Dear Kirk: I work as a freelancer, and my income is irregular at best. What’s the best way for me to approach a savings plan when my income is so unpredictable?
Kirk Says: When it comes to relying on freelance work or commission-based sales for your entire income, there is a lot of budgeting that must take place—both in time and dollars. These five steps will have you well on your way.
1. Don’t spend what you don’t have. This may seem obvious, but this step is truly the foundation for a successful career as a freelance professional. If freelancing is your passion, this is one of the sacrifices you must make to get your career started off on the right foot. There is nothing that will derail your plans like accumulating a pile of debt and feeling the immense pressure to produce. When the pressure of debt mounts, you will find yourself taking jobs and making decisions that are counterproductive to what you are trying to build.
2. Set a budget and stick to it. First, find out what you need at a minimum to survive. Total the dollars it will take to cover basic necessities like rent, food, transportation and taxes. When you have this number, you now know exactly what you have to produce to make this a viable career choice for you.
3. Build your storehouse. When times are good, set aside money for the future. My rule of thumb is to save 50% of every dollar that you make above and beyond your minimum survival income. For example, if your minimum to survive is $3,000 and you bring in $10,000 this month, then you should save $3,500 ($10,000 – $3,000 = $7,000; $7,000/2 = $3,500). The goal will be to save up six months of your minimum to survive.
4. Don’t forget the tax man. I mentioned this in the second step as part of your minimum to survive. The old saying about things that are certain in this country—death and taxes—could not be more relevant. So let me paint a picture here. You completed the first step by staying out of debt all year long. You then completed step two and created a budget, but you said to yourself, “I’m not making that much money, and things are tight, so I am going to put off taxes until later.”
Let’s say step three didn’t happen this year because you never made any extra to put back in the storehouse. And before you know it, you have a $2,500 tax bill at the end of the year. Do you really think that next month you are going to live off $500 just so you can pay your tax bill? And so the deadly spiral begins.
5. Budget your time to keep the marketing wagon rolling. A common rookie mistake in new freelancers is neglecting to budget your time with the same care and attention you pay to your money.
When you begin marketing your freelance business to get the ball rolling, you may find yourself working 50 hours a week networking and making sure people know what you do, and then maybe you land a gig or two. Since these actual paying jobs require real time to get the work done, you work for weeks competing the job, and you get those first few paychecks. It all feels very rewarding—until you realize that there is no new work in the pipeline.
So you are back to marketing yourself 50 hours a week. The secret here is to strike the balance of getting the real work done while putting the appropriate amount into marketing yourself each week. As a freelancer, striking a solid balance between the two will be an important part of eliminating financial peaks and valleys between jobs.
Kirk Gwaltney is a Chartered Financial Consultant and a Chartered Life Underwriter in Brentwood, Tenn. Learn more about him at kirkgwaltney.com.