How much should you save and invest as a freelancer?
As a freelancer, the responsibility to save money and invest for retirement falls 100% on you–there’s no one around to remind you to do it. So how do you know how much to set aside for these activities? Kaleigh and Paul share the strategies they use for both investing and saving and explain how the approaches have helped provide a level of financial security.
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Paul: So before we started recording this episode, you said something and I was going to ask you a question about it, but they’re like, “No, let’s save this for the show.” I think you said that you wished you were more aggressive with your investing or with your investment strategy. What do you mean and why?
Kaleigh:Yeah. I mean I have investments. I have a good chunk of money that I set aside every month. I guess it’s a security thing. I am a super saver so I like to be liquid. I like to be able to buy something outright if I want to. And so most of our money is in a savings account and then there is like a decent chunk that gets invested every month. And then it’s just kind of out of sight, out of mind, like it’s off limits. I guess I wished that I felt comfortable which I doubt at this point in my life, but I wished I felt more comfortable taking a chunk of that savings investing it because I’m still pretty young right now. I’m only 29 so if I did that now I know logically in my head that’s a smart thing to do. I just haven’t taken that step.
Paul: So you wished you had more of your liquid money in something that was giving you a return?
Kaleigh: Yes, exactly. But it’s not liquid then. What if you want to buy something really cool?
Paul: It’s very true… for everybody.
Kaleigh:I know, yeah.
Paul:We don’t even to specific numbers but how much do you like to keep liquid in terms of what you need per month? Like do you have like it’s a six month runway or 8-9 month runway.
Kaleigh: Maybe like 2-3 years of runway, like it’s a good chunk in there.
Paul: Wow! I just had shocked face. People can’t see my shocked face but I have like home alone shocked face.
Kaleigh: Yes. Like I said, I’m a super saver. I am super aggressive with saving, and that’s something that both my husband and I are just very onboard with. We live in a small house and neither of us, we don’t have a lot of super nice expensive things so we have this great savings. If we wanted to eventually but a different house or like we travel a lot, it enables us to do that. Right now, it’s like “Ughh”. Every once in a while I have that feeling like maybe we should take a chunk of that and put it away because like I said we’re both pretty young still that’s why I feel that would be wise.
Paul: That’s a big runway. Like I was thinking, I like to keep it 5 or 6 months in liquid and the rest I put into investments. And I was like, that’s a, I’m kind of a nerd with that but then you have even more so that’s interesting. I think I was looking into this before we started talking about it and there are probably stats for Canada. I couldn’t find them as quickly as I could find the American stats because America has to be the top of everything I think.
So the non-profit Institute on Retirement Security released a study in March of last year because it’s only just March, unless they were super on top on things. 2017, stating that nearly 40 million working age households, about 45% of the US, had no retirement savings at all or no investment savings. Which I think is difficult for me to process especially because I care more about freelancers, because when you work for a company sometimes there are things like RSPs in Canada, 41Ks like employee match stuff. And when you’re freelancing, I think this is why I wanted to talk about this because when you’re freelancing.
There is obviously perks to freelancing but you also take on more responsibility in your business and more responsibility for your financial freedom in the future, so I think investing and savings. Like should you have a plan for retirement? Are you like Kaleigh at 50 is going to be like live on the beach with her dog and her husband.
Kaleigh: That would be cool. I don’t have any hard wired plans right now. I started working the week after I graduated college. I took a full time job and started saving for retirement right off the bat. And so I’ve been saving for a long time now.
And when I switch to freelancing, one of the things that I really wanted to be sure that I was doing was still putting money inside for retirement because there is nobody to tell me to do that but I knew that it was important. And so I started at a really low level. Just saving a little bit because it was still new. I wasn’t sure how things we’re going to go but I knew that I needed to save, and I knew that I needed to set something up. For me I think it was… Oh, I did a Roth IRA.
Paul: I don’t know what that is because that’s American. I think I know what the thing is equivalent in Canada.
Kaleigh: Yeah. And then as I got a little bit more comfortable and started earning more, then I also set up a secondary which was a SEP IRA which is for self employed individuals. And so now I set aside a chunk of money every two weeks into both of those accounts, and then my husband has a full time job and he saves through that. That’s kind of how things played out. I don’t see myself, like I never think about retiring. I don’t know, maybe that’s weird. I always see myself doing something but it would really be baller to like do that from a beach like you said with my dog somewhere. Like to be able to travel and just work when I want to. And maybe that’s 50, maybe that’s 60. I don’t know.
