One of the things I discussed in my recent series on finances for freelancers is the use of averages to determine spending and salary. I thought the point could use further explanation as it is a central concept necessary to understanding the unique challenges freelancers face. While many people have irregular income, the way it manifests for freelancers can be uniquely tumultuous. Further, this is particularly tricky when just starting out.
The fee/income structure of your field will determine how useful averaging is. At the extreme are freelancers who get a single lump sum, while others will have regular payments throughout the project as various phases reach completion. I will be using my own field, theatrical lighting design, as an example throughout this discussion. Obviously your mileage may vary.
Lighting design fees are typically based around project phases and as such come in large irregular chunks. I tend to get three checks on any given project. The first check is delivered upon contract signing, the second when the lightplot is delivered to the theater, and the third at opening. Because of this structure I may, for example, sign several contracts at the beginning of the year thus leaving me with a large stockpile of cash in January. After that signing I may not have any projects completing in February, so while my income for January is quite high, my income for February is negligible to non-existent. March might be somewhere in the middle with a plot or two completing and a show opening.
As you can see, the variance month to month is quite profound. Obviously I can’t base my life and budget around the minimum I make in a month as I would then be trying to live off $500 a month and that is simply unrealistic. Trying to base my living off of the highest month would be unsustainable as it would land me in piles of debt once I hit a low period. Add to this the fact that every year has a slightly different rhythm to it, I need to find a way to look at the big picture and make my income assumptions, as well as budgeting plans based on something larger than a monthly unit of measurement.
What is critical with a system like this is taking the long view. Monthly projections will not get you very far. During boom times you will be living large or paying off debt and during bust times you will be scrambling and accumulating debt. By looking out at your income over several years and noting what a typical average month looks like, you will have enough data points at your disposal to make strong informed decisions.
Some systems suggest budgeting for your income based on the month you make the least amount of money. This might be fine if we are talking about someone whose income only fluctuates 10-20% each month. But with any profession whose income is as irregular as mine and most other freelancers I talk to, averages make far more sense. If you have any real track record for your income, at least 3-5 years, it will be a simple process to know what a typical year looks like and make your calculations from there. With a few years worth of data one can make assumptions based upon a large enough pool of information that a realistic monthly average will emerge almost naturally.
All this begs the question what to do when just starting out. How do you manage this in your first year when you have no data to fall back on? Below are a few points to consider when making the leap from employee to freelancer.
- Ask around
Talking with people in your field can be a great way to get a sense of what things will look like, realistically, for those first few years. Specifically talk to those a few years ahead of you. While someone at the top of the field can be wonderful as a hero, they won’t necessarily have practical help for where you are right now. Someone two years out from you will. - Build an emergency fund
Save up at least four months of income to spread out over the year. As you adjust to the boom and bust cycles of each month this will help you get by and feel comfortable and secure. - Don’t do it all at once
In my first two years as a freelancer I worked a full time job for four months out of the year as resident lighting assistant for the San Francisco Opera. This allowed me to stockpile cash and thus ease the burden of the next eight months. - Create multiple income streams
If you are a designer, can you also assist? Do you know photography, graphic design, or some other skillset that could get you work beyond your preferred niche? Do it. - Don’t specialize
Be receptive to projects outside your ideal aesthetic range. Take them on as a challenge to discover a broader array of aesthetic viewpoints. Not only will you learn a lot, but you will have access to more work. - Don’t be afraid to fail
I made just about every mistake possible my first year freelancing. The biggest was forgetting that I was responsible for tax withholding. It took a few months of scrambling to get together the money to pay that bill. I still mess up, but I take every error as a learning experience and constantly upgrade my system. - Have fun
Too many people get so frightened over the money situation that they pass up fun and exciting projects that may not pay as well. I got into freelance design in order to have the flexibility to take projects that are artistically satisfying. If I wanted to sit at a desk and be miserable in order to make money, I would get a full time job.
Gathering as much information as possible about the business aspects of your field is as important, if not more so for a freelancer, than is having the skill set necessary to do the job. The skills will get you the work and get you hired back. The financial knowledge will keep you from going bankrupt in the process.
