Taking personal time for family vacations, going out to dinner or the theater, and engaging in hobbies aren’t likely to happen if you’re strapped for cash. Even if you have good business cash flow, money can easily and swiftly leak through your fingers if you’re not careful. For example, you finish up a decent project and get a check for $5,000. But you quickly spend it on things you think you need. Pretty soon, it’s gone, and you really have no idea where it all went. Then the landlord comes, knocking on the door, wanting the rent. It happens all too often in the freelance world.
In their book, The Money Book for Freelancers, Part-Timers and the Self-Employed, authors (and my friends) Joseph D’Agnese and Denise Kiernan write: “Having your financial house in order brings peace of mind. It also puts you in a better position to survive and thrive, no matter what the economic climate.”
In a similar vein, author Tom Robbins once said, “There’s a certain Buddhistic calm that comes from having . . . money in the bank.”
It’s true. When there’s more month than money, anxiety rears its ugly head, and you can’t do your best work when you’re constantly worried about money. Plus, by not having a money management strategy in place, your finances can quickly turn into something that resembles a game of whack-a-mole gone horribly wrong. You find yourself worried, forever robbing Peter to pay Paul, never seeming to catch up.
Feast or famine syndrome is a common plight for freelancers without a money management plan. It’s a roller coaster ride that can drive many freelancers back to the nine-to-five cubicle world. To avoid it, freelancers must always be aggressively marketing their business and putting money away for the all-too-common rainy day.
Separating Your Money
Separating your business money from your personal money is central to a money management strategy. You should have both a business and personal checking account. Although freelancers working as sole proprietors technically take a draw from the business instead of an actual salary, consider drawing a set amount each week or every other week. It helps to make things much more predicable and makes it easier to manage your personal money.
When a project deposit comes in, set it aside in a kind of escrow account and hold it until the project is either well under way or, even better, completed. Sure, it can be a tough thing to do, but if you adequately capitalized your business at its startup, you won’t need to completely rely on project revenue to pay your personal and business bills. That usually means having at least three to four months worth of working capital when you launch your business. Keeping these funds out of your daily finances also ensures that you’ll have the money if something goes awry and you need to make a refund. It happens. A project gets cancelled for some reason before it really starts. The client suddenly turns into a nightmare and you’d rather not work with them. Of course, you could make your deposits non-refundable, but that can turn clients away.
Plan for Taxes
Taxes are another thing that will take a chunk of your check. Put aside roughly thirty percent to cover them and pay income taxes on a quarterly basis. You’ll also need to put money aside to cover your overhead expenses, marketing, insurances, and such. These can be separate bank accounts or just accounts within your accounting software. The trick is using this money as it was intended and not on other things. It requires some self-discipline, but it’s a habit that can be learned.
Noted designer Peleg Top is a creative entrepreneur with more than twenty years of experience running his own design firm and mentoring creatives. He’s also co-author of The Designer’s Guide To Marketing And Pricing. In it, he shares his personal money management system. He recommends setting aside thirty percent for taxes to start. What’s left will be considered 100 percent. From this, allocate sixty percent as a lifestyle account. These funds cover your house payment or rent, groceries, and other day-to-day necessities. Ten percent is set aside as a wealth account for investments. Once the money goes into this account, never touch it again. Five percent goes to your joy account. This is money that funds the fun things in life, such as going out to dinner, catching a movie, etc. Your dream account is used for bigger things, such as vacations, a new car, or a house. Ten percent is set aside for this purpose. Five percent goes to your enlightenment account and is used for things like personal or business growth, continuing education, training, or coaching. Finally, ten percent goes to a spiritual growth account and is used for tithing, donations, etc.
It becomes readily apparent that working for $25 per hour is probably not going to enable you live the life you want and pay all your business and personal bills. That’s why it’s important to accurately calculate your hourly rate based on your specific situation and goals. If you haven’t done this already, do it now. If math isn’t really your thing, visittortorelladesign.com/calc and download a copy of my rate calculator.
Start saving and investing early. The earlier the better. The longer you wait, the more difficult it is to achieve financial independency and have a comfortable retirement. Sure, for many readers, retirement is a long way off, but thinking and planning for it now will help ensure you’re not greeting people at the Wal-Mart entrance when you’re seventy-five.
