Financial planning for a freelance or self-employed income

It’s easy to divvy up a paycheck. Freelance income, not so much. The biggest problem with making a spending plan (because we all hate the word budget, right?) is that you’re never sure how much you’re going to get, and when it’s going to show up. This is a huge problem when you’re first starting out, but it’s still an issue even after your established—while you might know your average earnings, you still don’t know exactly when the check will be in the mail.

I’ve long recommended Ramit Sethi’s concept of dividing your income into percentages, rather than amounts. This works whether you get a regular paycheck or intermittent checks from freelancing or a small business. When I work with clients, we focus on constraining fixed expenses, prioritizing different types of savings, and managing discretionary spending. But if you’re a one-or-few person operation, there’s more to consider. I’ve been very happy, recently, to discover Mike Michalowicz’s book Profit First. (Disclaimer: both of these gentlemen sell a lot of products and services. I’d suggest reading their books and being an aware consumer–figure out what’s right for you!)

How much do you need to keep the business running? As a solo, it’s very easy to send nearly all the money to your personal account, then need to loan it back when business bills come in. Even if you don’t have a lot of expensive memberships and licensing requirements (my hand’s up), you’re still going to need to replace computer equipment; update software; print business cards, brochures, etc.; and perhaps pay an accountant or attorney. To this I would add that if you’re truly self-employed, you’re also going to need to factor in the cost of benefits usually supplied by an employer: health, life, and disability insurance; a reasonable amount of paid vacation, sick days, and holidays; contributions to a retirement plan; and the space you need to work. Michalowicz suggests that these operating expenses should be no more than 30%. I might quibble with that a little if we include health insurance, and I’ve been hard pressed to keep them under 35% myself, but it’s a good general principle.

The next big bugbear after keeping the doors open is keeping the wolf (aka, the IRS) away from them. Rather than scrambling to come up with the quarterly payment two days before the end of each quarter, Michalowicz suggests putting 15% of every check in a (preferably inconveniently located) savings account. This actually seems a little high to me, particularly for a start-up where you may not have all that much taxable income, but it depends on how the business is organized, and what you’ve paid in the past. In any case, I’d suggest no less than 10% of each payment/check go to tax savings. If you don’t need it all, there’s always next year (or property taxes).

When do you pay yourself? Okay—next up, owner’s pay. Here, Michalowicz suggests you pay yourself 50% of the gross. This is the amount that I would consider available to apply Sethi’s budget percentages, although where the retirement savings comes from depends on your own business model—just be sure it comes from somewhere!

Finally, Michalowicz points out that it’s absolutely essential to set aside something—5% suggested—for profit. As he rightly points out, without siphoning off some amount, you’ll have nothing to show for your work. Although he suggests using this money to ultimately reward yourself for hard work, I’d be conservative and say this is your business emergency fund until you have enough to keep up with expenses for 3-6 months, tiding you over any cash flow crises or dry spells.

Try out the percentage system. Using specific dollar amounts, and not meeting them at times, makes you feel like a failure and a spendthrift. When you use percentages, you’re always a success.

Adventures in Consumer Complaints

English: Stearns lawn mower - Made in Syracuse...

English: Stearns lawn mower – Made in Syracuse, New York – 1934 (Photo credit: Wikipedia)

 

If we’ve spent any time chatting you’ve probably guessed that I’m fairly frugal or at least trying to be (we all have our exceptions). Provided there’s a legitimate grievance, I think it’s good financial and consumer behavior to complain about poor services or products. I also think it provides valuable feedback to the practitioner or manufacturer. I don’t mean sending a wine or restaurant dish back because you don’t like the taste—but send it back if it’s spoiled or over-salted or cold when it should be hot. I don’t have a problem with returns if the business model demands it—like online shoe purchases. Many people complain illegitimately, but many people don’t complain at all. Sure it’s a pain, and sometimes the magic works and sometimes it doesn’t, as they say. Here are two recent experiences to illustrate the perils and worth. I make the mistakes so you don’t have to.

I need a new lawn mower, as you will agree if you’ve been here recently. After five years of struggling to be ecological with a mechanical push mower, I’ve decided it’s a lot less time consuming to go to the gym than to spend two hours cutting a few inches at a time. I researched mowers with Consumer Reports and to my delight found the one I wanted available online at both Amazon and Home Depot for the same price (no driving around for an entire Saturday). However, because dear daughter has Prime, Amazon was offering to deliver it within two days (that grass is really high) whereas Home Depot was going to take about 10 days. I ordered it from Amazon. Big mistake. Amazon used UPS as a carrier, and they dumped the 91 lb. package at my gate (blocking entrance) while I was out for the afternoon. It poured rain, soaking the box. In addition, it looked like gorillas had played polo with the carton.

I called Amazon to notify them that I would not accept a damaged and soaked electronic item that had a limited warranty, since if past experience is a guide, it will go kaput days after the warranty expires. They informed me that they would not pick it up because it was a hazmat item due to the battery. While they’d send another one, this one was my problem to dispose of (!) I’m not quite sure how I’d wrestle a dripping wet and falling apart 91lb. box to whatever hazmat disposal site exists in Chicago, but you can probably imagine that the conversation went somewhat south. That was 5 days ago. They decided to make a “one-time special exception” and send out a disposal service. I have still not heard from the hazmat disposal and to frost the cake, UPS delivered the second one right next to the first one, out in the yard. At least until I called and they sent the guy back to re-deliver it to the house. Finally, upon reading the warranty, I discovered that in order to exercise the guarantee, you have to return the machine to where you purchased it, or to a Black and Decker repair center, including shipping.  I’m not going to analyze how much time I’ve spent on the phone on this one, because for a $300 item there was nothing else I would have done. But my moral for the story is that if you are thinking about buying large electronics or machines that are likely to need servicing, well, I’ll think a long time before I buy them on Amazon again.

