Artwork donated by Pati Nagle. 

The Freelancer’s Survival Guide:  Money, Part Four

Kristine Kathryn Rusch

First, thanks to everyone who responded last week. I very much appreciate the fact that we’re talking again.  Since I mentioned that the money topic silenced everyone, I received a lot of comments (see the extended comment section on the post, Money Part 3) and several donations.  Much appreciated.  The e-mail is still relatively silent, but I think those questions are waiting until I’m done with the money topic.  I hope anyway.  Either that or I’ve scared you so badly that you’re not willing to ask any questions for fear of the answers I’m going to give.  

Second, Rick Dickson brought up the topic of credit cards in the comment section.  I answered, and he clarified his point, which is a good one.  Look at those comments if you don’t look at anything else.

But the reason I mention Rick’s credit card comment is because of the week I had.  This past week is the reason freelancers have credit cards.  Last Wednesday, moments after I finished writing Money Part 3, I logged onto the internet to download a few songs from iTunes.  It had been nearly a year since I downloaded songs—I still have dozens of CDs to put into my iTunes files—but there were a few songs that I’d heard and wanted on my iPod.

I couldn’t download any songs without upgrading iTunes.  Which I tried, but the system wouldn’t let me do so without a security patch.  You can see where this is going. After getting the patch, iTunes still didn’t work and I had to download a few more things, then a few more things—and because I was tired and not thinking and just wanting my songs, dammit, I forgot I was working on an already precariously overstuffed laptop, which finally gave up. Right then and there.

(This lovely computer meltdown is the reason I’ve been relatively silent during the week.  I have a number of posts I need to make, including recommended reading, recent publications, and more, but my backup computer is so old that it would shut down my web browser every time I approved a comment on the website.  So…I’ve got a lot of catching up to do.)

Fixing the poor old laptop is relatively easy, although it doesn’t solve the iTunes problem or any other upgrade problem.  But…we’d been planning to get a new laptop for four years now, and we figured this was the time.  We had money budgeted, but not entirely saved for it.  Still, we would be right near the computer store on Monday, so we decided to buy.

With a credit card—which will be paid off in its entirety in about three days, when the rest of the budgeted money arrives in the mail.

But there are times—and we’ve had maybe a dozen in the past few years—when the money’s not quite there as the emergency happens.  Credit cards cover the problem until the money arrives.

Here’s the key point about credit cards.  It’s the same point Rick makes:  Do not use them unless you can pay them off in full.  Otherwise, find another way to deal with the problem.

Sometimes there is no other way, and you can’t pay off the card immediately.  Go over your budget, add credit card payments in excess of the minimum to your monthly expenses, and try to pay the damn thing off as fast as you can.

Another key to credit cards:  Make sure your credit limit is low.  Also make sure that you have only one or two cards.  With only one or two cards and a low credit limit, you can’t get yourself into deep financial trouble in the face of a true emergency (like spiraling medical bills).  You won’t be tempted to pay with the card, and you’ll save yourself a huge disaster.

If most Americans use their available credit, they’ll owe more than their car is worth on credit cards alone. The payments for those credit cards will exceed the mortgage payment.  You don’t want to be in that situation, so cut up cards 3-10, keep the two with the lowest credit limits, and pay them in full when you do use them.

Okay, there.  That’s the credit card lecture, which I am going to follow myself on Friday or Monday when the already mailed check will arrive. 

Finally, a number of you have asked me how you learn this financial on your own—without making the mistakes—when there are very few books published about freelancing and money.  I’ll try to recommend some books as time goes on.  Most that I know of are out of date, thanks to the so-called New Economy.  I’m reading one right now that looks promising. If I like it, I’ll recommend it here.

However, most of my information that hasn’t come from personal experience has come from observation.  Not just observation of my friends and business associates, but observation of others as well.

And this week provided yet another opportunity for that kind of observation.

Mixed into the increasingly lurid coverage of Michael Jackson’s death is the coverage of his finances and his estate.  Read all of that.  Listen to whatever you can. Because you can learn from celebrities, who are mostly freelancers.  Michael Jackson certainly was.

