Saving and Investing for Freelancers

Credit: diego_cervo on Photodune

Back in the 1980s, when self employment was rare and stigmatized, it was difficult to get a lot of things that we modern-day freelancers take for granted.

Take credit cards, for example. When my father left his job in his industry and started a consulting practice, he couldn’t get a credit card on his own. My schoolteacher mother had to cosign for him.

These days, it’s hard to go to the mailbox without getting at least one piece touting a business credit card. Looks like the credit card industry loves self-employed people after all.

Then there are those office supply warehouse stores. You probably have at least one in your town – and they’re not targeting the Fortune 500. They’re targeting us.

It seems that the rest of the world has discovered us – and our money – in a big way. One of the big growth areas is investments. As a self-employed professional, you’ll encounter quite a few sales pitches for investments. Some will be worth pursuing. Some aren’t.

And then there are those that aren’t even investments. Such as life insurance.

A Freelancer’s Experience with Life Insurance

You’ve probably met at least one agent who’s pitched a life insurance policy as tax-free savings for your old age. Or maybe it’s a college savings plan for your kids. Or the platform for making a sizable charitable donation.

Trouble is, life insurance is often being sold as something it really isn’t. The purpose of life insurance remains the same as it always has. It’s intended to replace the loss of financial support caused by your death. That’s it.

So, if you’re single and don’t have a spouse or children depending on your income, you don’t need life insurance. That’s what I’ve always heard.

But this doesn’t stop the sellers of life insurance from pitching their wares to single freelancers. Hey, it’s happened to me – more than once, in fact.

The most recent pitch came from a former coworker. We worked for the same organization until I quit to go freelance back in 1994. And, quite frankly, I wasn’t aware that he was still in town. We got re-acquainted while I was volunteering for a local fund-raising drive.

The purpose of life insurance remains the same as it always has. It’s intended to replace the loss of financial support caused by your death. That’s it.

He told me that he was still working at the same organization, but in a much higher position. I filed that factoid away in my brain because I’d been trying to find prospects in this organization, and it’s been difficult.

This past summer, I acted on that factoid by sending him an e-mail. He responded, saying that he’d like to tell me about his current work. I figured that he’d been promoted again.

We met at a local restaurant, and wouldn’t you know it, he’d been let go and was embarking on a new career in life insurance sales. Let’s just say that he didn’t put it that way. No way. He was offering investments. Financial planning. And what were my financial goals?

Well, I said that I’d like to take a sabbatical in a few years. Great! My former coworker-turned financial planner had the the solution to that goal, and guess what it was? If you guessed “life insurance,” you’re right. Whole life insurance, to be exact.

I signed the contract, paid for first month’s premium, then started having serious second thoughts. As mentioned above, I’d heard that single people without dependents don’t need life insurance of any sort. Had that changed? Had it become some sort of great investment while I was paying attention to other things?

I decided to do some homework. It was simple as asking friends and acquaintances I trust. And doing simple online searches.

What did my homework assignment turn up? Well, I found that life insurance had long been regarded as a lousy investment. Especially whole life, which should really be called Whole Lotta Commissions (for the agent).

Since the premiums for term life are much lower than whole life, you’d take the difference and invest it elsewhere. And you get to choose the investments, not the company your insurance agent represents.

Reason: Those friendly people who so ardently sell these policies can get as much as 80 percent of first year premiums. No wonder they’re so cheerful when you sign the contract and the check for your first month’s premium. Whole life also makes the insurance industry quite happy, as it makes a substantial profit from sales of these policies.

Back to the homework report. One of the refrains I kept hearing was “Buy term and invest the difference.”

This bit of advice refers to the substantial cost difference between whole-life insurance and term insurance, which you’d buy for a certain length of time. For example, you might be interested in purchasing a 20-year policy that would cover the time it would take for your kids to grow into adulthood.

Since the premiums for term life are much lower than whole life, you’d take the difference and invest it elsewhere. And you get to choose the investments, not the company your insurance agent represents. Here’s another awful truth: When it comes to investing, insurance companies aren’t very good at it. Remember junk bonds? There were some insurance companies that got so heavily invested in them that they put themselves out of business. Sorry, policy holders, there goes your money.

Investment Opportunities to Choose From

So, what investment opportunities can you choose from? Well, there are stocks of publicly traded companies, corporate or government bonds, income-producing real estate, shares of privately-held companies, or private loans.

