Thirty years ago, it was common, expected even, that employees would commit to a single company for their entire career, working 30 to 40 years at the same place. Today, it’s the exception, especially for millennials and Gen Zs, who have swung hard in the opposite direction toward the gig economy.
Gig work, which means taking contract or freelance work, is a growing economy for people aged 18 to 34. In fact, according to a 2019 Angus Reid survey, 40 per cent of this population had participated in gig work.1
While this type of employment can be attractive for flexibility and autonomy, there’s a lot to think about when looking at how to make it a permanent lifestyle—while being able to tuck away money for the future.
If you’re a gig worker, or thinking about pursuing gig work, make sure you know what you’re getting into.
Have your own back
While gig work allows you the flexibility to accept the type of work that interests you and offers more control over your hours, you might have erratic income due to the short-term nature of the work. Gig workers are generally considered self-employed and not well covered by employment regulations designed to protect workers in a conventional employer/employee scenario. And, gig workers also have no safety net of employer-sponsored benefits and will not be eligible for job-loss programs such as regular employment insurance (EI) benefits.
Given all of that, building a reserve fund is critically important to ride out periods of low or no income. Once your reserve is established you can focus on longer-term financial goals. Equally important is carefully managing your debt and insuring yourself against health events or injuries that may cause financial losses, including lost earnings.
Here are four actions you can take to set yourself up for success.
1. Manage your debt
When it comes to managing debt, both the cost of debt (interest payments) and making both principal and interest payments can make a huge difference. A 2019 Statistics Canada report found that in 2016, millennials carried an average debt load of $35,400.2 At a five per cent cost of borrowing, you need to pay $666/month for five years to pay off $35,400 in debt. If the outstanding debt is being carried on a credit card, with a conventional rate of 19 per cent (compounded daily), it will take 10 years to pay off the $35,400 debt if you make the same $666 monthly payment.
If you’re carrying debt, you should work with a financial planner or personal banking specialist to assess your debt load and look for opportunities to convert high-interest debt to low-interest debt. They’ll also help you determine the combination of principal and interest payments required to reduce the debt to $0 by your goal date. Such a target date might be tied to buying a home and ensuring you are not carrying multiple contractual payments when taking on a mortgage, amongst other home ownership costs.
Monitor your credit score regularly. Several factors affect your credit score such as:
- Timeliness of payments—make your payments before the due date
- Credit-seeking behaviour—applying for, and taking on, lots of new debt will affect your score
- Good standing—collections, judgements, bankruptcies and consumer proposals are all reported to the credit bureaus
- Proportion of balances versus limits—do you pay off or pay down lines of credit and credit cards regularly? High balances versus authorized limits will affect your score
- Credit mix—A mix of facilities such as loans, mortgages, credit cards yields a better score than a significant number of the same types of credit facilities
2. Buy insurance
Being self-employed you need to protect your earning power and savings against illness or injury. Bills for expenses not covered by provincial health care can be significant and may eat into savings you had earmarked for your financial goals. Fortunately, you can protect yourself against this risk by enrolling in a health, dental and prescription drug benefit plan. You also need to protect your lifestyle by purchasing your own disability insurance so your cash flow is not derailed by loss of income due to a prolonged illness or serious injury. Consider purchasing life insurance to provide income replacement for your survivors such as your partner or children and to ensure you pass on assets not debt, in the event of premature death.
While you may not be eligible for conventional involuntary job loss benefits from the employment insurance (EI) program, you may be eligible to opt into the EI benefits for self-employed people program. This can provide financial support of up to 55 per cent of your earnings per week to a maximum of $638/week (2022) if you meet the qualifying criteria for the special benefits that cover maternity, parental, sickness, family caregiver, and compassionate care leaves. If you register for this program you must make premium payments.
As a contract worker, it is unlikely income taxes or payroll taxes will be deducted from any payments you receive. You need to self manage this by setting aside a portion of your gross income into a tax instalment fund, for income taxes and other remittances as follows:
- You may have to pay income tax on your contract/freelance income, plus; if your net tax owing is more than $3,000 for the current year, you may need to make tax installment payments for next year's taxes.
- Employee and employer CPP contributions are required when you are self-employed and your net self-employment income exceeds $3,500.
- If you collect GST on your services you must remit it regularly.