Estimates put him at $400 to $500 million in debt at the time of his death, yet he has an estate that will increase in value over the years—and has increased in value just since his death. Artists, writers, musicians, take heart from this and keep your copyrights, get royalties, and make sure you’re paid for your work without losing rights to any of it.  Those rights are what will make Jackson’s debt vanish in no time, and leave his heirs with a large fortune.

Jackson mismanaged his money horribly.  I wouldn’t be surprised if we soon learn of embezzlements and other problems in the estate itself.  I’m following this financial stuff as closely as I can, because there are always lessons to be learned—good and bad.  If nothing else, it helps with estate planning.

But the state of Jackson’s finances reminds me of the state of another entertainer’s finances at the time of his death.  Elvis Presley had spent every dime of his fortune and then some at the time of his death.  Like Jackson, he sometimes spent more than he had.  Yet now the Presley estate is one of the largest entertainment estates in the world.  What happened?  Priscilla Presley took over and managed the money properly.

You can read about the changes, the legal fights, and the money management in an out of print book called Elvis Inc.  Find this book.  It’ll make fascinating reading while you listen to the financial coverage of the Jackson estate.

And as you’re reading about Elvis and learning about the Jackson estate, realize that these two men made money outside of the mainstream.  They were entertainers, not brokers or money managers.  They made money from their art, and their estates continue to make money from the work that these people produced in their lifetime.

Which brings us to…

Income

Remember my initial freelancer’s equation?

Gross income – cost of doing business = net income

We discussed expenses for the past two posts.  This time, I’ll actually discuss net income.

First, a reminder: Gross income is all of the income that arrives at your business, from the smallest pennies to the largest checks.  All of the income without exception.  If you earned the money through your freelance labor, then it gets counted as part of the business’s gross income.

Net income is the money left over after you pay the expenses.  All of the expenses, including a salary to yourself and your employees.  (Note that I didn’t do much on employees in the expenses posts.  Never fear, I’m going to give employees a post all their own sometime in the future.)  Sometimes that net income is tiny and sometimes it’s very, very large. 

Because freelancing is often so unpredictable, you may not know on January 1 that you will make a large net profit by December 31.  Most freelancers plan for the bad times, but they have no idea how to plan for the good times.

In some ways, that’s what happens to millionaire lottery winners and others, like artists/entertainers/athletes, who can make six to seven figures more than they expected in a single year.  Even contractors can do that, by getting plum project in an upscale housing development—although that’s less likely these days than it was in 2005.

Before you get into the enviable position of making a large net income (and you will, if you’re good at what you do, you work hard at what you love, and you keep your expenses under control), you must learn how to handle large sums of money. 

How do you do that without the large sum of money? Easy.  You follow what others have done.  I read a lot of celebrity and sports news because mixed in with the gossip is valuable information about failed investments, horrible risks, and terrible tax problems.  Those are all relevant to you now.

In addition, I read the financial press.  The business section of my newspaper, the Wall Street Journal, and a lot of financial magazines.  As I do this, I remember that I used to be a business reporter, and I had only a marginal understanding of what I’m writing about.  So I take everything I read with a grain of salt.  If I don’t understand what the article said, I look for some other way of gleaning the same information, and I try to figure out if the reporter filter is inaccurate (often it is).

Reporters, even business reporters, rarely specialize in high finance.  The people who claim to do well in high finance don’t always do well either.  The financial gurus on the business channels like CNBC missed the upcoming housing bust, which I find laughable.  My business-oriented friends and I all saw it coming.  It was obvious—the elephant in the room, if you will.  Yet the so-called experts missed it and the inevitable economic downturn.

Read books about the history of finance.  Books about the Great Depression, about stock swindles, about banking schemes, about times of great worldwide financial success and great worldwide financial loss.  Start with John Kenneth Galbraith’s tidy little book on the crash of 1929, The Great Crash of 1929.  History really does repeat itself.  We just witnessed it.

Finally, read books by self-made millionaires.  Folks like Warren Buffet are willing to share their insights.  You don’t have to do what Buffet does—and probably shouldn’t—but you should learn his attitudes about money.  He’s extremely good at handling it, and he understands what it can and cannot do for you.