If you’re interested in investing, you’ll quickly find that there’s no shortage of opportunities. And, as a business owner, you have a big bulls eye painted on your checkbook. All sorts of sales people will be aiming at it. So, protect your money by doing your homework before opening the checkbook.

My two favorite places for investment research are the public library and the Internet. I usually have at least one financial book checked out. The most recent library reads that I recommend are:

  • I Will Teach You to Be Rich by Ramit Sethi. He’s a big believer in creating special savings accounts in online banks. Although the interest rate on a bank account is pretty paltry these days, if you’re saving up for something special (like a sabbatical), a bank savings account is a nice, secure hotel for your money.
  • The Ultimate Money Guide for Bubbles, Busts, Recession and Depression by Martin Weiss. Talk about a timely title! He’s big on keeping your money super-safe. Being the owner of a company that doesn’t take money from the firms it evaluates, he offers quite a few plugs for Weiss Ratings.

    Among other things, Weiss monitors the health of banks, and you might be shocked to learn that your money might be living in a rather precarious place. The book offers a very compelling case for why some of your funds should be in U.S Treasury securities, rather than banks. Another safe place to stack the cash for a sabbatical fund.

  • The Power to Prosper: 21 Days to Financial Freedom by Michelle Singletary. This is a Biblically-based book, and you may find all the Scripture to be attractive. Or it might be a turnoff. Either way, the book will take you through a 21-day financial fast that centers on getting your spending focused on needs, not wants.

    Getting out of debt is also a big priority. While not filled with hot stock tips, it does make a compelling case for focusing your life energy on things other than making money and buying things. Like spending more time with your family, for example.

    I especially liked her advice on housecleaning: Want to buy something that you’re convinced that you can’t live without? Clean the house first. And don’t just dust all those books and CDs and breeze past that closet-ful of shoes. No, you’re going to take every object in your house and clean it. Thoroughly. This is the best unnecessary shopping deterrent on the planet.

As for Internet hubs for investment research, I’ve recently become acquainted with the common-sense advice on the Bogleheads discussion forum. It’s for people who admire the work of John C. Bogle, founder of the low-cost U.S.-based investment company, the Vanguard Group. Here’s their philosophy:

  • Develop a workable plan
  • Invest early and often
  • Never bear too much or too little risk
  • Never try to time the market
  • Use index funds when possible
  • Keep costs low
  • Diversify
  • Minimize taxes
  • Beware of people trying to sell you something
  • Stay the course

Making Decisions for Your Investments

Okay, time to tie up a loose end. I’ve mentioned online savings accounts and U.S. Treasury securities as places for stashing your goal-oriented money. And I’ve spent much of this article talking about investments. Let’s understand the difference between your investments and your savings.

Simply put, investment money is your risky money. Meaning that you could lose some of it. Or all of it. You could also make a very nice return on your money. You just have to be willing to tolerate risk.

If you’re like a lot of people in business, you might be more concerned with the return OF your money than the return ON your money. So, investing might not hold much appeal.

Not to worry – I’m not going to lecture you about all the things you’re missing by not investing in the stock market. Matter of fact, I had a very dear friend who felt the same way. My friend came of age during the Great Depression, and he wouldn’t touch the stock market with a barge pole.

By living frugally – or simply, as he called it – he was able to save enormous amounts of money, which he put into U.S. Treasury securities. My friend died in January 2008 and left a substantial estate. A lot of local organizations have benefited from his bequests – and from the gifts he made during his 93 years of life. In short, it’s okay to be a saver. It worked out beautifully for my friend – and for this community.

So, What Happened to that Life Insurance Policy, Martha?

I canceled it! And I got all of my money back!

In addition to doing the aforementioned homework, the agent informing me that I could take a loan against the policy turned me off. If I’m going to take a sabbatical, I don’t want to get a loan in order to do so. Even one that I don’t have to pay back – like a loan against an insurance policy. Insurance companies don’t offer policy loans out of the goodness of their hearts. You have to pay interest on them.

No, thank you. I can find other places to save up for my sabbatical, and that’s what I’m doing.

Like the Bogleheads, I’m now wary of those friendly people who are trying to sell me something. And you should be too.

Photo credit: Some rights reserved by diego_cervo.

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