Farrell: Financial stakes are higher for 'free-agent' workers

The Star Tribune had an important story last Sunday by Adam Belz on the rise of the contingent labor force. Contingent workers include freelancers, contract workers and consultants, part-time workers, temporary help and accidental entrepreneurs.

The Government Accountability Office calculated that 31 percent of the workforce was contingent between 1995 and 2005. The ranks of contingent workers have swelled in recent years to some 40 percent or more of the workforce.

There are a number of competitive reasons why companies will continue to rely on contingent workers, skilled and unskilled. (A whole literature is developing on how to manage contingent workers.) The free-agent status of many workers has critical implications for managing personal finances. Financial insecurity is built into contingent work. For example, contingent workers typically don’t get access to an employer-sponsored retirement savings plan and health care plan. Employers won’t invest in their education and training. Contract labor goes on to the next job when the job is done.

Contingent work is an enjoyable, challenging option for some people and a fearful, worrisome treadmill for others. Either way, financial insecurity is a defining aspect of the contingent way of life.

The rise of a free-agent nation is a major reason why many workers and their families shouldn’t go back to personal finances as usual. The core issue in managing money is how secure is your job, your career and your household income. The greater your financial insecurity, the more important it is to manage money conservatively. To take an extreme example, a tenured university professor enjoys enormous job security. The professor can afford to embrace riskier investments. The same doesn’t hold for contingent workers, as well as those who imagine they may well be forced to join the contingent workforce sometime in their career — a reasonable expectation.

Contingent workers should manage their money in ways that offset the downside risks inherent in their job rather than try for the highest potential return. In practice, the approach means saving more, putting money into safe assets and borrowing less. Savings in safe assets such as government-insured accounts are a buffer against a setback. Savings also can be tapped to pursue a business opportunity, to invest in improving education and skill.

Similarly, it’s up to such workers to establish their own retirement savings plan. The good news is there are a number of options to choose from, including a SEP-IRA (very simple) to a solo 401(k) (a bit more complicated). Contingent workers should also pay attention to the evolution of the Minnesota health insurance exchange. Come October, the new state health care marketplace will open for business. The exchange should make it easier for individuals to comparison-shop.

I also recommend keeping personal finances simple. Contingent workers face tough time demands. As a contract ends, contingent workers are busy marketing their services, networking, keeping up with their bookkeeping and maintaining other job-related tasks. Downtime is a rare commodity. Keeping your personal finances simple frees up time for other activities, both professional and personal.

Chris Farrell is economics editor for “Marketplace Money.” His e-mail is cfarrell@mpr.org.

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