EP. 003

How to balance your budget as a freelancer

Freelancers sometimes struggle with the fact that their income isn’t consistent on a month-to-month basis. So what can you do about it? Kaleigh and Paul talk about what they’ve learned about budgeting, spending, and planning so that the financial ups and downs of freelance work aren’t so painful.

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Paul Jarvis: So this is one of my favorite topics to talk about. And probably one of the more popular topics to talk about. And that’s money and income and budgeting. So I don’t know, where do you even want to start with this? So actually, I do know, now that I’ve just said I don’t know, I do know. Do you pay yourself a consistent income from your freelancing business?

Kaleigh Moore: So when I started four years ago, I didn’t. I just paid myself with whatever money I made. But about two years ago, I switched to an LLC and then I put myself on salary, because my accountant told me that’s a really important thing for if you want to buy a house down the road, at least here in the US, it shows that you have a regular income. It’s a little bit more stable on the books I guess. So yes, I do pay myself a set amount every month, and that’s based on what I make on an average month. So I set aside about two thirds to pay myself out of that money, and then one third for taxes. And that just helps me keep it separate in my mind. This is my money, and this is money that I can’t touch.

Paul Jarvis: Yeah, and I think that’s smart and I kind of do the same, because I have such wildly varying income from month to month. I just kind of figure, this is the average of the last 12 months, this is how much I get. Because I’m incorporated as well. I think it works slightly different between Canada and the States, because we don’t have LLCs, we just have sole proprietorships, which it doesn’t have a buffer, and then corporations, which does have a buffer. We’ll talk about that more in a sec.

But I think that that’s … I just figure, I need this much to cover my expenses and my life. My personal expenses, not my business expenses. And then I just kind of average it out so I have the same amount every month. And for me, and it might be different in Canada and the US, I don’t know. But my accountant told me to pay myself dividends instead of a salary. I think because I save paying some other thing. Again, I am the worst at accounting, which is why I pay an accountant to do that stuff.

Kaleigh Moore: Me too.

Paul Jarvis: Yeah, I go based entirely on what they say to do. And I’m just like okay, tell me how much to pay, tell me how much I need to save, and then for me, what I do is, and this could actually change, I don’t want to get too far down the rabbit hole on this, but I take the money, because I pay myself less than I make for my business by a decent amount. And so I take the money, after I’ve saved for taxes and after I’ve saved for expenses, and then I invest that money through my corporation, just in things like low cost index bonds and that sort of thing, like Mr. Money Mustache stuff.

So I’m always trying to make, I’m always trying to cover inflation. And the way that I kind of figured it out, or the way that somebody else figured it out that’s way smarter than me is that, if inflation increases by about 3% year over year, then if the money that you have saved isn’t making at least that amount to cover inflation, then you’re technically losing money keeping all of your money in a bank account, which I know in Canada, bank accounts pay pretty much zero interest, pretty sure it’s the same in the States.

Kaleigh Moore: Yeah, same here.

Paul Jarvis: Yeah. So I always try to find the most hands off easy investing. I don’t invest in the stock market specifically, which is what an index fund is. I invest in every company in the stock market to kind of cover my bases. And that’s done through a company for me, so I can be as hands off as possible.

Kaleigh Moore: Yeah, I think that’s so smart. And I think even if you’re, I mean it’s important to have money in savings, but I think it’s also important when you’re a freelancer to think about retirement and what you’re going to need for the future, too. And that’s so easy to put of when you’re just getting started and you’re kind of unsure of what you’re gonna earn. But I think making that a priority right after that, like you said, if you’re not earning 3% in your savings account, which I really really doubt you are, you’re losing money. That’s what’s happening.

Paul Jarvis: Yeah, and I talk to a bunch of people about investing that don’t invest. And what I kind of hear back is, well I don’t have any money to invest. And I think that especially in the beginning, you may not have … First you have to cover your buffer. We’re talking about money that you have after you have liquid buffer. So you have money that you can have access to if you need it. If you’re investing it, it’s a lot harder to get that money out. So this is money past that buffer. So phase one, fill the buffer. Phase two, invest any of the money past the buffer. And I think that to start, it can be $50 a month.

Kaleigh Moore: Right.

Paul Jarvis: It can be a few dollars a day. And for a lot, especially like robo-investors, those sort of things help set up an automatic savings program and the beauty with that is, you can have it set to take out just a tiny bit of money that you don’t even notice from your account. A few bucks a day or a week or a month, and then increase it over time. And then with the beauty of compound interest and constantly putting money into it, and I know in a bunch of systems, you can see if you’re 29 now, then when you’re 69 you’ll have this much money. And it’s like holy crap, that’s a lot of money.

