Working in the gig economy -- a labour market characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs -- comes with certain freedoms. You're not tied to a desk from nine to five, you have the flexibility to pick the work you want to do, and you have the freedom to work with whomever you want.
Gig work is so attractive that Canada's labour market is shifting from permanent employment to gig work as "the new normal," says a BMO Wealth Management report. According to Statistics Canada, temporary employment accounted for nearly 20% of employment gains from 2016-2017 to 2017-2018, and growth in temporary work has outpaced permanent employment since 1998-1999.
However, gig work also comes with a unique set of challenges. Key among these is variability of cash flows, uncertainty of income and a lack of employer benefits. To meet these challenges, gig employees need to plan differently to financially insulate against these risks.
Importance of a safety net
When employed in the gig economy, one of the most important things to do is build a safety net, or an emergency fund. Freelance or gig work has an element of uncertainty in terms of how much you might make. There could be days, weeks or even months where work is scarce, and that needs to be built into the assumptions of how much you might need.
The rule of thumb is that an emergency fund should be three to six months of expenses, but employees in the gig economy, the buffer should be much more, and six to 12 months would be a better bet.
"Though the assumptions would depend on the nature of the gig work, there are lulls; the lowest I've encountered with a client is 18 months between projects," said Peter Hodgson, Senior VP and Portfolio Manager, BMO Nesbitt Burns.
Though having a year or even more of expenses saved up sounds overwhelming, for employees in the gig economy, things are slightly different; not every expense needs to make its way into the safety fund budget.
Rather than including all expenses, big or small, into safety net budget calculations, for gig employees, it would make sense to maintain a minimalist budget that requires the least spending, or the lowest amount needed to cover basic expenses: food, rent/mortgage and transport, says Chris Buttigieg, director at BMO Wealth Institute. Once these basics are covered, anything surplus could be funnelled toward discretionary expenses or savings.
Give yourself benefits
As temporary employees do not often get employer benefits, it is important to have a benefits back-up plan. One of the major benefits that gig employees need to get for themselves is insurance.
In general, Morningstar.ca does not usually discuss insurance, because insurance is not an alternative to investment, and we are an investment site. Having said that, insurance is the only way you can protect yourself from major risks; investing can only provide a safety net.
"For gig employees, their biggest asset is themselves and their ability to work -- and insurance should take care of anything that may impact their livelihood," Buttigieg says.
For single gig workers without dependents, that would mean getting disability insurance and/or critical illness coverage. For employees with spouses or dependents, life insurance is essential.
Whether you end up claiming anything from these policies is beside the point; the idea is to protect yourself financially from catastrophic risks that could otherwise derail your plan, says Christine Benz, director of personal finance at Morningstar. And of course, knowing you're insured provides immeasurable peace of mind.
Reducing non-deductible debt
As a gig employee, you probably are a small business owner, which means several of your expenses and debt could be written off as legitimate business expenses. Some of these include vehicle expenses, professional service related expenses, expenses for supplies, and even some entertainment expenses for business.
"Reducing non-deductible debt is a major part of stabilizing your budget, especially when employed in the gig economy," Hodgson said.
However, non-business credit cards, personal mortgages and personal lines of credit are not deductible. Reducing these monthly payouts will ease the strain on the budget and the safety net, and increase financial comfort levels.
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