money is like dieting: fads can be dangous, common sense is crucial.

[lagilman]

Some people do TMI about sex, or emotions, or physical symptoms. Me, I occasionally talk about Money. Specifically, the handling and planning of freelancer finances, although it can be adapted to the day-wage person, too.

Avert your eyes now, if it squicks you out. But think about WHY it squicks you out, when you do so

Today, I'm musing again about the ever-important emergency fund.



When I put together my projected budget for 2009, I scheduled out all the payments that would be due this year, based on contracted delivery dates, and predicted my income/outflow on that. All was well and good....except I blew one deadline by just enough weeks that I got caught in the Publishing Holiday Freeze. That's the period between Thanksgiving and New Year's, when it's a well-established fact that unless a payment is requested prior to the start, you probably won't see the money until after the new year, because the people who need to sign off on things won't be in the office.

So now I'm staring at -- not exactly a shortfall, because the money is coming, it will just be a few months late, and apply to the 2010 budget [for work done in 2009]. Which is weird and confusing and how the freelancer dice rolls, sometimes. This is why we have professionals help us with our tax prep.

It's also a good example of why a freelancer MUST maintain an emergency fund. I'm not talking about "enough cash to cover your bills for the next month," either. That's a good basic rule for everydamnbody to follow. But as a freelancer, you should have at least six month's basic living expenses (rent, food, health insurance, home/car insurance, utilities) in an account for the "everything falls apart, can't get a job pumping gas" worst case scenario.

Six months minimum. A year would be better.

Yeah, I know. Impossible. But unless you like staring at the ceiling at 3am panicking over money, you need that safety cushion. Because scenarios like the one I mentioned in the first paragraph? That's not even close to worst-case possible.

(ask any freelancer: contracts have fallen through, projects have been canceled, a favored editor is let go and their replacement won't take your phone calls or the entire magazine goes under, a dry patch gets dryer...)

If you don't have the emergency fund now, you can still make a start at it. Take the cash you were going to spend on a latte, and put it away. Ditto that new printer to replace the one that's not dead yet, or the new cd or dvd you really wanted. Have half the drinks you planned, when you're out, or eat in a cheaper restaurant. Do that consistently, until you have $250, or $500. Open a savings or money market account that pays interest, and put the money away. Add to it: do not remove anything from it. Yeah, it sucks not to be able to do/buy things. Pay yourself now, be thankful for it later.

Once you have that emergency fund? Be smart with it. Invest carefully, not aggressively (I have mine in a money market account, so I can get at it quickly, with minimal risk) And, if you can without freaking out, 'trick' yourself.

Trick how, you ask?

An Example: My emergency fund is only at $X, a little less than it should be. So part of my mind, being very busy with daily stuff, thinks "damn, emergency account is low, be careful." However, part of that "low" is because I took $Y and put it into a CD back when rates were higher. So come mid-2010, that money will come back to me, having earned more relative interest than the dollars left in the emergency fund. So I 'trick' myself into being careful, and then when I have time to think, I go "oh, no, we're okay, but still, good to be careful."

And because I am a very busy person, I also find myself forgetting* that, at the same time, I took a surprise windfall of cash and opened an ING Direct account. So there is also a small sum available for real, immediate emergencies. Squirrel iz Me.

This method will not work for everyone, though. Know your financial comfort zone! And if you aren't sure -- talk to a certified financial planner. The cost of that meeting could save you far more, down the road.

None of this is easy, no. It involves self-control and common sense and thinking about more than the moment. But the reward is knowing that, when tough times hit, you aren't going to go into a tailspin -- you have room to plan, rather than panic. And if you never need the money? Then it becomes part of your "I don't want to work so much any more" plan (what day-wagers call "retirement").



*[this is also why a) you keep very good records and b) you review those records every quarter...]


Next up: cash vs credit, and why I won't use a debit card (vote 1) or Taxes are coming. Am I ready? (vote 2)



REPEAT OF OB DISCLAIMER, for those who missed the jump-cut: I am not a Professional Financial-Type. These are just my own personal and hard-won observations/experiences.

Comments

[http://users.livejournal.com/la_marquise_de_/]

My problem is that I find it almost impossible to use my emergency fund, however great the emergency. Once money goes it, it somehow becomes imaginary and Not To Be Touched. While I panic and and skimp to cover the emergency. I am not logical.

