Do you have a plan for extra money coming in above monthly budgeted expenses?
…wait, what?…
Yes, you need a plan for that. You see, freelancers don’t have a steady paycheck. There will likely be months without income. There will definitely be months with less income than your expenses. If they go on for three, four months – the infamous summer slump – or even longer, like when the nation is dealing with election drama and the fall rebound never comes – can you cope?
Part of coping is having a plan for the good times, before they arrive. Note that even in one of our oldest stories, Joseph had to start building granaries for the seven good years before the first harvest came in, so he had enough storage when the land was producing to set aside food for the seven famine years.
What should your plan look like? Well, first, do treat yourself to something nice – otherwise you’re going to feel deprived. So a nice dinner to celebrate Royalty Check Day, or that pair of boots you’ve been wanting. But after that, rebuild your cash cushion and reduce your expenses. What do I mean by that?
Fill your gas tank.
Pay your quarterly taxes.
Pay off your car.
Pay off your credit cards.
Pay off your house.
When a friend quit smoking, she was living on a ramen & rice budget – and every time she found she had enough money to buy a pack of cigarettes, she went to the gas station and put that money into the gas tank instead. Pretty soon, she was no longer permanently worried about running out of gas on the way to and from work, because it was always at a half tank or above. Then she started paying off the overdue bills – and the lack of worry, the knowing she could make it to work, and that she wasn’t going to get the power shut off again, was enough to practically make her into a zen master compared to where she was before. You ever meet someone who was calmer and happier when they were going through withdrawal?
As a freelancer, you need to have the same mindset. If you have extra money, put it somewhere that will cause you less worry in the long run. Paying your quarterly taxes is pretty high on that list, because if you don’t do it when you’re flush with cash, how are you going to manage later? Second, pay your bills. Third, pay off the things that demand money every month – because those are the things that will hurt the most on months when you don’t have enough money coming in. If your car is paid for, then you don’t have to worry about repo; if your house is paid for, then you don’t have to worry about eviction or foreclosure.
(One caveat: if you’re planning to move within 3 years, don’t sink it into the house. Rule of thumb: you’ll lose 1% of the value of the house when you sell, and another 1% of the value of the house when you buy. Because fixing a place to sell, and fixing the little things on the house after you buy one, costs money. Keep that cash in a separate account that you call “New House”, so it’s available to make buying and moving easier.)
Now, obviously this can’t cover every person’s life. If you were forced freelance before you had 6 months cash cushion, “remove worry” may be much more immediate. Have you been limping by on tires so bare that you can’t see any tread left? Is your spouse putting up with near-blinding pain because you can’t afford a root canal? Are any of your bills coming with an “overdue” stamp on them? Set aside enough to cover the quarterly taxes (so you don’t get hit with the freight train labeled IRS) and take care of your most immediate pain and worry. Use the breathing space to get a couple good nights of sleep, and then tackle the world.
And if you want more good advice, Kris Rusch tackled the same subject Thursday: http://kriswrites.com/2017/02/22/business-musings-writer-finances-versus-the-paycheck-world/
And if you want a bit of an escape from reality, where the good guys triumph and the bad guys get what’s coming to them, try Scaling the Rim. It has action, adventure, romance, and plausible science fiction! What’s not to like?
Mad Genius Club 
I’d just add, these days, pay off any student loans. I suspect for some of us, they have replaced mortgage as the single biggest debt load.
One other thing – do you have an HSA or other health/medical savings account of some kind? Put what you can of your surplus in there as well. Life happens.
And if you don’t a budget category for such medical things can be a do it yourself version.
Yeah, student loans are another great one to pay off. (I might have done a happy dance when I paid off the first and second loan. It might have been embarrassing, and I didn’t care.) So, too, are medical debts. I was very happy the day I paid off my MRIs!
A writer friend had an *excellent* year. Being an experienced businessman, he’d set aside enough money to pay his taxes.
Unfortunately, just before it was time to send the tax check off, he had a sudden messy divorce, with the now-mandatory vacuuming-of-accounts and maxing-the-credit cards schticks. He owed more in taxes than he’d made, some years. It took him five or six years living hand-to-mouth on the payment plan the IRS insisted on.
If you’re going to be paying taxes as an independent businessman, that money shouldn’t be mixed in with household money. That’s not “community property” money. It should be in a separate account, preferably under a business name or DBA, so that it’s absolutely clear that it’s business money. If practical, it should be separate from your ordinary business account, with nothing in it but tax money.
By establishing the money’s purpose, and not mixing it with other money, you make it harder for an opposing divorce lawyer to throw into the community pool. It’s not *your* money; it belongs to the IRS. You’re just holding it for them.
If you’re making enough money to be paying taxes on it from the freelance end, it’s safest to assume it’s going to take at least half (unless you run it past an accountant, then use their numbers.) Self-employment taxes will bite you hard if you’re not expecting them.
