

Living on Last Month: For Freelancers - andy_adams
http://andyadams.org/living-on-last-month/

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nimblegorilla
It's better than nothing, but the OP's simplified budget leaves a lot to be
desired and could even be quite dangerous to a freelancer's savings and mental
health.

Spending the previous month's income one month after it hits your bank account
sets you up for a roller coaster of feast and famine that is little better
than living paycheck to paycheck. There was nothing in the article about
saving for the future.

A more effective budget would take a rolling average of your last 6-12 months
income. Subtract at least 25% of that for savings (if you can save over 50%
even better). The remaining money can be pro-rated for a reasonable monthly
income. When you have a windfall month (such as early/late paying clients
happening to fall on the same week) then put all of that extra money into
savings.

~~~
andy_adams
I agree the budgeting method isn't complete. When I write, I always debate
whether to delve into related subjects. I decided to keep it simple here.
Don't treat my method as the end-all!

~~~
jf22
This budgeting method is actually really dangerous.

I'd take down your blog post and rethink how you budget your money.

~~~
sanderjd
This is overly harsh. The article may not be the absolute best advice, but it
is probably illuminating to people who are already doing a worse job, living
month-to-month rather than next-month-to-next-month, and it's completely
harmless to people who already have a better system (hint: spend _less_ than
last month's income!).

~~~
nimblegorilla
This article provides the illusion of a real budget.

Month-to-month is actually better than last-month-to-month. A person living
month-to-month would at least stop spending money if they had a bad month. A
person living on last-month's income would continue spending money and go into
debt.

Freelancers depend on FUTURE income. A "budget" that encourages you to spend
all of your money regardless of future income is extremely messed up.

~~~
andy_adams
> A "budget" that encourages you to spend all of your money regardless of
> future income

This would only be true if you don't think _at all_ about this month.

If someone says "I'm making no money this month, but I'm just gonna spend last
month anyways" I don't think any budget is going to help them.

I appreciate your feedback, I just didn't think anyone would take "living on
last month" to mean "spend all of your money, no thinking allowed".

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jasonkester
This is terrible advice, but it took a while for me to process why it's such
terrible advice.

I think the big flaw is in the assumption that you can spend an entire month's
earnings in a single month. If you ever find that happening, it's a _huge_ red
flag that you're doing things wrong.

A much better way of looking at finances is to adjust your lifestyle so that
you require a tiny, insignificant fraction of your income to survive. As
developers (and freelancers), especially as a young one, this is quite easy.
Cheapest apartment available, same old car from college, roomates, no
television or electronic anything, etc. Fit your life into $20k/year.

If you do that (and if you're fresh out of college you'll have just survived
five years of doing exactly that), it's pretty hard to get yourself into a
spot where money is an issue if you have any sort of professional job. Even if
you have the roughest year imaginable and only book $40k worth of work, you'll
still sock away $10k into savings.

The author touches on the concept of having a full year's worth of living
expenses in the bank, but immediately dismisses it as if it were some
impossible ideal that nobody could ever achieve. But he could, in a single
year at the rate he seems to be billing, if he really wanted to.

And there's no way of explaining just how liberating it is to have that sort
of personal runway. If you don't have it, you need to drop everything and make
sure your only goal in life is to get that $10k-$50k pad into your bank
account.

~~~
cecilpl
Indeed! This line especially stuck out for me:

> Your spending decisions should be tied to the money that’s already in your
> bank account, not to the contracts you’re signing right now.

No! Your spending decisions should be based on what you need to buy, and you
should work to reduce that as much as possible.

My wife and I spend $35k/year and live very well. We currently make about
$110k after taxes, but we would spend exactly the same no matter whether we
made $40k or $400k. We have figured out that happiness isn't bought with
money.

The other nice thing is that every year we work, we bank two year's worth of
living expenses. At that rate it doesn't take long until you don't need to
work for a living any more.

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mgkimsal
"Only spend what you made last month".

It actually seems like extremely poor advice, conflicting heavily with the
situation described just a few paragraphs earlier.

=============

In January, you collect $4,000 -> In February, you can spend $4,000.

In February, you collect $5,000 -> In March, you can spend $5,000.

Simple, right? Wonderfully so.

=============

How about... figure out what your basic needs (and some wants are) on a
regular basis, and if you can't bill anywhere even close to that, find another
income source that will support those needs?

Just because you earned $4k one month, then $5k the next month doesn't mean
you should be spending those amounts the next month. While these aren't the
OPs exact words, it's the impression that can be gleaned. "Oh, I earned $5k
last month, I can spend $5k this month".

Hrmmm... you should be savvy enough to also understand that you might have $0
billable this month meaning that, in 3 weeks, you'll have $0. Following that
"last month/this month" strategy, you'll be able to spend $0 next month... not
a winning strategy.

I'm glad the OP woke up to some budgeting needs, but the way this advice is
presented seems, in fact, dangerous.

Figure out what your bare minimums are - cut your spending to bare minimums
while you work and collect income. During this time, build up enough reserve
to have a minimum of 3 months of savings. Aim for 4, then 5, then 6, then keep
going.

Check risk tolerance with other family members. If they're not on board with
this, go get a job earning what you need in a somewhat more stable capacity.