Kaleigh Moore: Right, it adds up.

Paul Jarvis: Yeah and you could put like $100 or $500 a month to start, but if you’re doing that over 20, 30 years, then you’re building a nest egg. I didn’t even know we were going to go right into investing and savings, but that kind of is where the conversation went.

Kaleigh Moore: Yeah, and I think, maybe you get into freelancing and you’re like oh, I love it so much, I want to do this forever. That’s kind of expected. When I started freelancing, that was kind of my mindset. But then I was like, even if I work forever, I want to be able to get to a point where I don’t have to work if I don’t want to. I can only work when I feel like it.

And that’s kind of getting into another conversation with financial independence. We don’t need to go there. But I think that planning ahead for the future is smart. Even if you have a medical emergency or something like that. Having those savings or having those accounts where there’s money set aside that you’re basically not touching. It’s there for the emergency situations which you can get to if you really really need it. You shouldn’t touch it, but you can if you need to. It’s just a good way to stay secure in this type of career path, where there’s not always a lot of security.

Paul Jarvis: Exactly. And I think that, if I think about, and I’m gonna ask you this as well, if I think about retirement, I’m kind of like eh. I like what I do, I don’t really know if I want to retire. But in reading people like Mr. Money Mustache or JL Collins, especially the book The Simple Path to Wealth, talks about retirement is when you’ve said up enough F-U money, which is what he calls it. It’s a book to his daughter, too, so it’s kind of cool that there’s a cuss word in it.

But like, he talks about saving up enough so you work when you want to, not when you have to. So if I saved up enough, and I’m so not there yet, and I’m almost 40, but when you save up enough that you can live off, I think it was Mr. Money Mustache who said that if you save up 25 times, sorry, math, of what you need to make a year to live, then you can live off of the interest indefinitely. So you’re never touching the principal, you’re only touching the interest.

And I think that gives a really clear goal. Because before that, I was like, I just need to save up all the money. And it’s kind of hard to save up all the money! I don’t have all the money. But when it becomes a finite thing, like I’m still nowhere near that amount, but it’s like okay, there’s a finite end to this. I can keep working to this, and then go from there.

Kaleigh Moore: Yeah, just to kind of touch on Mr. Money Mustache again, my husband and I just watched this video the other day. He was giving a talk and he was talking about how when you get to that point where you have enough money to feel secure or to at least have a little bit of flexibility in your career to where you’re not just like oh, I need to take every job all the time so I can pay my bills! When you get to that point, the work becomes more enjoyable because you’re not stressed about just covering your financial bases. You’re doing it for enjoyment, you’re doing it because you’re good at the work and you like it and you like the people that you work with. So I think that’s kind of something to think about, too, as you plan for savings, for investments, things like that. Getting to that point, I think is a really important, or at least interesting goal to think about.

Paul Jarvis: Yeah. And what I want to touch on now kind of dives straight from that, it’s like a good segue. It’s not always good segues with being, because my brain is so…tangential? Is that a word?

Kaleigh Moore: Sure! Let’s take it.

Paul Jarvis: So what I want to talk about now is this, part of this is okay, well if you need to save 25% of what you spend a year to be able to retire, have F-U money or whatever you want to call it, that dramatically goes down if the amount you need to live on is drastically decreased. So if you need, say $90,000 to live off of, then you need more than $2 million saved up, which is a lot of money.

Kaleigh Moore: It’s a lot of money.

Paul Jarvis: Yeah. If you can live off of $20,000, then you need to save up $500,000. So what I want to talk about now is that a lot of times, people think about the top number, the money they make. And they don’t consider the bottom number, the number they spend. Because a lot of times, even with bloggers on the internet, with income benchmarks, a lot of them show the total amount that they’ve made, but they don’t take into account, like they show the gross, not the net. And so I think the way to become profitable faster is to spend as little as you can. Because you can get to profitability faster.

And I think that the way that I think about it is like, okay, if I charge $1,000 as a freelancer for my service, and I need $2,000 to live off of, then I need two clients a month to hit profitability. The third one I’m profitable. If I charge $1,000 for my service and I need $6,000 to live off of, then it’s not until the seventh client a month that I achieve profitability. And then you have to start thinking about, can I get seven clients a month? Is that doable? Maybe it is and that’s awesome. Maybe it’s not, and maybe you have to say okay, where can I scale this back a bit? Or maybe I need to raise my rates to be able to cover it.