The problem most people have with a sudden net profit is that they see it as a windfall.  They don’t see it as something that needs to be managed, just as something that can be spent.

I mentioned the millionaire lottery winners who go broke within a few years.  Everyone wonders how they do that, but it’s really very simple.  They spend every single dime, save nothing, invest nothing, incur great expenses, and fail to understand that money—even a great deal of money—is finite.

Michael Jackson died $400-500 million dollars in debt.  Figure out how he did that.  It wasn’t all amusement parks and facial reconstructive surgery.  He lost more than he made year after year after year—and he made more per year than most people ever make in their lifetimes.

Here’s what you don’t do when you have a large net income—which I’m going to call a net profit from now on, because that’s the correct business term. 

You do not go on a mega-spending spree.

You can go on a small spending spree.  Buy your wife an expensive pair of earrings.  Buy your kids some great new toy. Buy yourself something small that you’ve always wanted, but see as an indulgence.

There.  Now you’re done spending.  You’ve rewarded yourself and your family, but not in a great big way.

Because—here’s the raw truth of it, folks—that small spending spree is a taxable event. The money you just spent is money you’ll have to pay taxes on.  It’s not a business expense.  It’s a bonus, and if any of you have ever gotten a bonus at your day job, you know that the bookkeeper already took payroll taxes out of the bonus before giving it to you.

How do all these lottery millionaires and first-time celebrities get in tax trouble?  Simple. They forget that they must pay taxes on their net profit (which they saw as a windfall). They spent all the money, and then the tax bill occurred.

If you figure federal taxes at one-third of your net income (which is how the IRS does it [roughly]), then you would owe over $33,000 on a net income of $100,000.  See how quickly that adds up?  And how difficult it is to catch up, particularly if your net profits don’t happen year after year after year?

So…you have a net profit.  You rewarded yourself with a tiny spending spree.  Or not.  Preferably not.  But people do like celebrating when they come into money, so if you’re one of those folks, then celebrate by spending a teeny tiny amount of money.

After your itty bitty spending spree, set aside one-third to one-half of the net profit to pay the taxman.  The IRS wants you to pay for large tax bills quarterly, and that’s a good idea.

Here’s why.

Net profits aren’t always predictable, as I noted above.  Most people underestimate how much they’ll earn once the profits start rolling in.  So if you set aside one-third of the money you got on the first quarter’s net profit, then forgot to do so for the second quarter, received a bigger-than-expected net profit in the third quarter, and no net profit in the fourth, you could easily be behind on your tax bill.  That one-third of the first quarter’s profits won’t be enough to cover the entire year.

Better to pay that one-third in at the end of that quarter. That’s called an estimated tax payment.  You don’t get penalized for estimating wrong, unless you continually underestimate and underpay, year after year after year.

Remember, I am not a tax attorney nor am I qualified to give tax and legal advice.  I’m just giving you my opinion here.

And my opinion is to pay those estimated payments to the best of your ability.  If, at the end of the year, you discover that you overpaid your estimated tax, you can get a refund, just like you did when you overestimated your withholding payments from your day job.

If you underestimated, you need to make that payment in full when you file your taxes.  And if you seriously underestimated, you can make payments, but you have to pay interest and/or penalties.

Don’t underestimate.  Set aside more money than you need for taxes, and pay your quarterly tax bills from that.  Keep that money in a liquid account like a money market savings account or a one- to three-month certificate of deposit especially earmarked for taxes.

At the end of the year, do your taxes and make your payments.  If you have money left over, great.  Set it aside for next year’s taxes, or invest it like you’re going to invest the rest of the your net profits.

So you’ve had your insy weensy spending spree and you’ve paid your taxes, and you still have money left over.  You can do a lot of different things with it.

You can pay yourself a large bonus, taking all of the leftover money—after you’ve taken tax payments out of that.  If you do so, realize that you’re going to pay taxes twice on that money—once on the business receipt of the money and once on your personal use of that money.  In other words, that’s probably not the best use of your money.