Consider investing in bookkeeping software to help you track your business revenues and expenses and keep on top of your remittances.
4. Segregate your savings
Given the employment instability gig workers face, they’re often less inclined to take on risk in other areas of their life. One example is investing, where they tend to choose low-risk, low-yield funds. However, low returns yield low rates of compounding, which will actually result in inevitable delays when trying to reach your financial goals, such as home ownership and retirement. To avoid this, segregate your savings into three buckets:
- A reserve
- Funds for mid-range goals
- Funds for long-range goals
You will also need to brush up on investment speak to help you navigate the savings journey. ATB Wealth’s one-stop guide can help you learn important terms and investing concepts.
Here are a few terms to help you get started:
Cash and equivalents - any short-term and low-risk investment that can easily be converted into cash. Can include government T-Bills with a maturity date of 90 days less.
Fixed income - this refers to a broad range of investments that are primarily debt instruments—such as bonds—which pay a fixed amount of interest to investors until its maturity date. These securities are typically considered lower-risk but also come with lower potential returns.
Equities - Also known as stocks, equity securities represent an ownership interest in a business. Units of stock are called shares and are purchased with the expectation that the business will grow in value benefitting the investor, either through an increase in the value of the shares, and/or by receiving periodic cash payments, called dividends. These securities are higher risk but may offer greater return potential.
Conservative asset mix - intended for the cautious investor, this allocation typically has a high percentage of fixed-income securities with a small exposure to equities to help provide modest growth to protect your nest egg from rising prices while limiting the risk of value drops.
Moderate asset mix - also known as a balanced mix,this allocation aims to be the middle ground between lower-risk fixed income investments and equities for investors looking for growth over the long-term that are willing to accept moderate fluctuations in value.
Growth asset mix - this asset mix is composed primarily of equities and offers investors with a higher return potential over the long-term but also provides the possibility of significant fluctuations in value over the shorter-term.
Below we outline using these various mixes to achieve your financial goals.
A reserve (next 12 months)
These are the reserves you will build to tide you over if you have gaps in your income. Deposit your earnings and pay yourself a steady “salary” out of it.
Allocation: Cash and equivalents most suitable as we want no risk with these funds.
How much you should add to this bucket: The amount you will have to accrue and eventually maintain regularly in this bucket in order to pay yourself a “salary” when you have no income coming in will require you to calculate what your monthly expenses are and save up several months’ worth of income.
Mid-range goals (3-7 years)
These funds are earmarked for large expenditures that are a few years away, such as saving up for the down payment on a home.
Allocation: Conservative to moderate, cash and short-term investments won't yield enough return to keep up with the rising costs of homes so we need some growth. A mix of 60%-70% fixed income (bonds) and 40%-30% equities (stocks) might be required.
How much you should add to this bucket: Once you have sufficient funds in your reserve you can now save 5% of your income to this bucket monthly.
Long-range goals (10 years +)
This is generally money for your retirement or a similar long-term goal, which may be 10 plus years away.
Allocation: Moderate to growth; you don't need this money in the next 10 years or less and your money needs to compound at a rate higher than the annual increase in the cost of living to keep up your buying power. When stock prices fall, it is normal to have feelings of unease or concern. It is important to take a step back and refer to your time horizon for these funds. You did not need the money right now therefore price fluctuations are likely to smooth out over time. Read Don't fear volatility to learn more about how market volatility is actually a sign of a healthy stock market.
How much you should add to this bucket: Once you have sufficient funds in your reserve you can now save 10% of your income to this bucket monthly.
To maintain and increase your earning power, keep investing in yourself with training and education, and pursuing interests outside your core area of expertise. Diligently manage your expenses and ensure you pay bills and remittances on time. Make sure you are adequately insured so your carefully constructed budget and long-term plans are not dramatically impacted in the event of an illness or injury.
Finally, seek advice from a planning professional who demonstrates education and expertise in the field to guide you through cash flow planning and help you set up savings plans towards meeting your goals.
Source: Angus Reid Institute, The “Gig” Picture; https://angusreid.org/gig-economy
Source: Statistics Canada, Wealth and Debt: How are millennials doing? https://www150.statcan.gc.ca/n1/pub/11-627-m/11-627-m2019029-eng.pdf
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