I can only assume OP is rather young. For someone to finish a project, work on
their own projects for months, then 'take a vacation', then 'come back' and
somehow be surprised that there's somehow not just a bunch of client work
waiting to be done... this is extremely naive, and something I typically only
see in really younger folks.

Again, glad the OP is getting savvy about budgeting and cash-flow, but take
take this budgeting advice as gospel.

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chasing
I mean, you took three months off, essentially -- _knowing_ that you'd have no
savings at the end?

I'd suggest this, which I think has been said elsewhere in this thread:

Pay yourself a monthly amount and don't touch the rest. And base that amount
on a figure that's somewhat less than the average of what you've been pulling
in for the last year or so.

Have a crazy lucrative month? Great! Into the "business" account it goes --
you get paid the same amount. Have a crap month? No worries -- you get paid
the same amount.

You've got to figure out techniques to smooth the unpredictable into the
predictable. That's how you remain sane as a freelancer. And I've been
freelancing for basically the entirety of my career, since the late 90s.

Also: Never put yourself in a position where you know you're going to have no
savings. That bit about taking three months off and having no savings at the
end. Ugh. Personal projects are great. Vacations are necessary. But as a
freelancer, you have to earn those things.

~~~
andy_adams
> I mean, you took three months off, essentially -- knowing that you'd have no
> savings at the end?

In retrospect, it was extraordinarily dumb! I hope that was clear from the
article. The point I was trying to make with the story is that when I had a
vague pool of "savings", it felt like I had a bigger cushion than I actually
did.

Kudos to you for making things predictable. I would wager most people don't
plan as well as you do. My hope is this will be their first step to
stabilizing their budget.

~~~
chasing
I hear where you're coming from, but this isn't a stable budget. It's living
in two-month feast/famine cycles rather than one-month ones.

I would wager that most _professional_ freelancers do plan as well as I've
described. And by that, I mean people who are into freelancing for the long
haul and not just between full time gigs.

And, to be totally honest, I actually don't structure my finances like this
(although I'm a very long-term freelancer). I have my own techniques. But I
would consider this to be the baseline for not going insane and/or getting
kicked out of one's apartment.

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desarun
I'd go a step further here.

If you can, aim to save at least half.

And _never_ charge on a per-project basis. Bill a daily rate, 1-2 week
sprints, demo, rinse & repeat.

It's much easier for expectation management & rapidly adjusting requirements.
Which is every requirement.

~~~
neals
I like that last part, I'm going to start doing this.

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propstratsux
Budget 101 for freelancers is to think and remember you are running a business
effectively, and always consider the two - personal and business cash flows
separate. Pay yourself a monthly salary that pays all bills plus a little
luxury plus allows a small amount to be banked and saved each month, with the
end aim of a personal rainy day fund that equals 18 months of that current
salary level as a minimum. For the business - don't turn work down - if need
be pass work onto colleagues friends and trusted third parties - always say
yes you will help your clients even if not personally doing the work. Retain a
healthy amount of cash in the company to weather drier times, unforeseen bills
to the company, and potential future growth (where you hire additional
resources top help achieve more and bigger projects).

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amwelles
I think Rule #1 is far more important: Give every dollar a job. Basically,
when you get money, decide what you are going to do with it _right away._ If
that means saving for an emergency, like a lack of inflow, then it should go
there.

I've been using YNAB for a couple of years now, and it's definitely changed
the way I think about money, but I would use it much differently if I had the
variable income of a freelancer. YNAB actually wrote an article[1] about
living on a variable income which is quite informative.

[1]: [http://www.youneedabudget.com/blog/2011/slaying-the-
variable...](http://www.youneedabudget.com/blog/2011/slaying-the-variable-
income-dragon/)

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vlucas
I am currently a full time freelancer/consultant. The best thing I've ever
done is to put myself (and my family) on a flat, fixed budget. All the money
from my work goes into my business account, and I write myself a check for our
personal account on the 1st of each month that's always the same, just like a
salary. This is the trick to making a variable income feel like a stable one.
Just pay yourself a salary and ignore the rest. At the end of the year,
chances are you'll have a good bit saved up that you otherwise would have
spent if your budget changed every month like the author suggests.

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sbjustin
"Only spend what you have left." \- Terrible habit to start. This should go
into savings.

Here's solid budgeting advice: If you don't have 3-6 months of savings set
aside, cut out unneeded items such as TV (use 10/m netflix), starbucks, eating
out as much, etc. Put all of this into savings immediately and forget about
it.

Also, read about this:
[http://www.investopedia.com/terms/p/payyourselffirst.asp](http://www.investopedia.com/terms/p/payyourselffirst.asp)

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woohoo7676
I had heard good things about YNAB, so I purchased it a few months ago. I can
see how it could work really well for some people, but reconciling it with my
finances was a little too much ongoing work for me (also the UI was somewhat
sluggish for me).

Good article though, I definitely agree with your points on how freelance
budgeting makes a big difference. Transitioning from a salaried job can be
tough, but you really do need to change your strategies/mentality for managing
finances.

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mrfusion
Remember to put aside half for taxes too :-(

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ftpaul
This is one of the best articles that I ever about freelancing . Thanks for
sharing!

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espace
This was great honest advice I needed to read. I'll check out the budget
software too. Thanks Andy.