Yes, separate accounts, or pay quarterly, or both. Then debt reduction (or payoff, happy thought), retirement, health accounts, charity. Yeah, a little bit of a splurge is nice, but it doesn’t have to be crazy. Getting a nice set of clothing; having a nice meal; getting something done that you haven’t quite had the money to do.
My husband and I have discovered that a small amount of splurging that is planed can prevent a large amount of splurging that is not. Near as we can figure ‘oh I have money for that nice meal we’ve been planning at that place we liked’ tricks the animal side of the human into thinking it can wait on other indulgences. (Or indulging in 2 packs of goblin minis for less than $10 or… whatever.) I don’t know how common this is but for us it seems to hit a level of ‘see? I can have things so I don’t have to rebel against the rest of the budget.’ below the conscious.
We’re finally at the point where we can remove the trees that have needed removal since we bought the house almost eight years ago. Note that two of those trees have fallen in that time, and it’s sheer luck that there wasn’t any damage. I’m having to fight against the mental chant of “we can’t afford that, it’s too expensive.”
I’m also having to figure out that we might be able to get the backyard up to zero this year, because the principle reason it hasn’t been there is that it was a total neglected mess when we moved in, I’m pretty much the only person who can do the work out there due to health & allergy issues on the part of the spouse, and I’ve got small kids. It’s one of those situations where a concentrated effort on the part of a number of people could get it to a stable situation, but we haven’t had them.
Wait, blowing a windfall on weed and easy women is a -bad- plan?
Man, I have been doing this life thing so wrong! ~:D
Love your book!!
Thank you!
I realize I’m not the sort of independent author that you/Kris are talking about. And, in general, the “don’t spend a windfall if you’re going to need it later” advice seems completely right to me. But, from a financial viewpoint, it would seem to me that the best use of the surplus funds would be to gain the greatest return on the “investment”. And that means, in general, retiring the debt that’s costing the most — the stuff with the highest interest rate. So, more than likely, pay off any credit cards first, since those are likely to be charging 15%+, rather than paying off a mortgage at 4% or so. Or even paying off the IRS, since they’re currently charging 4% on underpayments (but be sure to file, since the non-filing penalties are on top of that, and significant).
There are transaction costs, or course — you can’t just look at the raw interest rate, since getting a loan takes time / money / effort — but those can also be taken into account.
And you do want to take into account things that help your credit rating, since better credit ratings often mean cheaper loan rates (or sometimes even whether you can get a loan at all).
Of course, I’m not a lawyer, or an accountant, but that seems to me to be the most financially efficient method of dealing with debt. Or am I missing something?
If you’re able to look at your finances objectively, you’re not missing anything. But most of humanity is… not utterly rational when it comes to their finances. (If they were, credit card debt wouldn’t build up, and a lot fewer people would accept the creep of STEM degrees from 4 years to a minimum of 5, with mandatory non-STEM courses and piled extraneous fees.) So my rationale springs from motivations and psychology.
A while back I talked with a woman who does credit counseling, and she said that with most of her clients, the best advice was not to pay off the highest interest rate first, but to pay off the smallest balance. The reason: a quickly-achieved payoff provides the positive emotional feedback necessary to motivate them to tackle the next debt and stick with it, even when the life happens and paying extra to debt gets hard.
With freelancers, ideally they’ll be carrying no credit card debt at all. In reality, the kind of people who have no credit card debt, both cars and house paid off, and at least a year’s cash in the bank are rare, and generally look at this advice, roll their eyes, and go “of course?” So for the rest of us, I try to provides a better “Here’s where you want to get to, and here’s a way.”
And the thing is – credit card interest is high, but the per-month minimum payment is, for most people, less than the car payment. This makes the car payment more painful each month, especially when income is less than outgo. Also, when the credit card is paid off, there’s nothing tangible you can hold and say “this is better than it was before.” Whereas paying off a car not only frees up a large chunk of monthly payment, it provides a title in hand that says “this won’t be taken from you; you own it free and clear.” Having the emotional boost of a paid-off car provides more impetus to turn around and apply that set amount to the credit cards each month, until they, too, are paid off.
The rationale on the IRS above all is because I’ve seen too many people – including but not limited to freelancers – get into a vicious feedback cycle, because they spent the money on daily life or some inevitable emergency when they had it, and then didn’t have it when Uncle Sam came around for his pound of flesh. Owing the IRS, and fees and interest and penalties, is a vicious feedback loop that usually takes years, and lots of stress that’s bad on health and relationships, to get out of. So I counsel never getting into that trap in the first place.
