Many freelancers have shared that one of their biggest hurdles is inconsistent incomefrom month to month. Unless you land a roster of unicorn clients with long-term, flat-rate projects, this is likely an issue you are going to run into during your freelance career as well. So how can you mitigate that?
Setting up a savings account is a smart financial step that can give you peace of mind regarding future-you’s finances. It may seem like a bunch of unnecessary paperwork and an inconvenient trip to the bank, but the safety and security offered by having a Plan B is worth it.
What is a savings account?
Unlike your checking account, a savings account is specifically for you to store your money without using it very often. Think of it as your shoebox under the bed full of cash. You have a chance to earn some interest (0.06% is the national average rate) and the account is federally insured, meaning that the money is still yours even if the bank fails.
These accounts typically have a minimum investment required to open them and limit the number of withdrawals you can take per month. It is also a much safer, more predictable option than other investment options like an IRA.
Why do I need one?
Having a savings account is a smart way to plan for the future. Since it is not as accessible as your checking account, it might slow you down from spending your entire paycheck at once, help you prepare for a rainy day or unforeseen expense, or encourage you to save for a long-term goal like a vacation. If you have multiple savings goals, you can even open more than one account: maybe one as an emergency fund and one for a particular financial goal such as a down payment on a house.
Plus, if you are ever the victim of identity theft or bank fraud, storing your money in multiple places may help keep it safe.
How much money should I keep in my savings account?
These accounts are designed to limit your withdrawals, typically to no more than six per month, so you should plan to make mostly deposits.
Your bank may have a minimum deposit amount required to open the account, and this amount will vary by provider. In general, most financial experts recommend keeping between three and six months of expenses stashed away. When crunching the numbers, some regular expenses to consider might be:
- Rent or mortgage payments
- Student or car loan payments
- Childcare expenses
- Utility bills and insurance
- Gas, toll payments, or regular car maintenance
- Subscription services like a gym membership, Netflix, or Amazon Prime
- Prescription medication and healthcare copays
As far as actually contributing to the account, you have a few options. You can move your money from your checking account to your savings manually, most likely through your bank’s mobile app or website - which might be a good idea if your paychecks are inconsistent or you are in the early phases of saving. If you receive direct deposit payments from your clients, you can set up an automatic deposit based on a percentage of your check or a flat amount. This way, you’ll be saving without even needing to think about it. If you share expenses or savings goals with a spouse or another family member, you can set up the account jointly so you both have access to it - double the contributions!
How do I open a savings account?
Your first stop is likely going to be the bank or credit union that you already utilize. They likely have a handful of options and can recommend the best fit for you based on your needs. Having everything in one place makes managing all aspects of your finances easy.
If you do not anticipate needing in-person banking services very often, you may be interested in an online-only bank. These savings accounts typically have lower minimums.
In general, you’re looking for an account with the highest interest rate and the fewest maintenance fees that also has a realistic minimum deposit amount based on your needs.
Regardless of which option you pick, you will need to gather some identity verification documents and fill out your provider’s application - likely online. If you are opening a joint account, they will also need to verify their identity. Once you have filled everything out, your account is likely to be approved and opened within just a few days.
If I don’t want a traditional savings account, what are my options?
- Money market accounts: These accounts are like a hybrid of checking and savings. As a result, their features - and transactions - may be limited.
- Certificate of deposit: This is best for a lump sum that you don’t plan on using immediately. They hold your money for a fixed period of time to allow it to gather interest, and there may be penalties for withdrawing early.
- Cash management accounts: Typically offered by investment advisors, this may be a good pick if you have an investment account already established at that particular financial institution.
- High-yield money market accounts: These are essentially savings accounts that come with high interest rates and checks or debit cards, but they traditionally require large minimum deposits and balances.
- Peer-to-peer loans: These are personal loans funded by individual investors rather than banks. The investor typically receives a higher rate of return on their money, and borrowers get an interest rate lower than most financial institutions would offer. However, these are not a good pick if you need quick access to your money.