Paul: Yeah, so pretty much everybody had talk to and does alright working for themselves absolutely no plan as far as like what does retirement look like. It was like sugar mochi, like I don’t know. But I think what you wrote up, J. L. Collins. I can’t remember what the book is called. I’m going to look it up now or else people are going to email me. J. L. Collings book, Simple Path to Wealth. He calls it F-You money so when you have enough money saved where you don’t have the work, you just want to work. You have F-You money to say like, I don’t want to work with this client so I can just walk away or I don’t want to do this project I could just walk away.
I think most of the time when we’re talking about freelancers retiring I think we are talking about that. Whereas we just want to have enough where we know even if we weren’t working all our basis would be covered but we kind of like working at least sometimes. I don’t really work 40-hour a week now. But if I was retired I definitely wouldn’t want to work that much. Like I look at my dad who granted work full time for a while and has a pension from both England and Canada because he lived I both places. He doesn’t know what to do with himself during the day so he paints people’s houses like once or twice a week. He’s like I just want spending money to go on trips. Like they did with Ireland last year. They are saving up to come visit me this year. And he’s just like I don’t know what else to do. I get my tourist done, I just go and paint houses, and he loves it.
Kaleigh: That’s the dream, isn’t it?
Paul: Yeah, exactly.
Kaleigh: Just do what you want whenever you want.
Paul: Exactly. Like right now I wish I had more time to finish working on with the downstairs bathroom in my house. But I also have work because I don’t have that few money at this particular moment. I think it’s the same, and correct me if I’m wrong, but I think it’s the same in the States where you can put a certain amount of money away each year based on the income of the previous year where you don’t get taxed on that.
So if I made and 100 grand and I put 20 grand in the savings, like a tax free savings account. It’s like a TSFA in Canada. That’s probably some acronym in the States because all government were kind of the same like weird acronyms. Where you only pay income tax on the money, like if you have a 100 grand, and you only pay income tax on the 80 grand. That’s probably similar in the States? Yeah?
Kaleigh: Yes. You know, I don’t know if it’s a savings account. I don’t know if it’s kind of structured investment. But yeah, there are those who options. Or they have some of the investments are set up so that you pay taxes on it now and then you don’t have to pay taxes of it when you take it out late.
Paul: So there is no capital gains tax at the end?
Kaleigh: Well, there are capital gains but you get taxed at the current tax rate so that in the future it’s gone way up or something, you’ve already paid that tax.
Paul: That’s pretty cool.
Paul: I’m worrying about capital gains after selling all my bitcoins.
Kaleigh: Oh! Depending on when you sold. That could be interesting.
Paul: Yeah. I sold at the very top when either, and it’s not like I did not play the market at all I just wanted to buy another car and that’s the reason I sold it because I want something very specific. I just happen at that time at the exact peak which is based on absolutely no information or inside information which I had.
So myself for investing I basically put all of my investment money into index funds. That’s just basically I’m just going to bet on the market as a whole instead of like a specific stocks. One because I don’t care enough about looking at the market and like buying or selling. Like I remember when E-Trade became a thing and it was like in the early 2000s and people are like, “Oh, do you have an E-Trade account?”, “Like I bought Apple stocks at $50.” And now I was like, “I don’t care.” My investment strategy is to not have to think about my investments. So I use Wealth Simple which I think exists in Canada and in the US. I don’t recommend them they are just who I use, and it’s easy because I can log into their couple of times a year or once a month if I remember it. And I can just see, this is how much I have invested, this is how much I’ve made off of that investment, and then I just have automatic withdrawals.
I think that’s the key to investing is automatic withdrawals so I put a certain amount of money from my company into my index funds once a month. And I put a certain amount personally into RSPs which I think are similar like 41K personally. It’s not even a lot. It’s like $100 from my personal account. I think $500 from my corporate account. And I started less than that.
Like when I started freelancing I was making not a ton of money but I was putting like. I left college and started working full time. There wasn’t even much of a gap when I started. I think I was like $25 or $35 a month when I started. And I don’t even know why I started doing it. I was just like I should probably plan for something, I was like 19 or 20 years old. I was like I should probably plan for something. I don’t know what so I’m just going to start putting money in and then as my income grew I started to increase it and then a few times a year if I do have more money than I need because I pay myself the exact same amount every single month.
