When that big check I got last month bounced, I did more than freak out--I catastrophized. I wailed and gnashed my teeth and complained to all my personal friends about it. I was in a sour mood for a while.
And then the question came to me: What if I had plenty in my account to float myself until the check cleared? How would I have reacted then?
Let's be honest: I'd still be upset. But I wouldn't have felt like I'd blown out the nerves in my fingertips and my back with panic. It would have been an inconvenience instead of a crisis.
Managing it is number one barrier to successful freelancing, and I hear it from coaching clients and colleagues alike. It's also the primary way that economic stability is different for freelancers than it is for full-time employees. After all, when you're employed by someone else fulltime, your finances are structured around that twice-monthly infusion of cash. You run things down to the bone and make purchases secure in the knowledge that the cash will be there Tuesday. And if you don't quite have enough, it's okay--throw it on a credit card and pay for it in a few days.
As freelancers, it's a totally different ball of wax. That's why in this challenge, we'll share several opinions--professional and otherwise--about how to deal with the problem of uneven cashflow. Today, I want to start by laying out the mind shifts that have to take place to spend--and save--differently as a self employed person.
Mind Shift #1: Self-employment isn't just full-time employment on steroids.
Freelancing is so completely different from full-time employment. You have to do things yourself that in the past required one phone call then an afternoon complaining to your cube-mate. (When my Internet went out this weekend, I found myself spending my day off waiting for the Internet-repair guy to show up.) What you get paid for is different. (Hint: It's not your marketing, admin or the waiting around for the Internet-repair guy.)
So why wouldn't finances be different too? It seems obvious, but it's often bewildering to new freelancers, myself included. However you've structured your finances in the past, don't assume you can just make self-employment look the same. Eventually, you may get to the point that you can pay yourself a salary on the first and the 15th, but until then, you have to structure spending, payments and funds allocations differently. You can't run your account down to zero and hope the check shows up the day it's due--if you even know when that is.
Mind Shift #2: Credit is not your friend.
Given the current credit crisis, this may not be a surprise, but there are many freelancers who start their businesses with just their determination and some plastic. Do it if you must, but I argue that the best way to drive yourself out of business is to run up external debt.
Think of it this way: You spend on your credit card to float yourself till cash comes in. You end up spending $500 for groceries and gas and whatever else. Even if you pay just the minimum on that, you've likely added another $50 to your budget for the next several months--or you've added $510, $550 or even $1,000 to your expenses, depending on how quickly you pay it back.
As a freelancer, the name of the game is to keep your expenses consistent, knowable and productive. When you're constantly spending and paying down debt on credit cards, you're messing with a basic of your economic stability. And you've added a very large payment category that would be better spent towards savings, office equipment, lunches with potential clients or classes.
Mind Shift #3: Welcome to the United Bank of You
Despite last month's financial freak-out, I didn't resort to credit cards to float myself until the check arrived. Why? Because now I float myself my own credit, in the form of accruals in an online high-interest savings account.
A better approach than relying on an external company to provide credit is to keep money around, in your own checking, in your savings, in online savings accounts or elsewhere. I'm sure people will argue that using credit is an easy way to keep your finances stable by avoiding feast-and-famine cycles. But a better way to do that is to be constantly marketing, constantly selling, on top of invoices and diligent about putting a little away each month. That way, you aren't increasing your monthly expenses and you're keeping your finances stable.
Mind Shift #4: There are lots of ways to say savings.
In business, there's such a thing as an operating budget, prudent reserves and accruals. For freelancers, those are all ways to say savings. Here's why--it's one of the most important things in business survival. Here's what they mean:
- Operating: An account you create for yourself that has money in it that's allocated for nothing but keeping your business operating, no matter when the next check is scheduled. I call this my "cashflow" account.
- Prudent Reserve: This is money you plan not to touch unless there's an emergency. Even if there's $5, it's $5 towards financial stability.
- Accruals: Need a new office chair? Want the new version of MS Office? Know your computer or printer is on its last legs? Stash the cash in these funds to keep your business in business.
When I was starting off, my only goal was to cover my monthly expenses. It was a worthy and noble goal. But I learned quickly how insufficient it was if I hoped to make freelancing a sustainable prospect. There are always expenses you weren't expecting--always car, computer or other repairs that need making. And then ther's the need to float yourself money, to cover expected trips to the doctor, or to cover bills you forgot about.
I can guess that many of you new freelancers are blanching at the news. I don't say this to scare you. I say it because changing the way you approach your finances will help you, even if it scares you at first. You don't have to do it perfectly. You don't have to be hard on yourself about it. But you can set an intention, fold it into your business plan and marketing strategy and make a try at it every day. That's how you'll have the money.
What mind shifts did you experience when you went from permanent to freelance work? I'll share them in a later post if I get enough.
Photo by Howdy, I'm H. Michael Karshis.