Every year, even 10 years after the indie revolution began, there are a fresh crop of fine writers who discover that the IRS was expecting them to pay quarterly, and they now owe a significant chunk of their income at tax rates they weren’t expecting, along with a fresh helping of late payment penalties. I write things like this in the hopes that I can save at least one or two writers from the stress, sleepless nights, and suddenly barren bank accounts. Because in the end, I want everyone to be happy, healthy, successful, and enjoying life. (Even if I use a less-rational way to get there.)
Sorry for the length of reply; I’ve put in a full shift today. I’m verbose when exhausted, and only edit to concise when fresh.
And it’s an excellent reply. It thoroughly explains the difference between my analytical analysis, which doesn’t, in many cases, work as well with real people, and yours, which does.
Thank you — it really helps my understanding of the issue.
Dave Ramsay’s financial advice generally makes sense, at least to me. He’s written a few books to go with his radio show.
I once told a friend, “Clark Howard is talking to people who want to make their cash go further. Dave Ramsey is talking to credit card addicts. Of course they give different advice…”
I haven’t come across Clark Howard. We were almost out of debt when I discovered Dave Ramsey. We’ve been debt-free for ten years, had a minor bobble with some major medical expenses, and are temporarily in good shape,.until one of us goes to the hospital again, anyway.
“credit card debt wouldn’t build up,”
I know the advice to never use the credit card unless you have the money to pay it off. I will offer one strong caveat to that: dental work. Almost all of the big balance we had* on the credit card was for dental work, and part of the reason it was so expensive was that there was a lot of delay on the work. (One reason for the long delay was that my husband had basically developed complete immunity to all the dental painkillers; the discovery of sedation dentistry enabled him to get a lot of work done.)
Dental health is critical to overall health, and delay only makes things worse. If you know you’ve got an issue, get it fixed soonest and deal with the monetary end later.
*We traded some equity for liquidity and retired a lot of debt. This may not work for you, but paying off student loans and credit cards was worth some extra years on the mortgage for us.
I don’t believe in never using the credit card unless you have the money to pay it off, but I do believe in using the credit card wisely, and sparingly, as a cushion for large expenses.
Dental’s a great example: if you haven’t got your health, what have you got? Another is myself, recently: upon arrival at the ER, I didn’t worry about the amount of cash on hand, we just paid the bill on the credit card. We’re going to carry a balance this month, because between the shoulder and Peter’s latest kidney stone adventures (yay beginning of the year and fresh un-met deductibles), the cost in interest for carrying the debt and not doing very bad things to bank balances is worth it.
I know the money is coming; I released a book while sitting on the couch and unable to cook or clean, and Peter’s just finished the next western and is doing the first editing pass. Until it gets here, I don’t want to drop the bank balance to dangerously low levels. (Not everything in life can be covered by credit card.)
*grins* This is where I point out I’m not some rich guru dispensing wisdom from a mountain temple; I’m just struggling along, too, knowing where I want to go, gratefully accepting an occasional hand up, and trying my best to help everyone else on the path. The cars are paid off… and if we can avoid yet another trip to the hospital, we’ll get the credit card paid off again. Then, on to the student loans and the house!
Loved the book. Some of the best world-building I’ve read in a long time. The world is so different, yet just flows without info-dumps.
Does that count as a “trope”? The “toss the readers in and let them figure it out” pattern seems MUCH more common in Sci Fi/Fantasy than other genres. I suppose that is because most other genres take place on mostly-normal Earth.
Thank you!
I’d put it one meta-level up from “trope”, and all the way to “narrative style” – The formal name is “In Media Res”, from the Roman Poet Horace, who advised starting an epic at the crucial point of action instead of at the very beginning. (See: The Iliad, which starts 9 years into a siege.)
I go back and forth with this with a couple other authors; I personally dislike infodumps, and skim, skip, or put the book down when I hit wall-o-explanatory-text. Of course, some things do need explaining – and that’s where I went back to study Heinlein, whose mastery of worldbuilding through small details means he’s been immortalized as the other end of the infodump scale, including the infamous example of “the door dilated.” Bujold’s another great one for that – not so much on worldbuilding as on conveying emotions through little details. Someday, I hope to be as sneaky as them!
I recognize that not all, or even most, readers agree with me – and that to write without infodumps is to rely on your audience to be willing and able to do the extra work of picking up a lot of background clues and putting them all together. SF & F audiences, who started reading the genre because they love the constructed worlds within, are a lot more willing to stick with an author while they do that than other genres. The steeper the learning curve, too, the easier it is to throw the reader out of the book, and for them to fail to pick up crucial details.
Thankfully, I get some feedback from readers like you, telling me that it wasn’t too steep to be enjoyable!
(As an aside, this is part of why most middle-grade fantasies start with the protagonists being normal kids in the real world – because then the learning curve is a lot more gentle, and the author gets to put in a lot of work getting readers to empathize with the protagonists and stick with them when the going gets weird. I thought about doing that, but it was so very, very boring… and the cardinal sin of an entertainer is boring the audience!)