFSA mutual fund account will involve higher risk, but can reap considerably better (tax-free!) returns. Make sure that when you set up your portfolio it matches your appetite for market volatility.
Lastly, whatever your investing goals and despite your employment, as a freelancer in a constantly changing workforce you should be prepared to save and invest. Just because your income may fluctuate doesn’t mean you can’t organize yourself for financial success. And investment tools can be an important part of multiplying your earnings. When you’re ready to explore your investment options, connect with Coast Capital’s Business Banking Team for expertise on everything from basic budgeting to strategic investments.