Of all the classes I took in gradschool not one of them focused on how how to organize your finances. We had a CPA come in one day and talk about taxes, but nothing on day to day cash flow management. It is surprising since that is rather central to freelancing. And given that this is what a large percentage of their students end up doing, it surprises me there was no discussion of it. I had to make this system up on my own, via some help from talking with friends and colleagues. My system will not work for everyone, it may only work for me, but perhaps some of the ideas will be useful to others about to begin the freelance design experience.
One of the trickiest things I have found freelancing is budgeting my money. The switch from regular to irregular income can be quite a shock to the system if not prepared. It has taken me a number of years to get the system I have working with most major kinks ironed out, but it seems to be doing well currently. Since some months I will be working constantly with a fairly high and regular cash flow and other months are like a river evaporating in the desert I have adopted a system that works no matter what volume my monetary intake is at. Most of it is based on percentages and that allows my budget to expand and contract as the intake does.
Obviously I have fixed expenses like rent, gas, electricity, phone, student loan payments and internet. Thus there is a minimum I must make each month to not go into debt. By and large making those minimums is simple. Everyone has these expenses. They are obvious. There are a few other less obvious expenses that stung me a few times through my not considering them necessary.
For the system to work, taxes, savings and a “dry month buffer” should all be considered necessary expenses. By looking at these as necessary expenses I make sure I have them covered rather than waiting until the end of the month or end of the year only to find out I spent all my income.
Since I do not get W2′s there is no income withholding which means I must do that on my own. I am also under no illusion that I will “strike it rich” as a theatrical designer, so I have an IRA that I feed regularly. Both the taxes and the IRA follow the same model. As soon as I deposit each check for a project I take a percentage(currently ten percent) of that and put it towards my IRA(and to a savings account for taxes). So if I get a hundred dollar check that’s $10 to my IRA. A $3,000 dollar check and its $300. Simple.
The “dry month buffer” is less precise. Rather than a strict percentage I simply try and maintain about 1-2 months worth of necessary expenses in my savings account. This has been the most recent addition to my system and probably the one most needing of refinement. My next major tweak to the system is to make this more precise and methodical.
By doing all this before I even look at balances for necessary spending I have been able to save a decent amount of money on what can, at times, be a very meager income. There are two things that make this successful. One is knowing that almost anyone can adjust -10% of their income. It’s just enough to notice, but not significant enough to truly impact daily life.
One further trick I picked up from a friend of mine who uses a similar system has to do with money for taxes. In March he takes all his savings for taxes and puts it in a 9 month CD. In June does the same in a 6 month CD. And again in September with a 3 month.
It looks like an online savings account actually provides a higher rate of return than a short term CD. So this afternoon I will be opening an online savings account to hold my tax money until the end of the year.
The final element to the percentage system is discretionary spending. I give myself a monthly allowance, alternately called a flexible budget or spending plan, for excess income every month. By again treating it as a percentage of income I am able to allow it to expend and contract based upon earnings. And since all my credit card spending is accounted for in that spending plan I am able to pay off credit card bills at the end of the month(or weekly when I am really on top of things) to prevent that from getting out of control.
This all may fall into the over sharing category for some. But to me I would have loved to have this information at my disposal when I started working regularly on 1099 income. I hope this might help you out.