Kaleigh Moore: Right. And I think it’s also a question of thinking about purchases. Because when you’re getting started with freelancing, it’s so tempting to go out and buy all of the new things to set you up for success. Capital letters, SUCCESS! And that means things like a really expensive computer, and a really expensive desk chair, and an office space, and a coffee maker. All these things that are not entirely necessary, at least not on the expensive end of the scale. I think starting small and starting with a scaled back operation with just kind of the bare necessities is smart, because it sets you up to not be in debt when you’re getting started.

Paul Jarvis: Mm-hmm (affirmative). And if I think about how much money I spent on business cards, I think I’ve probably given out like three business cards in 20 years.

Kaleigh Moore: Me too, ugh.

Paul Jarvis: But because I was a designer, I was like okay, I need to have square cards with glossy on the front and matte on the … And it’s like, just ridiculous. At one point I was like, maybe I want like metal cards. It’s like, Paul! Rein this in just a little bit! So my favorite story about the beauty of freelancing, even the beauty of freelancing over building products or building a product business, is that for the most part, you can start right away.

My favorite story is, my buddy Alexandra Franzen, she was working for a broadcasting company. And she wanted to, she’d done a bit of freelancing, and she was like, she’d had enough with her job where she wanted to go full time. She’s done it a little bit so she wanted to do it. So the first thing she did wasn’t to buy that fancy new Apple laptop, which is probably gonna break anyway. The first thing she did the day she left her job was she just started emailing contacts.

Kaleigh Moore: Oh, I like that.

Paul Jarvis: Like hey, I’m not a freelance writer. These are the types of projects I need. Do you or anybody that you know need this type of work? So she could start right away, no investment. She had the computer that she had at home anyway to start. And the first thing she did instead of that fancy Herman Miller office chair or printers or fax … I don’t even think anybody buys, I don’t think fax machines are a thing anymore.

Kaleigh Moore: I don’t think so!

Paul Jarvis: Probably not. But so the first thing she did was to start reaching out to contacts, which is great. It just takes time. So I think I always come back to that story when people are like, I don’t think I can go freelance because they need this, this, this. It’s like, your list is too long, friend. You need to cut 99% of the things off of it, and just try to find that one client.

Kaleigh Moore: Absolutely. I love that story. I think that’s so great. And sometimes it sounds kind of sales-y and gross to do that and to take that stuff, just to email people and say hey, this is me, I’m doing this new thing. Because that makes people feel vulnerable sometimes. But I think that’s so smart. And you’re right, it’s free to do that. It’s just a matter of investing the time and saying, I’m gonna email X people today and make it part of the regular schedule. I think that’s something you should do your whole freelance career. I think that’s a great tool for just staying in touch with people, because relationships are at the core of everything.

Paul Jarvis: 100% agree with you on that. And I think if you start to, I don’t know about you, but I think people are scared of talking to clients about money. Nobody starts out feeling comfortable talking about those things with other people. But I think I eventually got, and this was years and years of work, but I eventually got super confident. The reason why I’m confident talking about budgets with people, and just being like, this is what it costs, I have no shyness or reservations about talking money. It’s only because I’ve probably pitched five, 600 or more people on work, and how much it costs. So like, in the beginning, I was scared as well, and it was really awkward. But over time, that only goes away with practice. So being able to talk money, being able to talk budgets with clients, it’s like yeah, it just takes time and it takes practice.

And if you think about it, a lot of creative people are like oh, I don’t like sales, it’s sleazy. If I think about Alex and if anybody knows Alex’s friends and her writing, she is the least slimy, sales-y, market-y person in the entire world. It is so cut and dry with her, and that’s why she’s one of the most awesome people. And I think if you just approach these things in your own way, in your own voice, your own style, then it becomes a lot like, you don’t have to be a certain way to talk budgets or to talk money with clients. You just have to be you and get comfortable with it over time.

Kaleigh Moore: Right. And the more you see value in your work and you see the results that it produces for the people you work with, the easier it becomes to kind of translate that into a sales proposition, or at least just a hey, here is what doing business with me is like, when you’re talking to new clients. It just becomes very natural because this is how it is. This is what I can deliver for you. I am really good at what I do. This is why you should hire me. And a lot of the time, when you get to that point, you’re getting a lot of referrals. So it’s people who are already excited to work with you in the first place. It’s really just a matter of finishing the deal. So yeah, it gets easier as time goes on.

