Covid-19 taught Americans how to let go of their steady paychecks

The number of unincorporated self-employed people in the U.S. reached 10 million in February, or 400,000 more than when the pandemic began, according to the Labor Department. It soared as high as 10.3 million last summer.

Those who willingly gave up the security of a paycheck say there are risks and rewards and certain strategies that work best. They get to pursue their passions, work the hours they want and improve their quality of life. They can do so, they say, because of heftier savings accumulated during the pandemic and a hot hiring market that could act as a cushion if their solo paths don’t work out.

But some may find their savings aren’t quite as substantial following a period of market turmoil that started earlier this year and accelerated with Russia’s invasion of Ukraine. Rising inflation is also eating away at cushions amassed since 2020, and the freelance life can make it more difficult to get a mortgage because of heightened scrutiny from lenders. Giving up a steady paycheck may no longer seem as financially attractive as it once did.

Lisa Camerlengo, 45 years old, experienced the rewards and pitfalls of such a life. After almost two decades at consulting firms, she quit a full-time job and launched her own brand-strategy and communications firm last July. She said she saved money on work clothes and commuting expenses, but her rent at home rose roughly $200 while the costs of food and gas also jumped. She also said she now pays more for medical and dental insurance.

“It’s challenging to save as the cost of living has certainly increased," said Ms. Camerlengo, who lives in central New Jersey.

It is more than just the self-employed who are living without a steady paycheck now. There are 4.2 million more people out of the U.S. labor force—meaning they aren’t employed and aren’t looking for work—compared with the period before the pandemic, according to the Labor Department. There are also 2.1 million fewer people on company payrolls. Those movements are aggravating labor shortages in some industries; there are still more than 11 million open jobs that employers can’t fill.

One who encountered unexpected challenges after leaving the workforce was Wayne Low, 49 years old, who spent the majority of his career advising ultra high-net worth families and managing their wealth. In early 2020 he started contemplating applying his skills to his own portfolio. He calculated that he had enough money to leave his job at Citigroup Inc., where he had worked for 17 years. He left in June 2020.

“I realized, this is doable if I cut down my expenses a bit," he says.

He doesn’t miss the 11-hour workdays, and says his portfolio has performed well enough despite recent market turbulence. But he and his wife encountered problems when they started a search for housing in the New York area so they could be closer to Mr. Low’s mother. A couple of landlords wouldn’t rent to the couple because he lacked a steady paycheck, Mr. Low says, and he had several mortgage applications denied despite his savings. Ultimately, he says, the couple may opt to buy a house outright in a less expensive part of the U.S.

“They want your assets to be this outlandish figure," he says. “The financial system doesn’t know what to do with people who retire early."

Malcolm Hollensteiner, head of mortgage production at Sandy Spring Bank in Maryland, said most mortgage lenders would require self-employed borrowers to provide two years of tax returns to prove their consistency and reliability.

“The mortgage-lending platform historically views self-employed borrowers as more complicated borrowers and potentially less successful borrowers, just because of the nature of self-employed income," he said.

The factors that emboldened many people to move to the labor-market sidelines could, of course, pull them back into traditional 9-to-5 work lives.

Some Americans quit jobs for better pay or because of child-care challenges or other hurdles. But others exited because of sizzling market returns, a run up in housing values and three separate rounds of stimulus checks of as much as $1,200, $600 and $1,400 per person. The personal savings rate—the share of disposable income households sock away each month—soared to an all-time high of 33.8% in April 2020 and remained elevated through last spring, according to Commerce Department data.

But that rate has been declining–it dropped to 6.4% as of January–as market turmoil and inflation pose new challenges to nest eggs. Michael Liersch, head of advice and planning at Wells Fargo, said those going out on their own need to have a support system to serve as a sounding board when times are tough. Ted Halpern, a financial planner in Ashburn, Va., said they need to pay off any high-interest credit card debt before leaving a paycheck behind. Joey Casolaro, a financial planner in Wayne, N.J., said they need to build a cash reserve of at least three to six months of expenses.

“Have a safety net for the leaner times," said Lindsey Swanson, a financial planner in Whitethorn, Calif.

