Last weekend, I grabbed coffee with one of my girlfriends, who is considering trying out her freelance career. She asked me a few questions about how I prepared and what I would have done differently. I’m particularly grateful for a few things I did to prepare for my freelance career. Please note that I am not an accountant, and this post is a behind-the-scenes into how I planned to make the jump!
For some context, you might want to read more on this post on I became a freelancer. When I quit my full-time job, I did not have a brand name or even a website. At my full-time job, I was working about 14-15 hour days, so I only had time to work on my side hustle on the weekends (hence, #SMARTERSATURDAY!). Even though I quit my full-time job pretty suddenly, I used the year leading up to it to prepare.
Start A Separate Bank Account | Build It Up
Any money that I made from my freelance side-hustle, I put in a separate bank account. I wanted to see how much income it generated per month, and this bank account clarified what came in and what went out. I did not pay myself out of this account immediately. Instead, I focused on building up about six months of living expenses in it. These savings acted as a cushion in case business was slow when I went full-time, but it also allowed me to set a fixed income for myself.
Follow A Payment Schedule
Once I built up my savings and analyzed how much money I brought in on average per month, I set a fixed amount to pay myself every two weeks (like a regular job). If business slowed for a month, I could use my cushion to maintain my same monthly income. On the reverse, I gave myself raises after my monthly income increased! Results-based raises! Yaya!
Similar to a retiree, I have become accustomed to living on a fixed income (kind of). When I first started, I was not making much money. To avoid debt, I significantly reduced my expenses, which included going out to eat less, buying fewer clothes and things for the home, and eliminating any superfluous expenses. I realized that I could not have or do it all. If working for myself was my priority, then reducing costs was a choice and lifestyle decision I was willing to make. I do not view it as a sacrifice because I found the whole process quite liberating.
I use Mint to track my personal accounts, and Quickbooks for self-employment to track my business expenses. Each Friday, I go through my accounts. Reviewing my expenditures made it pretty easy to eliminate superfluous expenses. Just for perspective, for most of 2013-2014, my average monthly expenses were less than $1000 (including rent, utilities, food, etc.). I split rent and utilities with my boyfriend. Every few months I would buy new clothes or things for the home, but those expenses were not even close to happening monthly.
I’m a big fan of Ramit Sethi’s I Will Teach You To Be Rich and his financial philosophy. He advocates for paying off your debt before you start focusing on saving. When I first started thinking about becoming a freelancer, I had about $10k of student loans from my master’s program, but no credit card debt. I decided that I would focus on paying off that student loan, as I did not want it to loom over me. I paid off the loan as soon as I could, then focused on building up the savings to set my regular payment schedule.
Sethi also discusses budgets (or lack of them) and diversifying income sources – two things that I’ve found very helpful in my career. With budgets, he’s surprisingly not an advocate for it, but instead, he encourages people to find the one thing that they want to spend money on, and then not spend money on other things. He gives an example of a guy who spends over $20k per year on restaurants, but then his living and other expense are very reduced. This philosophy along with Kondo-ing has helped me tremendously in finding those things I value.
In my business reports, I have shared details on how I’m slowly working towards diversifying my income sources. This diversification will be my focus for 2016.
So, that’s how I financially prepared myself for my freelance career. Following a payment schedule and reducing my expenses are probably the two most significant factors. If you’ve taken the jump to full-time freelance, how did you prepare? What advice would you give someone considering making the jump?