Becoming self-employed may seem like the chance to take part in an exciting career adventure, but it can set in motion a chain reaction that can have significant and long-lasting repercussions on your personal finances.
I knew about many of the potential pitfalls that are associated with self-employment before I ever made the move from hotel management into freelance writing. However, there were certain longer-term financial ramifications that I hadn’t fully considered and that have set off a chain reaction that will have a ripple effect upon my finances for years to come.
A huge reduction in income
When I left the hotel business to become a freelance writer, I left what was a stable and reasonable salary to move into a role in which I started off earning literally nothing. Thankfully, I had set aside a sizeable reserve fund to carry me through a period in which I knew income would be next to nothing. However, it took several years to build any sort of steady income streams, and even then, I was still left far below where I had been in regards to income in the hotel industry. This giant reduction in income has had more of an impact than I initially realized and has set off a chain reaction that tends to magnify as the years go by.
No retirement plan contributions
When I left my role in hotels, I also left behind my employer-sponsored and matched retirement plan. That was six years ago. While I still have the funds that I put into that plan, I haven’t contributed to it since then.
Thankfully, when I left behind that work, I eventually moved the fund into a dividend reinvestment plan — or DRIP — so that monthly dividends are reinvested into the plan. In this way, I’m at least continuing to build my share total in the fund, but it’s not quite the same as if I was continuing to contribute regularly. But with margins slim, that’s just not much of an option right now.
Without these regular retirement fund contributions, I could be costing myself tens or even hundreds of thousands of dollars over the course of time until I retire.
Reduced Social Security contributions
My reduced income could be affecting my retirement future in other ways as well. While some might scoff at me mentioning Social Security considering it’s projected state (by the administration’s own admission, benefits could be reduced to just 75 percent of estimates by 2033), it’s still a part of my retirement planning.
And with a reduced income comes reduced payments into the Social Security system. Some people might think that this is a good thing with the current instability of the system; however, with it being the only retirement plan of sorts that I’m currently contributing to, it’s a relevant aspect of my retirement future. Therefore, over the course of the next 30 years or so, reduced payments now could lead to a further reduction in my future benefit payouts.
So while there are certainly benefits to being self employed — things like being my own boss, working how and when I want, and reduced stress levels — there can also be downsides, and these downsides can have significant and long-lasting financial repercussions.
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The author is not a licensed financial or career professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.