The final element to discuss in our ongoing conversation about freelance finance is Automation. Unlike salaried employees we freelancers can not automate everything, as monthly intake varies, but we can do a lot.
Last week we explored targeted savings accounts as a means of minimizing the impact of large purchases. The ideas in that essay provided us with the necessary foundation for this last step and deserve a quick recap.
With targeted savings accounts we put in place a system that will even out the impact of large purchases by proactively averaging out the costs of those purchases over time and saving it in advance. These accounts differ from emergency funds in that they focus on known irregular expenses rather than unexpected expenses or income loss.
Going through our budget we find all those elements that should be in targeted savings accounts and set the money up to transfer at the top of each month. There should be a delay of a few days from the auto-deposit of your salary to avoid overdrafts. Once these accounts are set up to auto-transfer we can sit back and stop thinking or worrying about them. Pulling the stress and concern over purchases out of our day to day life leaves us with greater mindshare for exciting things like designing, or making more money.
Automating your savings is 90% of this process. We could set up accounts for things like a new car or computer, a down payment on a house, a vacation or any other big ticket item we want. Also smaller items like dentist visits, a new phone and so forth could have their accounts automated in this fashion. By savings I am including not only the of save-to-spend items included in the targeted accounts but also retirement savings, IRS contributions, etc. Again, the key to this is breaking these larger purchases down into smaller, more manageable monthly increments.
Another aspect of automation is monthly expenses. Electricity, phone and similar bills can all be routed through credit or debit cards to ease the stress of bill payments. In fact many credit cards themselves can have auto-pay set up for the account balance at the end of each billing cycle.
A word of caution. This step is the roof to the financial house we have been building over the last several weeks. Like a real house, if the walls or foundation are weak the weight of the roof could cause the whole thing to collapse. Overdrawing your checking account to pay a credit card bill will land you with enough fees to make you cry. Especially once the credit card adds fees for the processing of non-existent funds. Use this system wisely and at your own risk. It can be a powerful tool, but like anything powerful, there are risks involved.
Automation is the final step towards creating a smooth and stress free economic life as a freelancer. The economic realities of how we work is inherently complicated by uncertainty. If we are not actively engaged in a current project we are planning an upcoming project or tracking down future clients. We never know month to month or year to year how or when our income will come to us. While this system can in no way solve that problem, what it can do is minimize the impact of that uncertainty in our lives.
This system is not simply about managing money. It is about designing your life. Do you want your choices to be made out of fear and desperation or out of a proactive will to live the life that you want? Will you be like most of the world and flail about once an economic downturn hits? Or rather, will you be like Norway, using your strong foundation to gain economic advantage?
The choice is yours.
For more reading, a great explanation of one method of automating finances can be found here.
Good luck! Please feel welcome to share your thoughts in comments.