First, I would reinvest in the company.  I would upgrade something like a bit of machinery or something to a better product.  I would not incur monthly expenses doing so—which means I wouldn’t get an office outside the home or hire an employee. 

I might simply park that money in some kind of savings account as an emergency fund.  Over time, you’ll get a large emergency fund and you’ll need to diversify. But if it looks like the large net profit is not going to be a recurring event, then save as much of that money as you possible can—in low-risk savings.

Be smart about it.  Don’t put all of your money in the same institution.  As people learned this past year, banks do fail, and even though the FDIC insures them, sometimes it takes weeks to get all the money that you’re owed.  Spread your liquid savings around various banks.

Watch your level of risk.  Here’s my theory of investing.  My job—my writing career—is high risk.  I do not have a day job and a salary paid by someone outside.  I’m dependent on myself to make money.

So I keep my net profits in low-risk investments.  I plow a lot of money back into my business.  I have much more liquidity than the “experts” say a person should have.  And I have no stocks.  I never have.  They’re too high risk—and were even in the tech bubble of the 1990s.

I invest in real estate—and that took a hit in this recession—but I’ll continue to do so as time goes on. Why?  Real estate isn’t as high risk for me as it is for most people.  I used to work in real estate.  I handled rentals.  I’ve never expected property values to rise continually.  I’ve always expected—and planned for—the ups and downs.

I’m sure each and every one of you has expertise in an area outside of your freelance business.  You might consider your secondary investments there.  But again, watch your risk.

For example, between us, Dean and I have run or been involved in at least ten different bar and restaurant businesses.  We would never own one.  Running a restaurant takes diligence that we would not have as investors—and we don’t want to run the business ourselves.

Dean recently started a retail business to sell collectibles, which he knows quite a bit about.  We invested heavily in that business and sold it for a profit as the recession was getting deeper.  We always planned to sell the business.  We knew how much money we could make.  (We actually made more.)  But again, we both knew retail and we knew our limits.

Those are not traditional investments—stocks, bonds, etc—but we don’t live a traditional life.

So…to put it all in a nutshell:

If you have what you believe to be a short-term net profit:

1. set aside your taxes

2. save for future emergencies

3. reinvest in your business

4. stash the remaining money in a low-risk investment, maybe even something liquid.

If you know that your net profit will continue and might even grow over the next few years:

1. set aside your taxes each time you register that net profit

2. save for future emergencies.  Set a limit on that savings account.

3. reinvest in your business

4. Diversify.  Keep some money liquid.  Then invest in something quite different from the business you’re working in.  Again, keep your investments as low risk as possible.

Let me define risk: 

Risk comes in many forms.  Not just in the possible financial loss that can occur when your investment goes south, but also in the possible loss of time.  I wouldn’t own a restaurant not just because the financial risk is great (it is) but also because a restaurant needs hands-on management to make sure it maintains its profit margin.  I don’t have that kind of time.

Dean was willing to invest a great deal of time for his collectibles store, knowing that investment of time was limited to 12 to 18 months.  It paid off, even as the economic downturn started, because he knows the collectibles business and the local business environment very well, and because he has run other profitable retail businesses in the past.

It was a nice break from his writing, and he used it as such.  He does that now and then, which makes me, the financial conservative, very, very happy.

When you invest—in anything—research that investment first.  Know your level of risk.  Know the possible downside to the investment and monitor that investment closely.

I can’t tell you how many people I’ve talked to who never once looked at their 401K until stocks fell dramatically last September.  These people let other people invest for them, had no idea how their money was being used, and believed those “estimated rate of return” figures some broker spouted off when they joined the 401K.  Some people I talked to last fall had thought that the stock market was a risk-free investment.  I still shake my head over that.

Managing money takes a lot of time and effort.  The more money you have, the more effort it takes.

The people who lose their wealth do so because they let someone else manage their money.  Those managers embezzle (Bernie Madoff and all the lower level pond scum that are filling the news these days) or mismanage the money.  If the managers were wealthy, for the most part, they wouldn’t be doing the day job of managing other people’s money.  It’s that simple.

That doesn’t mean that financial managers are worthless.  But most people use them incorrectly. 