My other experience was delightful. I’m a huge fan of Craftsy and I do feel somewhat guilty about the money I spend, although as entertainment goes it’s not much more than going to the movies. Recently I anted up for 2 more classes, and 2 days later got a promo for the same classes for a total of $25 less. I complained and received a response with a coupon for TWO free classes (worth far more than the $25), and an explanation that they guarantee their prices for 30 days if purchased through them (I had used the Apple app, where I got charged tax). Sometime ago I had complained that the cost of essential materials (over $250) should have been disclosed before the class, and they refunded the entire class fee, although I’d assured them there was no problem with the actual class. And finally, some time ago they just sent me a free class to thank me for my patronage. It’s not a publicly traded company, but if it ever is, I’d be really tempted to take a hard look.

 

Is “good enough” the secret to wealth?

Cover of "Joy of Cooking"

Normally the Wall Street Journal starts touting tech innovations three months before they’re on the market, and then spends the next three months reviewing how they don’t work quite right. Got to keep that market churning, no? But two recent articles about trends have me amused and bemused, and I think they relate to how much dough you hold onto.

 

The first one was on how people are not replacing their electronic devices as fast as they used to. Basically, after the initial kinks are worked out (and that time span is getting shorter), electronic devices pretty much work. As long as there’s not a major change in the operating system, many people can put up with occasional crashes and slow response, especially since there’s no guarantee they won’t experience those same issues with the brand new device. I can see this with my own experience with e-readers. I stood in line one Black Friday to purchase an early Nook for $100 back in, I think, 2010. It was good for about a year before I got tired of the torturous internet connection, as soon as I discovered that links and the ability to research something online that I’d just read about was one of the chief benefits of e-books. In December of 2011, I purchased an iPad 2 and I haven’t replaced it yet. I did bash the screen in, but when I thought about replacing the whole thing, I decided I could live with it by spending the $100 or so to replace the screen. It was just good enough—even though its crash rate has gone up since various iOS updates.

 

My cell phone contract is up next month, and I’m thinking over whether I’ll replace my iPhone 5. It works just fine, but if I don’t, I read that I’ll still be paying for the same phone over the next contract, and I hate to pay twice for the same thing. My desktop dates from who knows? 2010? 2011? I used to assume computers were good for 3 years, mostly because of operating systems and updated software not working on old ones, but right now I’m not seeing any problems. Still, at some point I’ll probably switch to an all Apple system.

 

What’s the financial planning point? Well, things have changed. I used to fantasize about being an early-adopter—one who was always the latest with the greatest. In fact, I lusted to be able to afford the $2,500 Macintosh back in the 80s. But I’ve seen enough computer history to have learned that 1)the price comes down in 2.0 and 2) 1.0 usually doesn’t work very well. So being an early adopter is a little bit like lighting a cigar with a $100 bill—fun and flashy but a waste.

 

Lately I’ve seen the same thing with cars. When I was a kid, many people replaced their cars every two years, the more frugal waited five, and you were driving a rust bucket heap with fenders flapping by ten years. Then cars just got better. My clients routinely drive cars that are ten years old, with the oldest one so far a 1989. Virtually every one of these people could have bought any car they wanted.

 

Besides the fact that at least some devices seem to be better made and last longer (hear that, clothing industry?), I think a lot of people (my hand is up) simply hate the research required to buy a complex device, and in the case of cars, the overwhelming feeling that you will be taken every time. .That especially, and the fact that I have a kid in college, keeps me driving my 2002 Subaru.  It’s very easy to just keep putting it off until you have a complete breakdown. Consumer Reports has an interesting scale on fix vs. replace—if the fix costs more than 50% of the value of the car, replace. When I think about the cost of a couple of months of car payments (or the sticker on a new car), fixing has won so far. For other things, check the warranty! My daughter recently picked up a $300 set of Bose headphones from the free box at her college—they were still under warranty and she had them fixed for $100 (apple didn’t fall far from the tree).

 

Finally, this morning WSJ had an article on trendy food. There’s not much I won’t eat (lima beans and jello mold), although my daughter reserves a special circle of hell for kale. But I’m always stunned by food trends. Local and organic make sense to me based on quality and taste. But pot roast out and pan-sauced chicken breasts in? No one eats turkey tetrazzini anymore? People aren’t ready for Moroccan sauces?  Jeez, if it tastes good, it tastes good, and I don’t care if my mom used to cook it in 1957. It always stuns me that when I make a moron-level cake from the Joy of Cooking, people rave about the taste. In fact, lately if I simply make a cake from a box, people rave about the taste because all we are ever served nowadays is ersatz cake product from Sam’s, Jewel, or Costco. Years ago I was stunned to learn that éclairs never have actual custard filling anymore, because they’d have to be kept chilled. I never look at Facebook that some friend hasn’t linked to the latest hype on what we should eat, what precise method of exercising is best, and please god save me from all the vegan mumbo jumbo.

 

What I chiefly object to is that once it’s trendy, it becomes way more expensive. Ask my dog—she USED to enjoy chicken wings. We have no idea what’s seasonal anymore (hint, it’s usually what’s cheapest) and cooking shows are entertainment not instruction (except for my beloved Jacques Pepin).

 

Okay, before I rant on for several more pages, let me summarize the financial points I’m making:

 

  1. Save yourself time, money, and aggravation by being slow to adopt the new
  2. Fix it when it’s broke, as long as it makes financial sense
  3. Try to resist hyped trends. They’re making a fool of you.
  4. Don’t keep up with the Joneses. They don’t have any money saved for retirement.

Grumpy cat will now return to her regularly scheduled programming.