The graphic above, dollars and dates removed, represents what pay can look like over the course of a year. A normal person’s income (based on steady, regularly scheduled work) is a straight line, more or less, with some getting occasional bumps for bonuses or extra weeks in a month.
Freelancing work is not always steady. It can jostle up and down like a roller coaster. Bills, meanwhile, are more geared toward people with a steady paycheck. (In fact, here in the state of Florida, since I didn’t have steady income, I had to prove that I had assets on hand that could cover my entire one-year apartment lease!) And bills will keep coming, regardless of what your customers are doing. So how do you maintain a reasonable standard of living and your sanity when bills are steady but income is not? The tips below are not in any particular order, but a combination of all of them will help you weather budget storms better than hoping for a big lottery win by the end of the week.
Be Clear About Your Payment Terms and Budget Accordingly
I’ve set my invoicing up for “NET 30″ payment terms, meaning I expect to be paid the full amount of my invoice within 30 days. If you need to be paid more often, let your customer know that, but understand that their billing cycle might not be set up for that. Unfortunately, they usually have the leverage in those negotiations, but if you have tips for getting paid more often, I’d love to hear them.
The second part of this equation is to arrange your bills with the expectation that it will take 30 days to get paid. I got bitten by this assumption with one customer because they took the full 30 days, whereas most of my other customers sent checks within a week or so. If in doubt, ask your customer how they handle their accounts payable.
You need two budgets, actually: one that establishes a plan for how much it will cost for you to live in a certain place at a certain level of comfort, and another budget that identifies how many hours you need to work to pay for that lifestyle. If you discover that you can’t make the budget, you have to dig into savings, readjust your assumptions, raise your rates, or find more customers.
Set Money Aside
When a big payday does come in, you need to throw as much of that money into savings as you can. Your savings needs to be there to cover emergencies, taxes (especially if you file quarterly, as I do), bills in months where cash is tight, a well-earned vacation, and maybe even retirement.
This is easier to do with some collectors than others–in fact, now that I’m typing this, the only folks I can think of who will be more flexible about payment options are doctors, friends, and family. You might be able to renegotiate and refinance some of your loans, depending on what your bank or credit union or credit card is offering.
Pay Off Credit Card Bills
Credit cards are the high-roller bills with the highest (legal) interest rates. If you have multiple credit cards, consolidate them or pay off some of the smaller balances. Do not close the accounts! One trick is to pay off those small balances to give yourself some demonstration of progress. Another is to go after the cards with the highest interest rate because compound interest can eat your lunch faster than you can. Paradoxically, keeping an account open but with a zero or low balance is better for your credit rating. I’m down to one active credit card, one card I don’t use, and a couple of department store credit cards, which I keep at low or zero balances. When in doubt, talk to a reliable credit counseling organization.
Keep Paying Down “Good Debts”
What the heck is “good debt?” These would be things like student loans and mortgage payments–things that provide equity. I paid off my student loans from grad school (UCF ’02) just this year, four years early, by trying to pay a little bit more than the monthly minimum. You can do that with any bill, actually.
Cook Your Own Meals
This shouldn’t surprise you, but eating at home is cheaper than going out. Even making your own meals with fresh ingredients is cheaper and usually better for you. If you don’t know how to cook, start with a for-dummies cookbook and start acquiring basic utensils, pots, and pans so you can broaden your personal skill set. Look for bargains, BOGO, and coupons.
Don’t Use Automatic Bill Pay
Depending on your income stream, automatic bill paying might not be for you. Checks that you were expecting might be delayed or might not hit when you expect them to, but you can be assured that cable companies, cell phone companies, and utility companies will debit your account on the same date every month.
This covers all forms of spending, from frivolous purchases to going out to vacationing. There’s no better way to pay than your own hard-earned cash. Debts can also increase your level of stress, which can decrease your ability to concentrate and work effectively. While lower debt is a good stress reliever, it’s also a good idea to identify outings, play dates, and other forms of entertainment or relaxation that can be done for low to no cost.
Freelancing is not just an alternative form of work, it’s a fully integrated lifestyle that requires a lot more thinking, balancing, and action-taking than a more steady job. And if you’ve got a steady-paying freelance contract, that period of steady income is an excellent time to stash away as much cash as you can for those times when the steady work is not there.
Best of luck in 2015!