I pay myself basically a set salary based on exactly what I need for my life not more than that because then I have to pay tax on the money corporately and personally. So I’d rather get myself as little money as possible personally and then just invest the rest. Like you I have a liquid account just like, and it makes no interest.
Kaleigh: Yeah, nothing.
Paul: Maybe it’s not a good idea but in terms of making us both feel less stressed I think it’s a good idea. And then the rest I literally transferred into Wealth Simple. I have socially responsible investing enabled because it seem like the right thing to do. I don’t even know. And that’s it. I don’t know what my money is really put into. So I was talking about this in the Creative Plus Slack where people didn’t know how to start investing or didn’t think they have enough to invest.
I was like start with $20. And I did some calculations before we got on this call, so if you put away $500 a month for 30 years with compound interest based on current market rates you would have $368,000 in 30 years putting $500 away. If you put $100 away in that same 30 years you would $75,000. It seems like you’re turning $100 a month into $75,000 seems like a pretty good deal. It’s your money you’re making with 3%, 4%, 5% on the market every year if the market is ok. But that’s it. You don’t have to be smart to invest money for the future I think. I’m not smart.
Kaleigh: I’m not smart either. I’m not an effort person.
Paul: Yeah, it automatically comes out of my bank account so I know that I don’t have that money available and that’s one of the main things.
Kaleigh: Yeah, that’s what I’m just going to say. You made two really good points in that. One was that if you just set aside like a chunk of money every month or twice a month and you know that you’re going to invest it and that’s just in your mind concrete that’s where the money is going. It’s out of sight, out of mind. You don’t even think about it. You don’t even miss it because it automatically disappears anyway so you can’t touch it. It’s not an option.
The other thing is that you’ve touched on that I think is really important to remember also that as you start earning more it’s important to start contributing more too. Because it’s really easy to set up an autopilot investing plan where it’s just like I’m going to invest this amount forever. But as you earn more, you should start contributing more because your lifestyle is going to change as you earn a little bit more. Hopefully it doesn’t like you don’t go buy a Lamborghini or something like that. I mean, if you want to, go for it.
Paul: I’ll get a new plan.
Kaleigh: But yeah, I think that that’s easy too to just be like, “Oh, what do you mean? I’ll invest $200 a month forever. But I am earning a lot more.” Now, that’s something that you should think about, increasing that to go along with your increased earnings.
Paul: You really brought up a good point. It’s like a mindset that that money, like if I look at my monthly budget and you’re like, “Ok, I need to buy, This month I’ll buy a bunch of stuff for my bathroom.” I didn’t have enough money in my budget to buy the floating vanity which is like ridiculously expensive for some reason. Because I know that certain amount goes to mortgage, certain amount like a lot goes to food. And then that money is in mind, that $500 for my corporate and $100 for my personal. That’s not my money anymore. I see that it’s as just something like I pay for my cable bill or I pay for my power bill. That money isn’t really mine because I got to give it to somebody else. That investment money isn’t mine and I think it’s a matter of figuring out how much you can invest even if it’s like not very much to start.
Figuring out how much you can invest that you have that isn’t going to hurt because it doesn’t really make sense. And I’ve read, I don’t know what you think about this but I’ve seen a bunch of advertisements, but it’s for investment companies, so I don’t really trust it. Where they are saying it’s better to invest than pay off certain debt. And to me I was like illogically I could see that making sense especially if the debt was at a low interest rate but for me it’s like debt makes me hurt; like I have to buy cars in cash. It’s a bit neurotic how bad I am. Like the only debt I carry is my mortgage because it’s like 2.26%. It’s like the dumbestly low amount of that. I think it’s what people are comfortable with because like if your credit, it’s like 20% then probably make sense to pay that off before investing because you’re going to be losing more than you’re putting.
You’re never going to be able to balance it out because the debt is going to be increasing far faster than what you’re making even if you’re investing in bitcoin. The other thing is it hurts my heart to read articles about people going into debt to buy crypto currency when it’s like this isn’t a sure thing. Like people selling their houses and all their worldly possessions which I think is a good idea but not by bitcoin. I was reading Reddit the day after the bitcoin market crash. It went down by like 26% just in one day. People were freaking out because they had borrowed a lot of money. I was just like, “Oh, this sucks.” I feel so bad for these people.
