10 Items You Absolutely Need For Financial Security
Once you have left the land of COLA raises, paid sick days, and employer-matched 401Ks, not only do you need to be the writer/programmer/web designer for your business, you also need to be your own CFO.
Here are some absolutely necessary components for your business (and life) financial portfolio:
1. You need insurance. In addition to car and home insurance, you must also now fund life, health, and disability insurance. Without these critical coverages, not only could you be swamped with debt brought on by an unforeseen medical situation, but your business could lose its most important asset—you!
2. You need to pay your taxes. Religiously. As soon as income hits your mailbox or PayPal account, it is imperative that you take 30% off the top and tuck it securely away in a separate (interest-bearing) savings account. This money will then be ready to pay your monthly, quarterly, or annual IRS bill, in full and on time.
3. You need an emergency fund. Everyone should have an emergency fund of six month’s worth of living expenses put aside in a savings or money market account — even those with six figure incomes. Freelancers need this fund even more than others since income can often be erratic and you don’t want to worry about being able to pay the electricity bill which keeps your computer fired up and work coming in.
4. You need a retirement fund. One thing that many freelancers look back wistfully on, maybe one of the only things from their cubicle days, is their employer-matched retirement funds. Now that you are the employer, it is critical that you don’t put off starting this fund since your senior years will be here faster than you think.
5. You need an accountant. Depending on your financial situation, a CPA may be worth their weight in gold. They can help you strategize about the best way to protect your income, minimize your liabilities, and make sure all of the necessary taxes are done and paid on time.
6. You need to become debt free. Immediately. Freelancers, especially those with highly variable incomes, do not need the added stress of making debt payments each month. Sit back, close your eyes, and think of what life would be like if you had zero debt—no credit card bills, no student loans, no car note, not even a house payment. Would life be easier? Would you be able to do more of the work you want to do instead of the work you have to do? You bet you would.
7. You need a budget and a cash flow plan. Without these items to map out how your income will be spent, you could soon be facing some major cash flow issues.
8. You need to always carry $100 cash with you. Besides a credit card or a debit card, you need to have some cold, hard cash on you. You never know what kind of emergency—major or minor—will pop up. Having cash on hand can often get you out of these little challenges with ease.
9. You need to look at ways to develop multiple streams of income. Whether that means adding more clients to your current roster, spinning off your current business by teaching a class or writing a book, or supplementing your current income with mowing lawns (not a bad idea if it’s the only thing keeping you from sitting at a computer all day), having a number of “paychecks” coming in each month which aren’t all from the same source is a very comforting feeling.
10. You need a business continuity plan. What would happen if something along the lines of Hurricane Katrina suddenly struck your area? Would you be able to continue to work and earn an income? What if you were to, God forbid, die? Would your current work be able to continue to generate an income to support your family, especially in the short term? How would this happen? You need a written plan to outline how your spouse/executor/business partner could continue with what you have started.
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April Borbon is a business owner, freelance writer, world traveler, and director of a non-profit which she founded five years ago.
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Nice post.
Freelance is not my main income but I do revel in the fact that I have multiple streams of passive AND earned income. It’s one of the best feelings, to know you’re secure if the ‘bottom drops out’ of one of your income streams.
Remember not all your readers are American: health insurance is far less important in many countries: I’m currently self-insuring – its cheaper to hope a plane to Bangkok than pay the punative rates that Australian health insurers want – just because I only recently became resident! Get out debt is by far the most important thing for anyone who wants the freedom to escape the day job!
Good one, first FS article I’ve printed.
I like the $100 cash tip, but my wife knows that this is as good as gone once it enters my wallet. We do keep some cash in our emergency kits though.
Paying off my school loans and having zero debt (besides the house) has been the single most stress relieving decision my wife and I have made. Financial planning is essential when paychecks are hit-and-miss, it’s much easier to keep up the enthusiasm for projects when you have a general idea what the next few months hold.
Great post and very valuable advice for people on their own or considering taking the plunge. If you are unsure about how to make a plan, I recommend “The Total Money Makeover” by Dave Ramsey. It’s pretty “well duh” but it’s the simplicity of his ideas that make it easy to implement and see results.
Since I’m just starting out with my freelance business, this is EXACTLY the kind of post I needed. Thanks for cluing me in, I will heed your sage advice! Some of those things are no-brainers, but some of them are hard to grasp for art kids like myself. This list will help quite a bit, I’m sure.
Thanks again!
Re #6, becoming debt free: this is huge. There’s a lot of freedom in having no revolving debt. It’s so much easier to cut back on eating out, iTunes purchases, or even watch the monthly grocery bill more closely than it is to watch the bills stack up and become late.
Insurance isn’t something I can get behind.
We had a family plan for a while. It had a $5,000 deductible and ran us about $220/month. It wasn’t a great plan, but it was cheap.
