If you’re a freelancer, you know that life isn’t all sleeping in until 11, and never putting on pants. It’s an all consuming, and often terrifying day to day struggle to try to keep enough income coming in.
To make matters worse, your income comes in fits and spurts. There have been years where I make up to 80% of my income in a few months, which makes it pretty hard to apply the standard personal finance rules of budgeting and saving.
So what’s a poor freelancer to do? After a few years of hashing out this variable income life, I’ve realized that with a few tools, and a heaping tablespoon of discipline, I can have the freedom that the ‘free’lancer life implies, and still build the financial stability that helps me sleep at night.
So here are 5 things I think every variable income earner should know!!
1. Your number (What does your life cost?)
Your number is the minimum amount of money you need to keep your life going.
When you have no idea what your income is going to be from month to month, the only constant that you can cling to are your expenses (comforting right?). There’s no end to the money that you ‘could’ spend, but your number defines how much money you ‘have to’ spend.
How do you figure it out? Well, it’s a combination of your living costs, debt servicing, bills and food. You can even expand it to include the amount that your business business needs every month (depending how big your business is).
Basically, any bill that if you didn’t pay… there would be serious repercussions (like men coming after you with bats repercussions).
Most of us ‘think’ we have an idea of what we’re spending, but if you haven’t sat down and actually figured it out… you probably don’t (I sure didn’t). Knowing the exact number I need to break even every month has been a huge tool for me when figuring out how to smooth out the ebbs and flows of variable income.
Your life costs money… you need to know how much.
2. The difference between business and pleasure
Depending on your business, the line between the ‘personal’ you and the ‘business’ you, might get a little fuzzy.
That’s why you need to make an extra effort to keep these worlds as separate as possible. The cleaner your financial records can be, the easier your life will be.
That could mean: separate bank accounts, separate budgets, even separate financial strategies.
And the benefits aren’t just practical. Most freelancers talk about how hard it is to strike the right ‘work-life’ balance. The more you can separate out the business from the personal… the closer you’ll be to finding the balance that works best for you.
Remember, no matter how much it may seem like it… you are NOT your business. Your business is just a tool to help you build the life you want.
3. What the plan is WHEN an emergency hits
I say when… not if, because emergencies are coming.
You will have a period when the work isn’t flowing in. You will have times when, for whatever reason, your finances are strapped.
So what’s the plan?
For regular 9-5ers, financial planners recommend a big fat ole emergency fund ‘just in case’ they ever lose your job. In your case, it’s not a ‘just in case’, it’s only a matter of when. That means that you should give some long hard thought to having some kind of fund/account/bag-with-a-dollar-sign-on-it…. That’s going to help you get through your next dry time.
Don’t let an emergency ‘surprise’ you. It’s not a surprise. It’s going to happen. Start planning now.
4. No one is planning your retirement
There are lot of fun things that come with the self-employed life, but one of the drawbacks is that no one is in your corner when it comes to your later years.
That leaves the planning all up to you.
And let me stop you before you tell me: ‘ you don’t plan to stop working’ or ‘you’re too young to worry about retirement’.
Stuff happens, and the younger you start worrying about it, the better the position you’ll be in (#themagicofcompoundinterest).
You don’t have to have it all figured out right now, but don’t fool yourself into believing that someone else is going to take care of it. If you want to make your own hours doing something you’re passionate about… this comes with the territory.
5. You can do this
Seriously. You can learn how to handle, and thrive with a variable income.
Ya… it takes some getting used to, and you’re playing by a different set of rules than most other people, but that doesn’t mean you can’t still totally kick ass with your money.
Variable income is not an excuse not to budget. It’s not an excuse not to save.
It’s just a reality of the life you’ve chosen.
Sure, it takes a bit more discipline than if you could just have 10% taken off the top of your paycheque when it was automatically deposited in your account every second friday.
But you can build that discipline, and you can be great at this.
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Author: Chris Enns
Chris is an opera singer and personal finance blogger at From Rags to Reasonable: Personal Finance for Artists and Storytellers.