You won’t go broke with a financial cushion.
I get it – we are not a society of money savers. We like to spend, and we like to live pay check to pay check, or close to it. We are our grandparents’ worst nightmares.
But here’s some of the best advice I can give you if you’re dreaming of being your own boss: learn to spend less than you earn. Always. For the rest of your career.
Now, this isn’t just good advice for freelancers; it’s good advice in general. But here’s why you need money in the bank if you’re going to be an independent consultant.
Paydays are few and far between.
When you’re a consultant, projects can take a while to complete. Sometimes they drag on through no fault of your own; sometimes you’ll find that your client is taking forever to gather the information you need; or your client has to go on leave and find somebody to stand in for them and it takes a long time. There are a million reasons why your client won’t finish your project when they said they would. And none of them are within your control. It happens a lot.
And even in those blessed contracts when everything goes according to plan, you can go weeks or months longer without a pay check than you would have as an employee. It’s just the way consulting works; our projects take time.
So you need to make sure you can tide yourself over for those long periods when you’re waiting for the payment.
It can get stressful.
And then… then there’s the prospect of a dry period. They happen. Again, through no fault of yours, you can end up without enough contracts to pay all your bills. Sometimes a project falls through; sometimes the economy goes a bit sour and it affects your sector; sometimes awful things like pandemics happen.
I have often said that when you’re a freelancer, life’s highs are higher and the lows are lower. The same is true of the financial side. The upside is without limits; there’s no employer capping your rate or telling you that you’ve hit the max for your pay scale. It’s a wonderful thing, for those of us who have that entrepreneurial spirit.
But the downside is lower. When there’s not much work on, nobody is paying you. Honestly, the only thing I really miss about my old government job is that somebody used to put money in my bank account every two weeks whether I had worked hard or not. It was a little miracle, when I look back on it.
But no more. The money is there when I invoice someone and when they get around to paying. And sometimes, well, there aren’t as many invoices going out as I would like.
Not that I’m complaining.
Six years into my freelance consulting career, I can honestly tell you that I have never been without work (he says touching the wooden coffee table.) I have been busy and, by my own standards, successful.
But some years are better than others. Like a lot better.
So how much cash should you have in the bank?
Sit down because this might freak you out.
You won’t go broke with a year’s worth of cash.
I think you should have a year’s worth of living expenses in the bank, in some kind of easily-accessible financial instrument (cash, short term deposits, etc.)
I’m not talking about a year’s worth of lavish purchases, vacations in Ibiza, or anything like that. I’m talking about one year’s worth of basic mortgage or rent payments, groceries, basic clothes, basic transportation, and whatever else you need to get by. That’s all you have to do: just get by while you wait for some new work to come in.
And that easily-accessible part is really key. So not the equity in your car; not the value in your house; that doesn’t count and it would be imprudent to try to liquidate those in times of stress.
So start putting money in the bank. Start a lifelong practice of spending less than you earn. And when you do? You will be amazed at the peace of mind it brings you. And you’ll be amazed at how you start amassing wealth.
You see, I don’t really think you’re going to need that money. I don’t think you’re going to go a full year without work.
Cash is the universal solvent.
But I do know from experience that when that day comes when you’re ready to leave your day job, the confidence that having cash in the bank gives you will be the single greatest thing you can do to manage stress.
Imagine when your relatives try to tell you that you CAN’T be a freelancer, for heaven’s sake, and you look them in the eye and tell them you could quit your job tomorrow if you wanted to, and still have cash left over.
Having cash in the bank will do amazing things to your negotiating skills, too. Don’t believe me? Try negotiating a contract when you’re broke. You’ll settle for virtually anything. Now try it knowing you don’t really need the gig, and watch your confidence and your requirements go through the roof.
The single greatest influence on how well you can negotiate is how little you actually need the job.
So start saving today. I know you’re not quitting your day job for a while yet, and that’s great, but start putting cash aside like this week. Open a savings account if you don’t have one. Talk to your banker about the best short-term savings instruments. Start feeding that account. And watch your peace of mind, and your confidence in your future, start to increase with every dollar.
I know it won’t always be easy. Saving is hard. But you’ll be so glad you did.