Paul Jarvis: Yeah. I agree. And I think to totally parkour to a different part of this conversation just for a sec, because I think it’s important, is to consider things. And I mean, it’s different in every country, right? Like the country you’re in is vastly different from the country that I’m in in terms of taking into account things like medical stuff, or medical insurance. So I think if you’re thinking about going freelance, you have to be able to budget for basically, and it kind of sucks, but you have to budget for worst case scenarios. Like if you break your arm, what’s going to happen to your work and to your income for a month or two months? And I know insurance for freelancers, if you can get it in the States, can be ridiculous. But it’s something you need to take into consideration when you’re starting.

Kaleigh Moore: Yeah. And that’s huge. That could be a huge expense, like you said, if something goes terribly wrong. And you need medical help. That’s really something to think about. If you don’t have insurance…The insurance conversation is a very long conversation here in the US, but yeah for sure, that’s something to really think hard about before committing to freelancing full time.

Paul Jarvis: Yeah. Not to put you on the spot, but do you have any investments or a plan for the future for money?

Kaleigh Moore: I do. So I started at my first job, I started with a new job the week after I graduated college, and I almost immediately set up my first retirement fund there. And that was at my full time job that I was working at in PR for a non-profit. And so I just kind of carried that on when I switched over to freelancing. I knew that I wanted to make that a priority, so I went and set up a separate account for myself as a business owner to keep my retirement planning moving forward at the scale I wanted it to.

And then I also set up some additional investments which like you said is smart, because if it’s just sitting in a savings account, it’s not really earning as much as it could be, and actually, you’re losing money. So I had a plan, I really made that a priority right from the beginning. And then as my income has grown, I’ve scaled that up as well, just kind of accordingly along the way. I always keep a close eye on earnings and things like that so I’m adjusting at the right pace and at the right scale.

And it’s like you said, it’s very safe investments. These are not risky single stock investments or anything like that. It’s very secure, mutual funds, things like that. But it just makes me, again, it’s kind of going back to that point of, if I want to work forever that’s great, but if I don’t want to work at the same pace forever, or if I want to work just sporadically in the future, that’s what I’m striving for. So that’s kind of what those investments are helping me accomplish, hopefully, down the road. What about you?

Paul Jarvis: When I asked the question, I was like oh crap, I don’t want to put you on the spot. But then I forgot that you’re awesome and that you would have a plan like that in place. Do you check in on how well your investments are doing, or how often do you check in on them?

Kaleigh Moore: I get normal reports from the company that I invest with, so I keep an eye on it on a month to month basis, basically just looking at the piece of paper and be like huh, alright. And that’s about the extent of it.

Paul Jarvis: Yeah, yeah. I kind of do the same thing. Like I know I could easily get very neurotic. So I had the app on my phone that my investment company put out, and I’m like, this is just turning Paul into more obsessive-compulsive than he needs to be. So I deleted that app from my phone. ‘Cause I think for the type of investing that we do, the type of investing that we talk about, isn’t something you need to check in day to day.

Technically you should check on it probably year to year, but I think that’s too long of a space. So I get the same, I get monthly reports. I ignore 90% of the report because I’m not smart enough to understand what it means. I just look to see okay, the principal amount is growing because I’m putting money in every month automatically. And I’m just looking at what the rate of return is. So if the rate of return is crap for an entire year or two, then I’d probably contact my investment company and be like hey, maybe we can rejig the stocks versus bonds thing, or something. I don’t know. I’m just saying words now, ’cause I don’t understand.

Kaleigh Moore: Help me, sir!

Paul Jarvis: Exactly. Please re-jig the things! But I think that’s what passive investing really is, it’s just like, you put away your money into something that is probably gonna pay off. You don’t have to check in on it, you don’t even have to do things to it. And it just kind of does work for you. And I think, the other thing is, if there’s a lean month or a lean couple of months, you can hit pause on the automatic investments. It’s not like oh my god, I need to make an extra $200 because that $200 went in investments. Just pause it. Just turn it off. You can turn it back on and just remember to turn it back on when you can. But it doesn’t … It’s not a have to, it’s just when you can. It kind of makes sense to do that.

Kaleigh Moore:It does. And if you have a really great month, on the other end of that spectrum, maybe you want to invest more than you did the month before, or overall. So I think that’s just smart to do.

Paul Jarvis: Yeah, totally agree.

Kaleigh Moore: So, just kind of in closing. It’s smart to have a budget when your income is inconsistent, AKA freelancing. Sometimes it’s a really good month, sometimes it’s a really bad month. There are a lot of complexities to this conversation, but a good rule of thumb is, save money, don’t spend on things you don’t absolutely need when you’re just getting started, and you’ll be on the right path. Anything else, Paul?

Paul Jarvis: Hooray for math.
Kaleigh Moore:Yay, math!
Paul Jarvis: Thanks for listening.

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