How to Save: A Short Guide for Freelancers

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This post hasn't been updated in over 2 years.

This post is the first half of our two-author, two-part series on smart saving.

Many Freelance Switch readers are probably aspiring professional freelancers with a day job. Shama Hyder earlier provided 5 steps for switching from side gig to full time. There’s one really important step that Shama alluded to and that I’d like to expand on: savings.

Before you jump into full-time professional freelancing, you want savings. (Read further below for an explanation why, beyond the obvious.) Do not venture into full-time freelancing without savings.

General Savings Tips

  1. Save for the future.
    Don’t save for next week, next month, or later this year. Lean periods in freelancing careers can and do ruin marriages and family relationships. Think like a business owner, not like one person constantly looking for freelance work. Use longer-term investments such as bonds or blue chip stocks (that you’ve researched well).
  2. Use liquid investments.
    Put most of your “will need it soon” money into liquid investments such as an online savings account (OSA) or possibly some mutual funds. Do your research before investing in either. Some OSAs and funds have ridiculous front- and backend fees, as well as penalties for early withdrawal. If you end up with one of these, you’d have been better of keeping your cash in a cookie tin!
  3. Have an emergency fund.
    Determine what consitutes an emergency, how much you can afford to keep, and then keep it somewhere that’s easy to get at (i.e., liquid investments.)
  4. Keep taxes separate.
    If at all possible, have a separate bank account for the taxes (income, property) you will be paying.
  5. Do automatic withdrawals.
    Whether for debt payments, setting aside taxes, investing, or long-term savings, automatic withdrawals enforce a schedule and reduce the time you spend on personal finances – an activity most people seem to despise but need to do anyway.
  6. Use secure Internet connections.
    Don’t do online banking or PayPal transactions over public Wi-Fi access. Should be obvious, but in case you need a reminder.
  7. Pay yourself.
    Even if it’s only a small amount weekly, bi-weekly, or monthly, pay yourself out of freelance earnings. This forces you to keep your fingers out of your business funds, makes accounting easier, and ensures that you don’t build resentment towards working. It’s important to mentally separate work and business funds.
  8. Keep a financial spreadsheet.
    In addition to keeping ALL your receipts (for possible deductions), make a habit of keep an Expenses and Savings log book updated regularly (daily, weekly). You could do this in a print log book, but also keeping a spreadsheet means being able to file taxes more easily. You can “see” your expenses collectively, which might give you clues as to where you’re spending too much. There are all kinds of free web-based spreadsheets (such as Google Spreadsheet and Zoho Sheet), or if that makes you uncomfortable, the desktop based Open Office, which is like MS Office but free.

Types of Savings

I’ve broken down savings into five types, below. You won’t necessarily need five different bank or online accounts, but you need to mentally separate the funds, and keep them separate.

1. Operating Capital

This is what you need to keep your freelance business running smoothly and your personal finances covered. Costs to cover, as applicable.

  1. Day to day items such as office supplies.
  2. Less regular but necessary business expenses, such as equipment (computers, printers, mobile devices).
  3. Car expenses: gasoline, parking, car payment, potential maintenance.
  4. Clothing allowance and laundry costs. That is, if you don’t have an in-home washer and dryer.
  5. Rent, heat, hydro.
  6. Groceries and meals.
  7. Hygiene items – especially if you work offline 🙂
  8. Phone costs. (You can probably deduct some of this. Make it easier by using a dedicated phone or cell phone for business.)
  9. Internet costs: access, hosting, domain names.
  10. Health and property insurance. Also, business insurance, if your clients require it.
  11. Any other monthly debt payments for “necessary” items.

Add up these and any other “necessities” for one month, then multiply by 6. Six months operating capital is the minimum recommended to have on hand. But if you have other people relying on you financially, I’d recommend at least another 2-3 months.

I say this from hard experience – operating capital is crucial to success as a freelancer. It is a business. Things might seem rosy when you make the switch to full-time professional, when all kinds of new contracts come in, but downturns are commonplace for freelancers. If you can’t weather those downturns with savings, freelancing will be a rough life that will make you miserable.

