Living on Last Month: For Freelancers(andyadams.org)
andyadams.org
Living on Last Month: For Freelancers
http://andyadams.org/living-on-last-month/
13 comments
I agree the budgeting method isn't complete. When I write, I always debate whether to delve into related subjects. I decided to keep it simple here. Don't treat my method as the end-all!
This budgeting method is actually really dangerous.
I'd take down your blog post and rethink how you budget your money.
I'd take down your blog post and rethink how you budget your money.
This is overly harsh. The article may not be the absolute best advice, but it is probably illuminating to people who are already doing a worse job, living month-to-month rather than next-month-to-next-month, and it's completely harmless to people who already have a better system (hint: spend less than last month's income!).
This article provides the illusion of a real budget.
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.
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.
> A "budget" that encourages you to spend all of your money regardless of future income
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".
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".
A better simplified budget might end with something like: 5. Subtract off a reasonable estimate for spending money, 6. Save the rest. Instead of thinking of spending money as unbounded, think of savings as unbounded, and bound everything else.
You're right! I should've mentioned savings before spending. Edited the article. Thanks!
This is terrible advice, but it took a while for me to process why it's such terrible advice.
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 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.
Indeed! This line especially stuck out for me:
> 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.
> 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.
> But he could, in a single year at the rate he seems to be billing, if he really wanted to.
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.
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.
"Only spend what you made last month".
It actually seems like extremely poor advice, conflicting heavily with the situation described just a few paragraphs earlier.
=============
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.
=============
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.
It actually seems like extremely poor advice, conflicting heavily with the situation described just a few paragraphs earlier.
=============
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.
=============
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 mean, you took three months off, essentially -- knowing that you'd have no savings at the end?
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.
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.
> Pay yourself a monthly amount and don't touch the rest.
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.
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.
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In cases where monthly income is going to fluctuate dramatically, I couldn't imagine NOT doing what you're suggesting. This could go for other jobs besides freelancing, like living off of small business incomes or gambling professionally.
> I mean, you took three months off, essentially -- knowing that you'd have no savings at the end?
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.
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 hear where you're coming from, but this isn't a stable budget. It's living in two-month feast/famine cycles rather than one-month ones.
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.
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.
Kudos to you, for sharing your experience.
I'd go a step further here.
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.
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 like that last part, I'm going to start doing this.
Budget 101 for freelancers is to think and remember you are running a business effectively, and always consider the two - personal and business cash flows separate.
Pay yourself a monthly salary that pays all bills plus a little luxury plus allows a small amount to be banked and saved each month, with the end aim of a personal rainy day fund that equals 18 months of that current salary level as a minimum.
For the business - don't turn work down - if need be pass work onto colleagues friends and trusted third parties - always say yes you will help your clients even if not personally doing the work. Retain a healthy amount of cash in the company to weather drier times, unforeseen bills to the company, and potential future growth (where you hire additional resources top help achieve more and bigger projects).
I think Rule #1 is far more important: Give every dollar a job. Basically, when you get money, decide what you are going to do with it right away. If that means saving for an emergency, like a lack of inflow, then it should go there.
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...
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...
I am currently a full time freelancer/consultant. The best thing I've ever done is to put myself (and my family) on a flat, fixed budget. All the money from my work goes into my business account, and I write myself a check for our personal account on the 1st of each month that's always the same, just like a salary. This is the trick to making a variable income feel like a stable one. Just pay yourself a salary and ignore the rest. At the end of the year, chances are you'll have a good bit saved up that you otherwise would have spent if your budget changed every month like the author suggests.
"Only spend what you have left." - Terrible habit to start. This should go into savings.
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
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
I had heard good things about YNAB, so I purchased it a few months ago. I can see how it could work really well for some people, but reconciling it with my finances was a little too much ongoing work for me (also the UI was somewhat sluggish for me).
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.
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.
Remember to put aside half for taxes too :-(
This is one of the best articles that I ever about freelancing . Thanks for sharing!
This was great honest advice I needed to read. I'll check out the budget software too. Thanks Andy.
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.