[lagilman]

You're frozen yourself into thinking of the Even Greater Than This emergency? It's the logical extension of saving-for-emergency, taken to a painful extreme.

Do you have someone you trust enough to talk you down off the ledge long enough to transfer the needed funds?

[http://users.livejournal.com/la_marquise_de_/]

That's pretty much what I do. But I still find it very hard.

[rosefox]

I have this, not just because of "what if something worse happens?" but because it's so frustrating to put all that effort into saving and then have it undone. When we borrowed to pay the rent for the third straight month, though, I decided that paying 8% interest on debt was worse than leaving my money in savings to earn 1.5% interest, so out it came.

Maybe it would help to write up a list of circumstances under which it's okay to take money out of the emergency account.

[lagilman]

Ohyeah. Comparing interest rates falls under the category of "pay yourself first." If you're paying more in fees than you're earning on money collecting interest.... time to pay down the debt, so you're not taking the hit twice!

[signeh.livejournal.com]

I vote 1, for the debit card post.

[jennielf.livejournal.com]

+1 for number 1 - i am very curious as to why.

[galeni.livejournal.com]

Me, too. Although I have my suspicions. (debit junkie r us)

[jhetley.livejournal.com]

Your advice can stretch to just about any self-employment (self-unemployment for a lot of us, these days.) I had to follow a similar pattern for the architectural practice, long before I saw any money from the writing.

A year cushion is better. That's the actual recommendation I got. Either that, or choose rich parents . . .

[lagilman]

Yep, as I said, a year is better. It's also damned difficult unless you build it up while you're still a wage-worker (which is what I did). Six months is the minimum by any standard.

[jhetley.livejournal.com]

Yeah, we saved for some years whilst wage-slaving. And already owned the house free and clear, with room for the home office . . .

[controuble.livejournal.com]

Another vote for #1.
I don't use one either, but I am curious about your reasoning.

[birdhousefrog.livejournal.com]

Six months is considered the minimum, back when I was kept my license current. In the current economic climate, and as a writer in these times, 1 year would be the minimum I'd recommend if you have no safety net of a significant other with wages. Your suggestions for how to begin building that fund are very sound. Most people have a few 'treats' they can cut back on or they eat out.

I vote for 1, the debit card. I hate them, never use one. My beef is the lack of proper trail for my balance and how I'm spending my money.

Oz

disclaimer: Oz IS a trained tax professional

[lagilman]

The problem with telling people "a year, minimum" is that many of them will, right there, give up. Too hard, too impossible, like being told you MUST lose 30 pounds before New Year's Day, the day before Thanksgiving.

Six months gives generic-you enough room to breath in the immediate aftermath, and it's possible to achieve. Then you can [and should] build on it.

Re: disclaimer: Oz IS a trained tax professional

[birdhousefrog.livejournal.com]

I couldn't agree with you more. Right now I'm losing weight and getting fit. And I'm focusing on it in very small amounts because if I look at the total, I can't deal with it. It doesn't mean that I'll only lose 5 pounds. It's more like that 'trick yourself' you were talking about. I'll get there and then I'll congratulate myself and look at where I want to be next. I will NOT be celebrating each interim goal with a 'treat!' (been there, done that)

ANY cushion is a good cushion, as long as it stays a cushion. So your advice to put pennies, one dollar, fifty cents, aside at any one time, is the way to go. It sounds like nothing, but it adds up. Keeping it in a separate account is even better.

Oz

[barbhendee.livejournal.com]

Do you write checks in the grocery store or just make certain you have enough cash?

[birdhousefrog.livejournal.com]

I use a specific credit card for groceries and gas (everyday purchases) that is paid off every month in full. We try to limit how much cash we use each month, as it's another place we would have trouble tracking how it's spent. You can only do this if you know you can pay it off each month. Otherwise, I don't recommend using a credit card for your basic needs. Cash or check would be better. I have a significant other with a steady job.

The credit card won't hit my bank account until I'm ready for it to hit. I get a bit of float, too. I also get a full list of transactions, which at times I've entered into Quicken in detail to review my budget.

The debit card, for me, hits unpredictably. I keep a check register with every check recorded, but nowadays I don't use many checks. It would be pretty time-consuming to enter every debit card transaction, if I used one the way people do.