2. Emergency Funds

These funds are much harder to define and to size up. The amounts you keep for emergencies depend on your circumstances and even the country you live in. For example, when it comes to health, Canadians are on average a bit better covered than Americans. Hospital and surgery costs can climb into the thousands, unless you have a good health insurance plan, which is something that a lot of freelancers neglect.

Other “sources of need” for emergency funds are old cars that break down or go kaput, relatives out of work, illness in general. I’m sure you can think up more. Sitting on your ass at home all day freelancing can cause a variety of illnesses, and if you’re too busy to be active, you’d better make financial allowances for healthcare.

3. Taxes

Every time a client pays you, approximate your income tax rate, apply it to determine what you might owe (before deductions), and immediately set these funds aside. If you can’t/don’t want to keep them in a separate bank account, then keep very good tabs on the totals – such as with a spreadsheet – and do not dip into these funds. If you do not have to pay quarterly installments, then you might consider putting this money into an online savings account, which give the highest savings interest rates at present. Do not put these funds into mutual funds or other semi-risky or risky investments.

If you have a mortgage, you will owe regular city property taxes. Set aside tax funds for this purpose as well. Unless you have an overwhelming reason not to do so, you can use the same account as you do for your income taxes.

Even if you cannot claim enough deductions to reduce your taxes, you can at least earn some interest on the amounts – which likely won’t happen if you stuff them in a regular bank account.

4. Long-term and Retirement Savings

Dr. Andrew Weill was on PBS recently and said that some scientists believe that we humans might achieve ages of 1,000 years, and that this could happen in our lifetimes. Dr. Weill doesn’t believe that himself (if I understood correctly) and neither do I. Though I do believe 100 might become more commonplace. (My own father is nearly 80 and he used to think he’d be like his immediate relatives, who all passed away before 45, or even younger.)

However, if this Methuselah factor is true, then in any society that thinks 65 is old and doesn’t respect the elderly and/or give them work opportunities, freelancers especially need to save for the long-term. Thinking of your mortality is never easy, but it’s a necessity. If you do stay healthy after retirement, you will probably want to do more than sit at home or garden, and it will take funds. Your savings, plus compound interest, will have to take care of the general cost of living decades from now, plus any activities you’d like to enjoy. However, if you wait to start a long-term fund, you lose out on a lot of the power of compound interest.

5. Play Funds

You know the old saying: “All work and no play makes Johnny a dull boy.” It applies to both sexes, but goes beyond just being dull. Humans are social creatures, and not allowing yourself to “play” once in a while affects emotional, mental, and physical health. You simply cannot work non-stop and not accumulate negative effects upon your health.

Decide what you can afford, based on earnings, for non-work activities – even it’s a couple of movies each weekend with someone, a dinner out, or a vacation.

The Emotional Benefits of Saving

If you’re an offline freelancer (and sometimes online), there’s something else you might have to contend with, if you go full-time: jealousy. My experience is that even when you’re not after the job of the employee of a client, some people will want to think you are. They’ll also think that you’re making lots more money than they are, and that they should have your job. (I’ve earned far less overall in my career as a freelancer than I would have as a full-time salaried employee doing similar work. There have been long periods of no work. I just happen to like the variety and freedom of being a freelancer.) They can and will make your life miserable – especially if you have the audacity to ask questions, even if it’s your job to do so.

If you’re a hot-headed, passionate but hard-working person, that kind of response can get to you emotionally, affecting your prospects and ultimately your finances. This in turn can drive you to a state of mind where you seem desperate basically because you are. Which almost guarantees you won’t get work when you need it most.

On the flipside, being nonchalant is far more likely to ensure you’ll get the contracts you apply for (assuming you’re qualified). The best thing you can do for your freelancing career is to save up the funds that allow you to automatically be in a nonchalant state of mind. When you’re not worrying about how you’ll pay the bills this month, you won’t come across desperate, and you might even exude quiet confidence – the key to getting contracts and building up even more savings.

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