Kaleigh: It’s very risky. That’s like a high risk. And they would always see that was stocks too like never buy individual stocks unless you really really have the time to invest in watching them and knowing a lot about them and understanding the market which who honestly does. If you’re freelancing especially it’s really really hard unless that’s something you’re super into. It’s a hobby of yours. It’s really really hard to play the individual stock game.
Paul: Even Warren Buffet. He knows a lot about this kind of stuff says, “You should just put your money in index funds.” Or if you look at like what he says is kind of different than what his actions are. You’re kind of like a mini Warren Buffet. I just have to say because he has most of his money in cash. I think last year I was reading a report somewhere, he had like $38 billion in cash.
Kaleigh: Me too.
Paul: It’s like off by just a tiny but, right?
Kaleigh: Just a little.
Paul: But he had a lot of money liquid. Even though he is like Mr. Stock Guy, and maybe that’s what he is comfortable with. Maybe Warren Buffet can only sleep at night if he has like $38 billion in runway buffer liquid in his account.
Kaleigh: Yeah. Warren Buffet, if you’re out there listening you are invited to be a guest on this podcast.
Paul: Exactly. The only guest we’ll ever have is Warren Buffet. Just FYI before people start emailing asking to be guest on the show unless you are Warren Buffet.
Kaleigh: No, I think this is a really important conversation. I think all of it is kind of based on the importance of paying yourself a set salary and making sure that you’re always covering both the good times and the bad times so that you have the opportunity to make investments and just safe for retirement and do those extra things.
Paul: Yeah, the last thing that I wanted to ask you is do you have an amount we’re you’ve hit in your savings where it’s like, “Ok, like I now have F-You money or like I could now stop working if I felt like it.” Do you know what that exact number is or have some idea or guess?
Kaleigh: I thought I did and I hit a certain point where I was like, “Oh, I still don’t feel super secure.” So yeah, again and that’s why I’m like or maybe I would feel better if that money was invested or at least a chunk of that money was invested so then I can keep then. If I did that it’s like, ok this money is over here is set aside I can’t touch it and now I can start refilling this pot again in getting to a really safe, secure place there. I don’t know. I feel like that’s how money works like it’s never enough, you know. Back to bottom line.
Paul: For me I think it’s like I could probably read way too much Mr. Money Mustache, who I think has a good blog. He is a super weird guy I think that’s why I like him because he’s like all into and co-working and investing and living frugally. It’s not just like the trendiest thing we do. I am super cheap about 99% of the things in my life. There is like 1% of things where I really like to have the best things because I love the thing but.
Kaleigh: What is it by the way?
Paul: Cars and coffee.
Kaleigh: Ok, just curious.
Paul: Like yesterday I needed a new workout clothes and I bought them at Cusco. I literally buy most of my clothes at Cusco because it’s cheap.
Kaleigh: I love it. Folks, that’s where Paul gets his workout clothes.
Paul: There you go. So for me I like to follow Mr. Money Mustache’s guide. I think he called it the 25 times rule. I don’t think it’s a rule. It’s think it’s more of a guideline where if you have 25 times what you need to live off saved up then you could technically retire and lived off the interest based on average markets. So say you make, an easy number would be $100 grand, $100 grand times 25 is like $2.5 million. It seems like a lot of money. But if you start to think about if that’s a guideline then, because I don’t like aiming for goals that don’t have an upper limit, because otherwise I feel like it’s stressful. I always have to keep saving more. If I have to save and I don’t even need to lived off. I live off less than $100 grand a year so my number is less than $2.5 million.
But for me that upper goal is like something to work towards and then I feel like I can relax when I hit that number as opposed to just always feeling like, “I wish I was making more money.” I don’t know what the number is but I need more. Whereas, for me it’s like, ok well if I hit that number then I feel like I can ease off the gas just a little bit. I don’t think I will but in theory that seems like that what happened. I feel like this is good.
Kaleigh: It was. We covered a lot of ground.
Paul: I’m so excited about investing so I hope everybody got something from this. And like we said, the best way to start investing is to just start investing with whatever you can and just set to decide as like a monthly automatic withdrawal. I feel like that’s the biggest takeaway.
Kaleigh: Right, that’s the really smart first step to take. It’s just to get some automation introduced to the whole process so that you don’t have to think about it all the time. It just happens.
Paul: And Step 2 would just be to talk to Warren Buffet as often as you can.
Kaleigh: Right, no big deal.
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