One worker who plans to go without any paycheck starting at the end of May is Landon Taylor, a middle-school teacher in Denton, Texas. He decided to resign when the school year ends and take a one-year break.

Savings amassed by Mr. Taylor and his wife—along with several hundred dollars Mr. Taylor earns each month leading a local band and helping a friend with weekend tree-trimming jobs—should be enough to sustain their family for the year, he said. He plans to explore other options for earning money, including renting out an extra bedroom in their home and selling home goods online.

“I feel like it’s an opportunity that I can give myself," says Mr. Taylor, who is 39. “How great would that be, to have a steady income and I don’t have to go to work five days a week and stress about working for somebody else?"

Some companies are benefiting from all these new people willing to work without a consistent paycheck. Sellers on Etsy.com—a crafts-focused online marketplace that attracted more interest during the pandemic—ballooned to 5.3 million by the end of 2021 compared with 2.5 million two years earlier. At LinkedIn, a new feature that helps users seek out short-term projects is attracting self-employed people in marketing, design, engineering as well as illustration and video editing, says Matt Faustman, product lead at LinkedIn. Sign-ups for the marketing and design services are up more than 50% month-over-month since October 2021.

“We’ve had a lot of people who think ‘I can make either a full shift to working as a freelancer or I might be having a little extra time because I don’t have to commute—I’m going to try to take my skills and apply them in a part-time way,’" Mr. Faustman says.

Quitting a full-time job while keeping your finances intact takes some work. Grant Maddox learned this lesson when he started his own financial-advisory firm in October after working as a salaried employee at another firm. His company’s billing is primarily quarterly, pushing Mr. Maddox to carefully track his cash flow and stretch his dollars–knowing that his pay may fluctuate with how many clients he has.

“The stress is undoubtedly there," he said.

Mr. Maddox, 29, creates a line-item budget for his monthly expenses such as groceries to make sure he has enough at the end of each quarter. If he spends $500 in one month on groceries instead of the $600 he’s budgeted for, he transfers $100 into his savings account. If he goes over budget in a category, he’ll look for ways to cut expenses elsewhere, forgoing buying new clothes, for instance.

Anna McCorvey, 36, also did some preparation before leaving her full-time job as an architect last summer: She saved about six months of expenses. She now works part time at a smaller firm and a nonprofit called the River East Design Center that she started in Washington, D.C.

She then adapted her life to a smaller income. She cooks at home, only subscribes to one streaming service and does her own hair and nails. On Fridays, she will Google “free stuff to do near me this weekend" and may go on local hikes or visit a free museum exhibit. She can’t afford to eat out as much as she is used to but she said the trade-off is worth it.

“Covid-19 made me more diligent about pursuing things that fulfill me," Ms. McCorvey said.

Abby Regan, 42, also made sacrifices after starting a part-time, in-home physical therapy business. Her increased autonomy came with a 90% paycut compared with what she made in a previous physical-therapy job she lost in May 2020. She had the opportunity to apply to another site owned by her employer but turned it down.

“I was like, ‘I don’t feel like working for anybody anymore,’" said Ms. Regan, who also is a mother of three young children in Melbourne, Fla.

She and her husband decided to live primarily on his software-engineer salary. The family saves enough in child-care costs to go without financial sacrifices, she said. “Now I know what it feels like to have 100% control of my own time," says Ms. Regan, who works about 10 hours a week.

Some people say they have found alternative ways to make a living even before launching a career. Leon Ondieki, 19, is studying toward a degree in management information systems at the University of Georgia. But for now, using it to get a salaried job is a backup plan, he says. Instead, he is paying for college—and saving for a Tesla Model Y—by creating content for his 1.6 million TikTok followers.

Mr. Ondieki now devotes more than 40 hours a week to planning, filming, editing and posting his videos, in which he typically banters with passersby on campus or at shopping malls, asking trivia questions or playing quirky games with a small prize. He earns as much as $30,000 a month, he says, through a combination of paid sponsorships from brands and the TikTok Creator Fund.

“I can’t see myself working for a company or for someone else," says Mr. Ondieki.