Never lose control of your money.  Keep track of every single dime.  If you made a risky investment, fine—as long as you know the risks going in.  The last thing you want to do is be surprised, as so many Madoff investors were last fall.  One day those sad people were comfortable or even rich.  The next, they were broke. All because they forgot the basic rules of investing:  Keep an eye on your money, ask questions, and diversify.

I can’t be much more specific than this because everyone’s risk tolerance varies.  Everyone’s knowledge of money management varies.  Everyone’s expertise varies.

But if, with this post, I’ve gotten you to be conservative with your profits, I’ve done my job.  Don’t hide your money under the mattress.  But it’s okay to park the money in a low-yield money market account (or several accounts) while you’re deciding what to do with it.  Research everything and go into each investment with your eyes wide open.

The best thing you can do is start researching how you want to invest before you ever have a net profit.  If it’s too late for you and you’ve been running profits for years, then start your research now.

Yes, managing your money takes time.  But that’s one of the problems you trade up for.  You want to spend time allocating your profits.  It’s a much better way to spend your days then trying to keep yourself from sinking in too much debt.

Like all writers, I make my living by getting paid for each project I’m working on.  The usual model is to pitch a book, get an advance payment, and then get to work.  The publisher publishes the book and recoups that advance payment from the monies the readers spend when they buy the book.  On the Freelancer’s Guide, I’ve cut out the publishing step.  Which means I’m relying on you all to pay me the way that you would pay when you purchase the book in a bookstore.  That’s why I’ve attached a donation button.  Please feel free to e-mail me or comment below.  And please forward the Freelancer’s Guide to other people.  I appreciate the support.

Artwork donated by Pati Nagle.

The Freelancer’s Survival Guide:  Money, Part Three

Kristine Kathryn Rusch

The money topic.  As I mentioned two posts ago, it’s difficult for Americans to talk about money.  And these last few weeks have borne that out.

The moment I mentioned money, the comments slowed, the e-mail stopped, and so did the donations.  If it weren’t for the website statistics and Twitter, I would have thought that people had stopped coming to my website.

Instead, tweets pointing out the posts have abounded on Twitter (thanks y’all) and the number of unique visitors to my website has gone up dramatically since I started the posts about money.

But the silence has been deafening.  I’m not sure if that’s because y’all are waiting for me to get through the entire money section before commenting, or if you’re stunned at my candor, or terrified by the actual economics of freelancing.

I’m sure I’ll never know exactly.

So…in the face of this silence, I’ll soldier on, and continue my discussion of expenses.

If you haven’t read the two previous posts on money, go read them now. http://kriswrites.com/2009/06/11/freelancers-survival-guide-money-part-one/ and http://kriswrites.com/2009/06/18/freelancers-survival-guide-money-part-two/  I’m going to be building on them.

In last week’s post, I had three versions of an equation, the freelancer’s financial equation.  (The equation, really, that defines all businesses.)

Gross income – cost of doing business = net income

But, I pointed out, that for many freelancers, the actual equation goes more like this:

Gross income – cost of doing business = zero

Or, worse:

Gross income – cost of doing business = net loss

Let’s define terms. 

Gross income is all of the income that arrives at your business, from the smallest pennies to the largest checks.  All of the income without exception.  If you earned the money through your freelance labor, then it gets counted as part of the business’s gross income.

We are only discussing the income that comes into your business, not the income that comes into your household.  For many freelancers, that’s a tough distinction.  Early on in freelancing, the money you made at your part-time work was bonus money, used to splurge on dinner or perhaps buy a nice pair of diamond earrings for the wife.

I would hope that before you became a fulltime freelancer, you learned how to separate your freelance income from your belief that it’s all bonus money and yours for the taking.

If not, you’re already in a world of hurt, and probably don’t even realize it.

A lot of freelancers, however, only count their primary freelance income as gross income, and that too is a mistake.  For example, fiction writers make a lot of money from a variety of sources, from New York publishing houses to audio sales to foreign sales.  Some writers believe that checks under $100 are bonus money.  Others think that sales from other countries are bonus.  If you make money in a way that is somehow tied to your business (selling extra copies of your own books on eBay, for example), then that money is all part of your gross income.