The problem is that we are an extremely healthy family (problem, ha!). We’ve hardly ever seen doctors (last time my wife saw an MD was in 1998 at our daughter’s birth – and we’ve had a baby since!). I had a shoulder pain issue last year and a few acupuncture treatments cleared it right up.
I also had an ER visit last year for an infected sore (very rare for me and weird). I’m still paying for the portion that our insurance didn’t cover, a total of about $3,000 (yep, to lance a friggin’ boil). I arranged a workable payment plan with the hospital, so it’s manageable.
However, the insurance barely covered any of it, so I wondered, “Why am I paying this premium?” It amounted to about $2,000 at that time, which could have just gone to the hospital bill.
I cancelled our plan and decided to put the money into my investment plan. Since then, instead of sending money out without anything to show for it, I doubled it. Now I can pay an even bigger bill if necessary.
I could get into a lot of detail about our preventive medicine success, but I won’t digress here (if you really wanna know, just e-mail me: mail at sparkyfirepants.com).
People always say, “but what about accidents, injuries, and disease?” My answer to that is that an insurance plan that’s affordable to our family doesn’t cover those things adequately anyway(I read the fine print). We would still be in debt up to our eyeballs if we came down with dysentery, cancer, or loss of a limb.
That’s just my take, and I’m curious to know others’.
I should mention that I’m a full time independent (freelance) illustrator and animator. I don’t have a side job, but #9 (mowing lawns) is not a bad idea sometimes.
For the insurance – a lot of people have never heard of it, but try to get Accounts Receivable insurance. Assuming you are doing everything you should be (detailed contracts, complete scope of work, sign off on payments and each stage etc.) this can be a life saver. Unfortunately it is only available to c/s-corp/llc etc. (you are protected as a company right?)
It is costing my company about $150/yr for $100,000 in receivable insurance. What happens is if a client doesn’t pay after you have done your work (this is where immaculate records come in – as you have the burden of proof) you can file a claim for work done and payments not made.
Phil
Fantastic post. I just walked into the world of freelance and it was great to find a place with all my anxieties neatly wrapped into text.
The $100 in emergency cash is a wise bit of advice. I lived in Cleveland in 2003 during the blackout that spanned from Detroit to New York City. When the blackout hit it knocked out the ATMs and the credit card processing machines. You couldn’t take out cash from the bank and you couldn’t use plastic if you needed buy supplies. Parts of Cleveland lost their water and you could only buy bottled water if you had cash. Luckily I withdrew $60 the morning before the blackout and that cash covered my family during the blackout. You can’t go wrong with having a little cold hard cash stashed away for times like these.
Nice post!
I like the #10 particularly.
#8 is very interesting and new tip for me. I can put 500 Rs. And its enough for me.
Thanks for this good post.
Suresh
- http://www.realgroup.co.in
I do just about all of those – good advice. However, #6 doesn’t seem practical to me. Unless you’re a top-tier consultant, it’s going to be difficult, if not impossible to pay off all of you debts. I would concentrate on those you have the most control over (ex: credit card).
This is a really great post. It insightfully hightlights key areas and pushes to the surface things that many people, while knowing we should, really don’t like to deal with. In part, because a lot of it was already partially taken care of before by employers and well, because most of it is just not fun to do.
I feel that # 10 is excellent. It is planning for the future in creating a business. But hardly in a negative future at all. Aside from the full Business Continuity Plan, if one considers the tasks that you do not have to be involved with, creatively speaking, and creates SOP’s ( Standard Operating Procdures) you now have a set of training materials to use if you scale up the size and add help or outsource some of the Admin tasks. I also feel, that doing that can uncover areas where you may find out how you can do something faster and more efficiently.
I am also going to suggest something that goes along with # 5, getting a CPA. Actually consider creating a business entity versus merely working as self-employed. Talk that over with the CPA and see how that can better protect your income and minimize liability and help the CPA do a better job for you with all of that.
This is great and all, but things like “Become debt free” and “get insurance” are not things that most of us can just make happen.
Thanks for the common sense advice, but why not offer some suggestions as to how freelancers can actually achieve these things instead of just writing an outline?
becoming debt free gives a great feeling of security…and freedom. There’s no greater feeling that mailing in that final car payment
the thing on this list that i really need to work on is the separate streams of income. and i dont mean mowing lawns (i’m too girllie for that), but something residual, like selling stock photography on istockphoto.com or writing a book or something. just need to figure out what it is i can do, so even when im on vacation, money is still coming in.
Good advice. I believe that part of 7 (cash flow) is to lower your living and business expenses. Many people who go into freelance to be independent find that they are financially dependent on many people. They buy lots of things for their freelance life (new computer, fax machine, new furniture, new P.O. box rental, etc.).
Learn to live on half your pre-freelance salary (at the most). Eat cheap, dress cheap, save your money.
The key to freelance independence is the same to all financial independence. Spend less than you earn over a long period of time.
…or we could just all marry rich.
I’m KIDDING I’m KIDDING.
