by Alan on November 23, 2009
Now that we’ve covered some of the basics, I’d like to start focusing these posts on personal finance hurdles specific to freelancers. Don’t worry, if you work a “regular job” you’ll still get a lot out of this site, but my goal here is to help those who own their own business or freelance online.
One of the biggest initial adjustments to make when you’re freelancing is learning to live and budget on an income that varies every month. Unlike the working stiffs, we usually can’t write down at the beginning of the month exactly how much we’ll be bringing home that month. After you freelance long enough, you should be able to make a pretty good guestimation, or use a six to twelve month average, but those numbers still won’t be as precise as a steady paycheck would.
One of the goals I set and achieved before leaving my full time job was to build up a one-month cushion in my checking account. Now, I basically pay this month’s bills with last month’s income. That way I can plan my monthly budget with an accurate income, because I already know what that amount is, I earned it last month.
If you’re able to work a bit of overtime, or drastically reduce your spending before leaving your day job, I am a huge fan of the one-month cushion. This cushion is in addition to my emergency fund. The emergency fund is in a separate account and should not be left in your checking account, that makes it way too easy to spend.
If you are living month to month, or paycheck to paycheck, setting small earnings goals may be a good way to go as well. When I first started freelancing I set daily goals. I would tell myself I have to earn $75 per day to cover my bills. So if the first day I earned $100 on a small project, then I only had to earn $50 the following day. Or, if I earned $100 the first day, I had an extra $25 to save or spend at the end of the month.
After the first six months, I was able to better estimate and plan my income for each month, and I stopped with the daily or weekly goals, they just weren’t needed any longer. But when you first start out, they’re a great way to keep yourself motivated and on track so there are no surprises at the end of the month.
Freelancers also have some pretty unique expenses, from office equipment and software that we can write off, to self-employment tax and our own health insurance. I’ll run down some freelancing expenses in tomorrow’s post. If you’re currently budgeting on a variable income, let me know in the comments if you have any additional tips.
by Alan on November 21, 2009
If you have a question you’d like to submit, leave it in the comments section below or email it to freelancefinances@gmail.com and I will do my best to answer as many questions as I can each Saturday.
I was wondering if you use a commercial software package such as Quicken to track your finances or do you use some other method?
I used to use Quicken. And I credit purchasing Quicken as one of the best financial decisions I ever made. Quicken helped me to see exactly where every dollar I had, or owed, was. It tracked my checking, saving, retirement, credit cards, car loans, school loans and everything else, when I had it all.
I think it’s a great piece of software that forces you to be actively involved with your budget and your money.
That said, now that I’m debt free (except for my student loan, which is on automatic payment), I just use a simple Excel spreadsheet. Quicken is very good at what it does, but once you don’t need to track a ton of different debts and loans and payments, it becomes overkill.
I would recommend that if you’re in any kind of debt, you buy Quicken and get involved daily with your money. But I can also tell you that once you’re out of debt, you will most likely find you have no need for all of Quicken’s bells and whistles and you will move to a single Excel spreadsheet monthly budget, like I did.
I am 22, I have just graduated from university and have a reasonably well-paying job. I also have no debts and some savings, so I am not too worried about that (for now at least). Anyway, I am not trying to make myself out to be some kind of huge philanthropist here by any means but I do struggle with the ‘right’ way to donate money from time to time.
For example, a month or two ago when there were those awful natural disasters in Indonesia, I felt compelled to donate to the relief appeal — but how to choose how much money to give? Could I really not afford to give ten or twenty pounds more? Of course I could, but where to draw the line? Is it more worthwhile perhaps to set up some regular donations rather than these sporadic ones?
Donating and/or tithing are going to be personal decisions, different for each reader. But seeing as how you asked for my opinion, I will certainly share it.
I find I feel better giving to just one or two causes, rather than spreading my giving out to numerous places. Focusing on one or two causes that inspire me, or move me, allows me to give more to that cause, and feel like it’ll actually do some good.
There are really only three causes I give money to semi-regularly. Kiva.org, I donate a percentage of all of the royalties from my first album to Kiva. Money given to Kiva goes directly to entrepreneurs looking for small business loans. As a small business owner myself, who relies on sales and support from a small community, I can appreciate how hard it is to get started, and enjoy helping. Save the Music, because I can’t imagine a future in which music is not taught in school. And Uncultured Project, because Shawn is a good kid, donating so much of his time and energy to running Uncultured, the least I can do is send some money when he needs it.
These are the things that stir me. What stirs you? None of us can save the whole world. But each of us can make a small part of the world a little bit better.
I would not suggest setting up your donations as a regular monthly contribution, because then it will feel like a bill. I would suggest giving when you can, and figure out an appropriate dollar amount for your budget that month. 5%, 10%, more during certain months? Of course we could all probably give 10 or 20 dollars more when we donate, but don’t think about what you’re not giving, think about how much you are giving, and how far that will go to helping or curing or supporting what matters to you.
by Alan on November 20, 2009
While we’re on an investing kick this week I thought I should bring up one of the more fundamental ideas of investing, and that is dollar cost averaging. New investers tend to look at performance charts and dream big about buying low and selling high. But it’s impossible to “time the market”. A better strategy is to invest consistently over a long period of time.
Investing the same amount every month, over time, means you will sometimes buy shares when the share price is up, and other times buy shares when the share price is down. But your average cost is what’s important.
This is dollar cost averaging.
Here’s an example of how it works: If I invest in a mutual fund that currently costs $8 per share, and I invest $100 this month, that’s about 12.5 shares. If I invest the same $100 next month, when the share price has gone up to $10, that’s 10 shares. So now I’ve spent a total of $200 on 22.5 shares, which means my average cost per share is $8.89. So at the current $10 price per share, my two-month portfolio of 22.5 shares (which only cost me $200) would be worth $225.
Use this method over 20 or 30 years, and you’ll save yourself huge headaches over trying to time the market, putting all your money into a stock just before it falls, and in the end, coming up short.
Remember that your investing should be for the long-term.
In the short-term, prices might go down. You don’t want to cash out your shares when prices are down. That’s how you lose money. Any money you will need within the next two or three years, should be in CDs or savings accounts, or other guaranteed, but low interest-earning vehicles.
Over time, however, prices have always gone up. Over the last 25 years, the stock market has had an average annual return of +11%. Even over the last nine months, recovering from the largest hit the market’s ever taken, we’ve already recovered more than 50% of the losses. I have no doubt that over the next few years we will see a full recovery. And the only people who will actually lose anything, are those who cash out early, before we recover fully.
There is no best time to begin investing and saving for your future. The best time is right now, or as soon as you’re out of debt. And the best way is slow and steady and consistent. It’s boring, but it works.