Here’s a reality check: The richest Americans are investors and savers. Of those who have an income of one million dollars or more, only one-third of their income is generated from their job or business. The rest comes from investments. Getting your piece of the pie means investing and saving.
Investing works over time due to the miracle of compound interest. It makes your savings and investment grow almost exponentially. In his book Become A Recognized Authority In Your Field In Sixty Days Or Less, Bob Bly writes: “If you were to open an IRA at age 50, and contribute $2,000 a year earning eight percent compounded monthly, at age sixty-five your IRA would be worth $54,300.
Had you opened the same IRA when you were twenty-five, and put in the same amount of money annually earning the same rate of return, at age sixty-five your IRA would be worth more than half a million dollars—almost ten times as much.”
Consider finding a good financial planner to advise you as to the best strategy for your age.
A little bit of something is a lot better than a whole lot of nothing. That certainly goes for saving, investing, and living. Find ways to cut costs, but make sure they make sense. By that I mean, sometimes it doesn’t make economic sense to do something that appears to save you money but really doesn’t. For example, driving all around town to save a couple of cents on a gallon of gasoline probably doesn’t make too much sense. You’d probably burn up more fuel looking for a bargain than you would have saved. Similarly, when it comes to work, are you doing tasks that take away from your billable time? You might be better off outsourcing them and focus your efforts on revenue generating activities.
Here are words that should be etched in stone—live below your means. That doesn’t mean going without. It means being frugal. It’s also worthwhile to note that most millionaires don’t drive luxury cars or live in mansions. They’re the couple next door, driving a ten-year old car that they’ve taken care to maintain. That’s why they’re millionaires. They watch what they spend their money on, they save, and they invest.
In the United States, we live in a world of status symbols. Many people finance their lifestyle with credit cards in an effort to appear wealthier than they are, just to impress the folks next door. America has become a nation of high-volume consumers who must have the latest toy. As a matter of fact, CreditCards.com reports that the average credit card debt per household with credit card debt is a whopping $15,788. Even scarier, 36 percent of respondents in a FINRA Investor Education Foundation survey said they didn’t know the interest rate on the card they use most often. (Source: FINRA Investor Education Foundation, “Financial Capability in the United States,” December 2009).
Credit cards often have very high interest rates when compared with other types of credit and loans. This means that credit card debt can accumulate very fast and has the potential to ruin your financial health for years or even decades if you neglect to pay it off. If you’re struggling, make a budget and explore some of the other ways of getting out of credit card debt quickly.
A case in point: When I started my business in the mid 1980s, I was young and stupid. I simply had to have an Acura with a car phone. This was well before mobile phones were commonplace. Granted, it was the best car I ever owned, and I bought out the lease early. But did I really need it? Probably not. In retrospect, I should have bought a pre-owned car and invested the rest of the money into my business. Alas, hindsight is twenty-twenty.
Before making a purchase, especially a major one, it’s a good idea to wait about thirty days. Buying on impulse can be a major way for money to leak out of your business and your life. After a thirty-day cooling off period, you may find the item isn’t as needed or important as you originally thought. If you still want it after thirty or so days, go ahead and buy it.
“Do not overspend on a bunch of office stuff you don’t need,” freelance designer, Jenny Leonard said.
She added, “I’m able to provide a high-quality product to my clients and I only have a laptop. I don’t have an office, a desk, a chair, nothing. The less you spend on expenses, the less you have to make. The less you have to make, the less you have to work. The less you have to work, the more time you have to spend doing things in life your passionate about. Life’s about living. Not about work.”
Jenny now globe-trots, living all around the world working from her laptop. If you plan things right, you can do the same. Living and working in the U.S. for a while, then it’s Central America for a couple of months, next it’s off to Asia. Nice. It all depends on your goals.
Living below your means and finding ways to be frugal will help ensure you can meet your obligations each month and put some money away. Be sure you know your numbers. Those include how much you spend in both your business and personal arenas each month, what you owe, what you own, and what you bring in on average each month. Taming your finances bring with it a lot of freedom.
About the author:
Neil Tortorella is a graphic designer, writer and marketing consultant with over thirty years experience. He is the author of Starting Your Career As A Freelance Web Designer, Starting Your Career As A Musician and The Freelance Writer’s Business Book. Tortorella is a frequent speaker at conferences and business events. His writing and consulting site can be found at www.neiltortorella.com