Thanks for this post, April. I must admit, finances have never been my strong suit but, when you decide to go full-time freelance you can’t rely solely on your creative talents to get you through. You have automatically dubbed yourself Head Businessman by default.
The quarterly tax payments definitely took me by surprise, and I’ll be saving 30% of every paycheck from now on. My husband said the other day: “The payments took me by surprise; you’re making more money than I thought you would.” (Thanks for that vote of confidence, hubby.) I asked him if he’d prefer that I work less, and bring in less money.
As far as debt goes, I kick myself every day that I let my credit card debt get so out of control. I’m handling my money a lot more wisely these days, but it still takes time to chip away at the debt I built up (with student loans sitting there besides).
A question for everyone about insurance: Which providers do you go through, as freelancers? At the moment, my husband still holds a full-time job, but he’s also building a web design business on the side. It would be quite idyllic if we could both work from home one day. (I’d forgo the insurance, but I’m quite the sickly one.)
Stephanerd: Check if any professional organizations you can join offer group plans or discounted rates on individual plans. As a journalist, I joined the SPJ and in return got decent health insurance for a reasonable price. I was paying for the exact same plan out of pocket and it was costing me $20 more a month–so for an annual membership fee of $36 I’m saving quite a bit. (It helps that I can join the org at the “household rate” for living under the same roof as another SPJ member).
Great article, I totally agree with all of they points. I have a few advantages to being Scottish (British), I don’t need insurance… well besides home and motorbike but my health is all covered. Also you do need an accountant but not full time, if you do all your own books and keep everything up to date as you go along you will have no stress at the end of the tax year.
Luckily my partner has an excellent benefits plan that covers me. It would be tough if both of us were freelancing. The one thing I have invested in is long term disability coverage.
I am desperately striving for #6. In fact, that’s my #1 goal right now – owe less and save more. Just wish I could go back in time and chop up two or three of those nasty credit card offers and tell my self to get those general education credits somewhere cheaper.
As for insurance, I’ve been looking at both http://www.freelancersunion.org and https://www.ehealthinsurance.com. Luckily, I’m still on COBRA for 6 more months, so I’m trying to do my research (or, like Allena says, find a hubby in a hurry).
I’m curious to know the average age of everyone who’s debt-free versus those who are still in debt. I’m curious to know if my being 20-something and in this much debt is common. Maybe FSw can do a poll about that?
I can’t agree more with the #5. Having an accountant allows me to focus more on my work and worry less about money. Well worth twice his weight in gold…and he’s a fat man!
Very good list. We need to remind ourselves regularly of these.
A lot of people don’t want to pay for an accountant, but a good one is well worth it! For me, the difference was thousands of dollars. Save your receipts!
Great article, thanks!
Mostly a great post but agree with 8bit about the debt. Totally unrealistic to get rid of it all unless you want to live like a monk. What entrepreneur, business and/or multi-millionaire doesn’t have some debt? Obviously you don’t want stupidly large credit card balances and 73 different loans all at extortionate interest rates. But there is nothing inherently wrong with running a credit card, or having a mortgage or leasing a car as long as you do it SENSIBLY!
The bottom line is that as long as you live within your means, are preparing for your retirement, have life and/or critical illness insurance or are sufficiently self-insured, and have that emergency fund, you are fine.
Thanks for a great read! I really have to learn to deal with that taxation thing..
Thanks for a great read.
So many great suggestions. Wouldn’t it be great if we would all strive for these goals. Especially no debt, emergency fund, and budget.
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Austin Hike and Bike
Great suggestions, but I think 6 months of salary savings is a bit of an ask, I’d say a buffer of two would suffice. You missed out an imperative #1 should be – You need return clients!
Regarding the medical insurance thing for non-americans: I took out medical insurance that replaces my income (not entirely, but it does pay the mortgage) if I should become too sick to carry on my business. In the UK we can fall back on the NHS for treatment BUT it doesn’t help with getting money in. I was diagnosed with cancer in February and haven’t worked since then. I’m so glad I took the policy out – as I said, it pays the mortgage which is by far the biggest monthly outlay. I don’t have to worry about the house being repossessed or whatever. Do give it some serious thought.
I recently wrote an article on the sorts of insurances that freelancers may need: http://cybertext.wordpress.com/2008/06/09/business-of-freelancing-insurances/
While my perspective is that of a technical writer in Australia, I would guess that the general princples would apply to most western countries, at least.
Coming up in a few months will be a companion article on managing your money with 10 strategies for doing so. Again, from the freelancers’ perspective.
A freelancer should have two types of ‘jobs’, one where he is actually making real money every month and the other where he is working on making huge money in the long run.
Great Post! I was thinking for sure I was going to see credit card or line of credit on the list, but instead, to my pleasant surprise, becoming debt free made the list. It’s great to see common sense financial wisdom in the mainstream. Yes, I am a disciple of http://www.daveramsey.com.