I used to write checks in grocery stores before they took credit cards, yes. It actually grew out of being a military spouse and buying groceries in bulk.

[lagilman]

or, y'know, I could let Oz write the credit-cash-debit post... *grin*

[birdhousefrog.livejournal.com]

I'm curious to hear what you have to say and to hear others on the subject. I don't know what the 'official' advice is, frankly. I've just never been interested in debit cards and I think that has to do with my age. I know many people my age who pay off their credit cards each month, but can't face the idea of using them for ordinary purchases instead of cash or check. I began using the credit card for ordinary expenses when the kid became a Disney fanatic and we began using a Disney Visa for the points. And because of those points, we tend to use one card for almost everything. 80% of my budget shows up in one bill. (Excepting the mortgage, which is an auto-withdrawal.)

I can see using a debit card if it linked to a checking account that you loaded each month with your budget for food and gas and incidentals from another account. That would keep the spending in line, let you know with the available balance how much you had left.

Can't wait to see what you do with the post. :D

[brownkitty.livejournal.com]

I vote for both. Two different perspectives on this would be very useful.

[elektra.livejournal.com]

Another vote for 1. I'm real curious.
We just moved from somewhere where I paid for a number of routine expenses with checks (example: haircut) to a new location where this is no longer possible. It is also far less convenient to obtain cash. So I'm using one for the first time, and training my husband to do so--just for the routine items that we would have either written checks for in the past or paid cash for. And we're tracking use very carefully.

[rovanda.livejournal.com]

My husband and I use the debit card a lot, but keep all our receipts until they're entered in Quicken, which usually gets done at least once a week. Checks, auto-pays, atm withdrawals and credit card spending also all get entered.

[lagilman]

we might want to save comments on that thread until the post discussing thsoe topics is actually posted? Just sayin' it might be more useful that way...

[burger-eater.livejournal.com]

I vote for #1, mainly to see whether your reasons match mine.

[handworn.livejournal.com]

Are you a reader of the finance blog Get Rich Slowly (http://www.getrichslowly.org)? J.D. Roth, who runs it, has advocated emergency funds many times, with very similar advice to yours.

[lagilman]

No, but this is not new or novel advice, just something too many of us -- despite knowing it's wise -- fail to do.

I'm actually curious, if freelancers don't have the cushion, why not.

(this does not apply to folk who did, and had to use it. Although it would certainly be useful for us to see how it helps, in action, if anyone wanted to share those stories...)

[desperance.livejournal.com]

I'm actually curious, if freelancers don't have the cushion, why not.

Um, this is one freelancer who doesn't have the cushion, and never has had.

Why not? Because the opportunity has never been there. Never had a day job, or rich parents, or any other means of supplying money not written for; everything I ever earned came out of my keyboard. Which was hand to mouth when I started, back when I was eighteen and selling stories to magazines; and still is hand to mouth now that I'm L and selling novels to publishers. This year's advance covers this year's expenses, less a bit. I don't have emergency funds, I have debts.

[lagilman]

Oh, I really wish I'd thought/planned better and gotten rich parents. Or not been the youngest of three. I really think the Universe should ask us first, don't you? "I want to be a writer/painter/scholar. Give me patron-parents!"

Yes. Next Universe, that's what we'll do.

*raises a glass to your continued forward motion*

[desperance.livejournal.com]

Oh, I really wish I'd thought/planned better and gotten rich parents. Or not been the youngest of three. I really think the Universe should ask us first, don't you? "I want to be a writer/painter/scholar. Give me patron-parents!"

Yup, 'zackly that. But is it our fault(s) for not better planning, or can we blame the Universe for being mean?

*clinks glasses*

[jhetley.livejournal.com]

It's the Universe. Definitely.

[desperance.livejournal.com]

Yup, that's how I feel. 'Specially as it has also conspicuously failed to supply me with a well-paid partner, which is the other obvious way to go. I'm out of ideas, me...

[lagilman]

that well-paid partner thing don't always work, neither. Alas.

I have a lottery ticket for tomorrow, me. 118 mil US, and I'll buy n oversized house on a large plot of land, and give y'all a set of rooms, and we can meet in the oversized kitchen of a night and sneer at each other over our preparations....