Freelancer Guide To Building A Financial Safety Net

Who doesn’t want to be their own boss?

Based on Malaysia Digital Economy Corporation (MDEC) data, there are more than 1.2 million Malaysians working in the gig economy.  MDEC refers to this ‘sharing economy’ as contributing over RM4 billion in earnings since 2016.

When you include those working in the agriculture sector in non-formal employment, the number is even higher. Based on Department of Statistics (DOSM) findings, Malaysians working in informal employment or the informal sector total 3.5 million in its 2021 survey.

But the life of a hustler means fending for yourself and to do that, you need a financial safety net. The good news is, setting that up is easy and we’ll show you how to build it. Step by step.

Step 1: Build out your emergency fund

Also known as a “rainy day” fund, this amount of money stashed away in a liquid savings account is set aside for unexpected events that carry some financial impact. In the case of a freelancer that’s basically your reserves to carry you through during the lean times.

Some of the products you can consider to park your emergency money in are fixed deposit accounts, unit trust funds and Amanah Saham Bumiputera/Nasional, as these products offer higher interest rates than a regular savings account to protect your fund from being eroded by inflation, and yet still offer liquidity.

The objective is to have this money easily accessible during emergencies and help you and your family avoid high-interest credit card debt.

Some financial advisors suggest having enough to cover living expenses across three to six months. If you were a staffed employee, that would be an easy exercise to navigate and achieve.

But where do you start as a freelancer? One way to do this is set aside a portion of every pay cheque based on the 50/30/20 budgeting method. The 20% earmarked for savings may seem small but his allows you to realistically start building a proper emergency savings  while still allowing for investments and fixed annual expenses like paying your taxes.

That 20% might be a small start but being realistic is the goal here. The key is to have some form of loose money to tide you over.

Step 2: Contribute to EPF monthly

Freelancers are not required under the EPF Act 1991 to mandatorily set aside a certain amount of their earnings for forced savings.

But voluntary participation is encouraged and for good reason: you need a retirement fund. We have been told repeatedly that many Malaysians don’t have enough saved in their Employment Provident Fund contributions to live above the poverty line in retirement. The actual number is 71 percent who don’t have the minimum RM240,000 in their account by age 55.

So it’s not that easy to rest on your laurels when you reach those golden years, and while things are much more challenging for a freelancer, you could certainly do yourself a favour by ensuring that you contribute monthly to EPF by being a member.

The EPF introduced the voluntary contribution initiative called i-Saraan. If you are self employed or working in the gig economy, you can get exclusive government incentives for retirement purposes while building your retirement funds. The maximum limit of voluntary contribution which includes i-Saraan, self-contribution as well as Account 1 top up savings is RM100,000 per year.

Read More: How Can Gig Economy Workers Prepare For Retirement?

If you put away RM10,000 every year in your EPF account, you would have accumulated RM150,200 in your EPF savings in 10 years. This is assuming a 6% annual dividend rate, with the contribution split equally over 12 months.

Also aside from retiring, your EPF funds, especially those in your Account 2, can come in handy in the event of an emergency, or if you want to further your studies but can’t afford a dent in your cash flow.

Step 3: Consider life and medical insurance

This is a necessity if you have financial dependents, such as a spouse and children and it’s an altruistic effort on your part, the policyholder: in the event of your death or permanent disability, your family gets to move on without absorbing financial shocks.

The rule of thumb is to secure insurance coverage that equals 10 times your annual income. But remember before signing up for one, educate yourself about the pros and cons of the policy and also do some research before committing to one.

And always avoid falling to the underinsured trap where you do pay for insurance coverage, only to find that it is not sufficient to tide you over in the event something untoward happens to you.

Step 4: And maybe a critical illness plan

This is not the same as having a medical card which deals with hospitalisation and surgical coverage. A critical illness policy gives you a lump-sum benefit upon diagnosis of any of the 36 critical illnesses.

And how much do you need? Well since money is your ceiling, the rule of thumb is that your contribution should not exceed 10% of your annual income. So for example, if you are earning RM60,000 a year, you should be contributing roughly RM6,000 per annum. And you should buy RM180,000 worth of critical illness coverage.

Read More: Should You Get Critical Illness Insurance If You Have A Medical Card?

To put this in perspective, if you buy three years of your income coverage, you can afford to take some time off work for medical treatment. The lump sum from your critical illness policy should be able to cover some of your out-of-pocket expenses while you concentrate on recovery.

Step 5: File your taxes properly

Being in the informal sector doesn’t mean you could dodge taxes. Even ride sharing and food delivery drivers are required to file in their taxes.

That said, there are a few ways to cushion yourself from paying the full amount: you have to know your tax exemptions and deductions.

The former reduces or entirely eliminates your obligation to pay tax; the latter is similar but a deduction reduces your chargeable income and is a result of gifts and donations.

For example, if your chargeable income is RM55,000, and you’ve donated RM2,500 to an approved charitable organisation, you are allowed to deduct 7% of your aggregate income to reduce your chargeable income.

The former reduces or entirely eliminates your obligation to pay tax; the latter is similar but a deduction reduces your chargeable income and is a result of gifts and donations. There are also personal tax reliefs for your medical, insurance, childcare, and sports expenses that you can claim to reduce the amount of tax you need to pay

So all these deductions will help you save and therefore increase your monthly cash flow.

Step 6: Aim for retainers

As its name suggests, freelance work is usually associated with being project-based, but it is not unheard of for independent these days to treat it more like a solo-run agency. If you are a freelance writer, for instance, you could ask your clients if they need to produce a whitepaper on a monthly basis.

But remember it’s all about empathising and communicating the benefits of this structure in the context of your clients’ own challenges.

Retainers can be much easier for clients to manage since they remove the need to have consultancy costs approved internally with each task and help build an ongoing support resource that can be budgeted over time.

Clients also need not worry about added costs involved in hiring a full-time employee, such as EPF contributions or insurance, granting them more savings.

For you, the freelancer, the benefit is obvious: a steady source of guaranteed income that can be contracted on a monthly basis.

Step 7: Plan and think ahead

The life of a freelancer is akin to managing your own business: the learning curve is steep with a 50-50 chance of failure and success. But that shouldn’t put a damper on your dreams.

Maybe the first thing to do is prove yourself: take up a few gigs while holding down your full-time job. That might be exhausting but it’s the safest way to hedge your bets in the event going independent does not bear fruit.

Read More: Busted! Ten Reasons Why You Fail At Your Budget

You might also want to tweak your lifestyle and learn to be frugal as quickly as possible. Debt? That has to go, too.

And if you have those big-ticket items such as a mortgage, you might want to really take your time in transitioning to the freelance world. Defaulting on your home loan payments can bring serious consequences.

But the rewards of being your own boss is indescribable. No one said it was easy, but impossible? Not quite.

Read More: Gig Workers Reveal How Much They Can Make

This article was first published in February 2018 and has been updated for freshness, accuracy and comprehensiveness