How to Manage an Unpredictable Cash Flow – Tips for Freelancers
The worst part of freelancing (or any self-employed home-based business) is managing an unpredictable cash flow. These tips for freelancers are from a financial expert (not me) and an experienced freelance writer (me!).
First, here’s a cool quip from a writer:
“Writing is turning one’s worst moments into money,” said Irish American author J. P. Donleavy.
The more you can turn the most miserable moments of your life into writing fodder, the happier and wealthier you’ll be as a writer.
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One of the most important things I’ve learned as a freelancer is that writing is a business. It is my career. So as much as I love reading books about writing, I also have to read books about running a self-employed home-based business — such as Creative, Inc: The Ultimate Guide to Running a Successful Freelance Business.
But it never hurts to read books like Writing Movies for Fun and Profit: How We Made a Billion Dollars at the Box Office and You Can, Too!
On to the boring-but-important stuff: managing cash flow for freelance writers…
How to Manage an Unpredictable Cash Flow
These tips for freelancers aren’t just for writers; they’re for all entrepreneurs. Freelancers have to adopt a long-term view of their money, because their income fluctuates monthly (sometimes even weekly!).
You may be observing a pattern by now: lower income around the holidays or in the summer, for instance. You may also know that you’ll almost always earn a typical monthly minimum income. For instance, I always earn at least $2,000 per month. Last month, I earned over $4,000. Next month I hope to earn over $5,000.
No matter what your minimum monthly income is, your budgeting, spending and saving should be done with that “base” in mind.
And that’s what these tips are all about! To manage an unpredictable cash flow…
Set your baseline writing and financial goals
What are your minimum financial goals? Establish your bottom line: the absolute bottom limit that you need to earn to cover expenses.You need money for rent/mortgage, household bills, your nasty writer’s habits (red wine? cool hats? gourmet coffee?). And you need six months’ living expenses in an emergency fund at all times. If you’re a freelance writer, you can use this account as a “floating” fund. Pull from it during leaner times, then replenish when your cash flow increases.
Don’t forget about your tax bill; I just paid $3,500 in taxes to cover next year’s tax bill — a prepayment! For tax tips for freelancers, read Income Taxes for Working Writers (it’s not just about doing your taxes in April, fellow scribes).
Try “zero-based budgeting”
According to Investopedia, zero-based budgeting is “a method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a ‘zero base’ and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.”
This means you can’t buy luxuries (wine, cool writers’ hats, gourmet coffee) until you have the cold hard cash in hand to pay for it.
Save a percentage of your freelance income
Need I say more?
Yes. Yes, I do.
The percentage you save depends on how much you earn, what your future financial goals are, and how unpredictable your cash flow is.
Sock away financial windfalls
When you earn or receive extra money from a big magazine assignment or a generous child who earns more than you, save rather than spend the excess money.
Once you get used to living on a freelancer’s unpredictable cash flow, you’ll feel better sticking to your budget than spending your excess money on stuff you don’t need. Get used to stashing your extra income, in addition to the normal pre-determined amount you save. Keep your eye on the ball: financial security (or that Hawaiian cruise!).
Set up an automatic deduction plan
The best way to manage an unpredictable cash flow is to make everything automatic. Some banks and financial institutions let you arrange automatic withdrawal from your checking account to a savings account. Record this expense like a bill every month, and you’ll painlessly accumulate savings!
If necessary, start with a small amount like $25 or $50 per month and increase it whenever possible, such as when you pay off a credit card bill and have an extra $50 a month floating around.
The Best Online Banks for Writers will help you figure out which banks charge the lowest (or no) fees.
Find a good investment account
Finding a strong-but-safe investment is easier said than done, but it’s worth the effort! Don’t let your money rot in a savings or checking account. If you don’t want your money tied up long term, choose a money market account that allows withdrawals only at certain minimum levels. Or purchase short-term CDs (three- or six-month terms) on a regular basis. You’ll get interest earnings, which you can constantly reinvest.
The best way to manage an unpredictable cash flow is to consistently control what you can control. Freelancing isn’t that tricky once you get the hang of it – but it does take time to get your financial ducks in a row.
Or you could marry rich, and not worry about money at all.
Have you tried and failed to make money blogging? Read 6 Reasons Your Blog Isn’t Earning Money.
If you have any financial tips for freelancers, please comment below…
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Partial source: Brad Stroh, Bills.com.