Javaddicts

One of the things that differentiates freelancing from a day-job is the fact that you don’t get your money on a regular basis. While it’s not a problem to get used to this fact, you gotta adapt your financial habits to this fact. Some should be common sense, but these things tend to get more important once you start handling stuff like taxes, insurance and the like by yourself.

So, welcome to the first part of my “Freelancing Adventures” series. Since there’s a lot of different stuff that becomes important, apparent, or just obvious once you’re a freelancer, I thought it’s best to separate these into nice and easy posts.

This one deals with finances. While you’ll have to deal with finances in any case, whether you’re an employee or a freelancer, some things are a little different.

• Plan your start-up costs

  When you quit your day job to become a freelancer, you’ll most likely have some start-up costs. These may not be much when seen separately, but they add up. Depending on what you have you’ll most likely have to calculate for new hardware (I know I did), maybe an office, stationery, marketing (website, business cards, etc.). The new hardware might be the costliest thing in this list. Having such a list ready gives you an idea on how much money you should have saved up to begin your freelancer career.

  Don’t be too optimistic. Eric Sink said something like this in his book “On The Business of Software”: “Write down all your costs (income and expenses) for the next year. Refine the list until you have a sense of it being realistic. Then multiply the expenses by two and halve the income.” After doing this you’ll have a list that’s deprived of any optimism that might’ve been left in you. Though his book deals with founding a product-driven software company, this example is easily applicable to you as a freelancer. Your income also depends on paying customers. You might not have to invest in employees, don’t need something like a year or two to develop your product, but you definitely need some time to get things going.

  The resulting list shouldn’t scare you. If it does, maybe you should think again, if it’s the right thing to do. The more money you have saved up until now, the better and more comfortable your initial bootstrap will be.

• Plan your monthly expenses

  It’s very important to be aware of what you have to pay and who’s to be paid for what. This is not to be seen as a to-do list for payments, but rather as a calculation of how much money you’ll have to spend, and therefore to save up. While you can’t plan everything in advance, you’ll at least get a rough idea of your fixed costs, and can maybe add a little for stuff like books, hardware, your next barbie, and stuff like that.

  Put everything in here you’ll have to pay on a regular basis: rent, insurance, phone/internet, car leasing, magazine subscriptions, your Basecamp subscription, to name a few. I tend to add some money for food, electricity, my mobile and general household stuff. It will give you a good idea about how much money you’ll have to have in your pocket for the current or next month.

  I use an OmniOutliner sheet to keep track of my expenses. An Excel sheet or a simple text file will do, too.

• Keep track of your bills and payments

  Whenever I write an invoice for a gig, for rent or other stuff, I put it into another OmniOutliner sheet. I add the invoicing date, a number for the invoice and, once it’s paid, the payment date. This way I can keep track of what invoices I’ve written and which have been paid when (important for the tax office). If you like to automate this stuff you can use tools like Blinksale to send out your bills.

  This list also gives you an idea of how much money you’ll have at hand. This of course implies that your customers are happy to pay you on time. I’ll get back to that later.

• Saving up

  Don’t spend all your money! This might seem obvious, but once you get your first payments it’s tempting to buy that new MacBook or that big-screen TV you always wanted. Think twice before you do it. If you’re sure you can afford it, go ahead, big spender. But otherwise you might be better off saving some of the money. You might need it someday.

  Imagine that you don’t find a new gig for two or three months. You need some money then right? As a rule of thumb the money in your savings account should be enough for you to live for three months without a gig. Whether you wanna do a trip to Australia in that time (I know I do ;) or just want to spend time with your kids or that new book about the coolest new technology, is up to you. The fact is that you’ll need money to pay your fixed costs. Your landlord won’t care if you don’t have a gig right now, and neither will most likely your phone company. So you better start saving right from the beginning. It might take you some time to have enough money in your savings account, but it’s definitely worth it. Having enough money in the back pocket will not only allow you to live without a gig for some months, you can even take that time off, if you want to.

  Regardless of what you wanna do with it, it doesn’t hurt to have enough money on your savings account.

• Taxes

  This one goes hand in hand with the last item. You don’t get all your money for free. Your tax office is gonna wanna have some of it. Keep track of how much money you’ll have to pay and put it on your savings account. If you have to pay taxes annually this is a nice way to at least let that money work for you over the year.

• To buy or not to buy

  Whenever I’m in the mood to buy something, I browse some online shops, fill my shopping cart, and usually proceed to checkout. That’s the moment when I tend to have second thoughts. Do I really need a new hard drive? Don’t I already have enough pairs of shoes? Do I really need another book about Rails? While the answer to the latter question usually is “Yes”, the other questions are more than valid.

  The point is that I tend to think twice about what I buy. While it’s not always good to never buy anything (if you spend money on something valuable for your business, you can deduct it from your taxes, and the less money you’ll have to pay your tax office), it never hurts to think about an investment. The bigger it is, the more you should think about it. If you come to the conclusion that you don’t really need it right now, put it on a reminder for later, and stop thinking about it.

  Another trick is to let it settle for a few days. Put your errand on a piece of paper, put it into your inbox (or somewhere else you’ll find it later on) and stop thinking about it. If it’s still in your head after some days, go ahead and buy it. If it doesn’t: money saved. It will come back into your head once you really need it. If you’re worried that you might need it someday, and it might to late by that time, then maybe it’s a good idea to buy it anyway.

  But the point is to think twice about stuff you buy. Spending money is normal and part of a healthy business, but how you spend it should be thought through.

• Keep a financial log

  Write down what you spend. That way you always have a back log of what you spent and when. You don’t need to write down every Coke or pack of cigarettes (you should rather give up both bad habits ;), but every investment that exceeds a specific amount of money. Whether that’s 10 bucks or 20 is up to you. The higher the amount, the more coarse-grained, the easier it is to lose track of those small payments that easily add up to a few hundred bucks. The smaller, more fine-grained it is, the more work there’s for you. Work needs time, and time is money. So you’ll have to find out what works for you here.

• Don’t freak out

  If you don’t have enough money to pay your bills, there’s no need to freak out. You’re not alone for sure. There are some things you can do. See what payments you can postpone. Ask your customer if she can give you some money in advance, borrow something from your spouse (I recommend not borrowing money from friends, unless there’s no other way, and both of you are aware that you might not be able to pay it back right away) or family. Or maybe you can live with your checking account being in debt for a while.

  For the most part, there’s always a way out, even if it means to get a new day-job. When you’re out of luck money-wise, it’s best to have a realistic view at all your options, even the ones you don’t necessarily like. Living by your principles or keeping your pride is not always best in that kind of situation. It’s not weak to ask someone for money or help, if you’re in trouble.

• Don’t count on money you don’t have

  ‘Nuff said, although it can’t be said enough.

Handling finances is not easy, but nobody’s gonna do it for you. While you can let an accountant handle your taxes, she can’t give you the money to pay them. You’re in control and you better take over the stick. Otherwise you might be out of luck, and out of money someday. Personally I don’t need everything planned out, but it doesn’t hurt to have a rather realistic view on your finances. Having to pay money for stuff is not the scary part (people are paying you, anyway), it’s rather the thought of not having enough because you spent it on something you don’t really need.

And for the record: I still enjoy spending money on shopping trips or while going out with friends.

If you have more tips on how to handle finances, feel free to leave a comment.

Technorati Tags: getting real, freelancing, finances, money

This entry was posted on Sunday, July 16th, 2006 at 4:30 pm and is filed under Freelancing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.