Living on Last Month: For Freelancers
andyadams.org
andyadams.org
Spending the previous month's income one month after it hits your bank account sets you up for a roller coaster of feast and famine that is little better than living paycheck to paycheck. There was nothing in the article about saving for the future.
A more effective budget would take a rolling average of your last 6-12 months income. Subtract at least 25% of that for savings (if you can save over 50% even better). The remaining money can be pro-rated for a reasonable monthly income. When you have a windfall month (such as early/late paying clients happening to fall on the same week) then put all of that extra money into savings.
I'd take down your blog post and rethink how you budget your money.
Month-to-month is actually better than last-month-to-month. A person living month-to-month would at least stop spending money if they had a bad month. A person living on last-month's income would continue spending money and go into debt.
Freelancers depend on FUTURE income. A "budget" that encourages you to spend all of your money regardless of future income is extremely messed up.
This would only be true if you don't think at all about this month.
If someone says "I'm making no money this month, but I'm just gonna spend last month anyways" I don't think any budget is going to help them.
I appreciate your feedback, I just didn't think anyone would take "living on last month" to mean "spend all of your money, no thinking allowed".
I think the big flaw is in the assumption that you can spend an entire month's earnings in a single month. If you ever find that happening, it's a huge red flag that you're doing things wrong.
A much better way of looking at finances is to adjust your lifestyle so that you require a tiny, insignificant fraction of your income to survive. As developers (and freelancers), especially as a young one, this is quite easy. Cheapest apartment available, same old car from college, roomates, no television or electronic anything, etc. Fit your life into $20k/year.
If you do that (and if you're fresh out of college you'll have just survived five years of doing exactly that), it's pretty hard to get yourself into a spot where money is an issue if you have any sort of professional job. Even if you have the roughest year imaginable and only book $40k worth of work, you'll still sock away $10k into savings.
The author touches on the concept of having a full year's worth of living expenses in the bank, but immediately dismisses it as if it were some impossible ideal that nobody could ever achieve. But he could, in a single year at the rate he seems to be billing, if he really wanted to.
And there's no way of explaining just how liberating it is to have that sort of personal runway. If you don't have it, you need to drop everything and make sure your only goal in life is to get that $10k-$50k pad into your bank account.
I wish this were true. I'll just say that having 3 kids changes the equation dramatically. I make a good living and am fairly tight with my spending, and this is nearly impossible for me. I know plenty of families making far less, so while the advice works for single folks, I feel it breaks down once you add family in.
I still believe you should be saving, but this is fairly unrealistic for many folks.
> Your spending decisions should be tied to the money that’s already in your bank account, not to the contracts you’re signing right now.
No! Your spending decisions should be based on what you need to buy, and you should work to reduce that as much as possible.
My wife and I spend $35k/year and live very well. We currently make about $110k after taxes, but we would spend exactly the same no matter whether we made $40k or $400k. We have figured out that happiness isn't bought with money.
The other nice thing is that every year we work, we bank two year's worth of living expenses. At that rate it doesn't take long until you don't need to work for a living any more.
It actually seems like extremely poor advice, conflicting heavily with the situation described just a few paragraphs earlier.
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In January, you collect $4,000 -> In February, you can spend $4,000.
In February, you collect $5,000 -> In March, you can spend $5,000.
Simple, right? Wonderfully so.
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How about... figure out what your basic needs (and some wants are) on a regular basis, and if you can't bill anywhere even close to that, find another income source that will support those needs?
Just because you earned $4k one month, then $5k the next month doesn't mean you should be spending those amounts the next month. While these aren't the OPs exact words, it's the impression that can be gleaned. "Oh, I earned $5k last month, I can spend $5k this month".
Hrmmm... you should be savvy enough to also understand that you might have $0 billable this month meaning that, in 3 weeks, you'll have $0. Following that "last month/this month" strategy, you'll be able to spend $0 next month... not a winning strategy.
I'm glad the OP woke up to some budgeting needs, but the way this advice is presented seems, in fact, dangerous.
Figure out what your bare minimums are - cut your spending to bare minimums while you work and collect income. During this time, build up enough reserve to have a minimum of 3 months of savings. Aim for 4, then 5, then 6, then keep going.
Check risk tolerance with other family members. If they're not on board with this, go get a job earning what you need in a somewhat more stable capacity.
I can only assume OP is rather young. For someone to finish a project, work on their own projects for months, then 'take a vacation', then 'come back' and somehow be surprised that there's somehow not just a bunch of client work waiting to be done... this is extremely naive, and something I typically only see in really younger folks.
Again, glad the OP is getting savvy about budgeting and cash-flow, but take take this budgeting advice as gospel.
I'd suggest this, which I think has been said elsewhere in this thread:
Pay yourself a monthly amount and don't touch the rest. And base that amount on a figure that's somewhat less than the average of what you've been pulling in for the last year or so.
Have a crazy lucrative month? Great! Into the "business" account it goes -- you get paid the same amount. Have a crap month? No worries -- you get paid the same amount.
You've got to figure out techniques to smooth the unpredictable into the predictable. That's how you remain sane as a freelancer. And I've been freelancing for basically the entirety of my career, since the late 90s.
Also: Never put yourself in a position where you know you're going to have no savings. That bit about taking three months off and having no savings at the end. Ugh. Personal projects are great. Vacations are necessary. But as a freelancer, you have to earn those things.
In retrospect, it was extraordinarily dumb! I hope that was clear from the article. The point I was trying to make with the story is that when I had a vague pool of "savings", it felt like I had a bigger cushion than I actually did.
Kudos to you for making things predictable. I would wager most people don't plan as well as you do. My hope is this will be their first step to stabilizing their budget.
I would wager that most professional freelancers do plan as well as I've described. And by that, I mean people who are into freelancing for the long haul and not just between full time gigs.
And, to be totally honest, I actually don't structure my finances like this (although I'm a very long-term freelancer). I have my own techniques. But I would consider this to be the baseline for not going insane and/or getting kicked out of one's apartment.
This is exactly what I do. I used to not and it sucked. I would never ever go back.
I would also add the micro-tip that I set up not only separate accounts for business and personal, but separate accounts within person for "money I can blow" and "money to live on". My wife and I each have our own money-to-blow account which totally prevents arguments about wasteful purchases.
If you can, aim to save at least half.
And never charge on a per-project basis. Bill a daily rate, 1-2 week sprints, demo, rinse & repeat.
It's much easier for expectation management & rapidly adjusting requirements. Which is every requirement.
I've been using YNAB for a couple of years now, and it's definitely changed the way I think about money, but I would use it much differently if I had the variable income of a freelancer. YNAB actually wrote an article[1] about living on a variable income which is quite informative.
[1]: http://www.youneedabudget.com/blog/2011/slaying-the-variable...
Here's solid budgeting advice: If you don't have 3-6 months of savings set aside, cut out unneeded items such as TV (use 10/m netflix), starbucks, eating out as much, etc. Put all of this into savings immediately and forget about it.
Also, read about this: http://www.investopedia.com/terms/p/payyourselffirst.asp
Good article though, I definitely agree with your points on how freelance budgeting makes a big difference. Transitioning from a salaried job can be tough, but you really do need to change your strategies/mentality for managing finances.