I can hear some of you complain now.  You don’t want to keep track of the tiny checks, or the twenty bucks someone hands you for a hard-to-find copy of your novel.  Too bad.  Set up your accounting system so that you can keep track of every dime.  Even if it isn’t important now, it will become important later.

The cost of doing business is precisely that.  How much does it cost you to run your business?

Break this down into finite units, depending on your business.

If you have a retail store or an office outside the home, I would break this down into the smallest possible unit:  How much does it cost you to run your business every single day?

Some businesses can get by with knowing that figure for the entire week.

Most businesses keep track of costs by the month.

A few keep track by project.  (How much did it cost you to do that particular client’s job from start to finish, including overhead?)

For the sake of this piece, I’m going to go over general monthly costs.  I do realize that each freelance business is different.  I can’t write a piece that will include all the expenses plumbers incur and a piece that will include all the expenses criminal defense attorneys incur.

But I can speak about expenses in general.

Overhead:  overhead is the general recurring costs of running your business.  Remember last week that I mentioned I realized that even by breathing, we were all incurring expenses? To a business, that’s the overhead.

Overhead includes those expenses that happen even if you’re earning no money at all.  Those expenses include (but are not limited to):

1.  Rent

2. Utilities, including telephone and internet (and cable, for those of us who are freelance storytellers or freelance reporters).

3. Salaries (your salary as well as the salaries for any employees)

4. Vehicles/large equipment (trucks, tractors, large machinery, etc.) (I’m figuring that you’re amortizing the cost of these machines over the year, instead of writing off the cost of purchase in the month it occurs.)

5. Office equipment (computers, printers, photocopiers, etc.) (Again, see the note for #4)

6. Supplies (the monthly things you need to keep all of that running)

7. Maintenance (from equipment maintenance to janitorial services)

8. Business insurance(s)

9. Taxes.  All of them, from sales tax to property tax to social security tax. 

Costs per project: People who own storefronts usually don’t have this issue but the rest of us work on a piece-work basis.  We don’t get paid a salary (except through our own business).  We generate income by finishing projects.  Each project will have general, predictable costs, and several unpredictable costs.  All projects also have basic costs that most freelancers ignore.  These costs include (but, again, are not limited to):

1. Materials specific to the project.  For example, a friend of mine makes quilts.  She has fabric, thread, batting, and all the other things she needs for the average quilt, but if someone wants a quilt made from a specially imported silk, that silk would be specific to this project.

2. Gas/transportation/travel expenses/meals.  Any errands you do associated with this project and this project only, you should include a per diem expense for the vehicle used or the exact mileage and cost of gas.  (For example, most writers never count their mileage to and from the post office as part of the expense of a particular project.  But they should.) 

As for travel expenses and meals, the IRS has rules as to what can be deducted.  But we’re not discussing the IRS here.  We talking actual cost.  So include the full price of business travel per project, as well as the full cost of each meal.

3. Cost overruns:  You should know how much each project will cost to complete.  Projects sometimes cost more because the client demands something new or because the project is bigger than initially predicted.  Those overruns need to be included in cost per project.

Note:  I should include time as part of the cost per project.  I am not going to here, because we’re discussing actual cash outlay.  But time is an important part of project costs, and I will get to that in a later section.  Because time is, essentially, what we freelancers bill for.

But right now, we’re talking internal costs and I trust I’ve taken care of the cost of your time in overhead with the inclusion of your salary (hint, hint).

Other important business costs.  I almost called these hidden costs of doing business, but that’s a whole different section.  This category, important costs, often includes the expenses that make or break your business. 

1. Continuing education.  Many professions require a certain amount of continuing education from the practitioners so that they can keep their license.  Many state bars require continuing education from attorneys.  Most hospitals require continuing education from their doctors (and damn, I wish that was all hospitals). 

Freelancers should always continue educating themselves about their business.  Sometimes that means attending a class.  Often it just means keeping up with the current materials—books on the latest trends, subscribing to the trade magazines, etc.

2.  Advertising/The cost of finding new business.  Not every business has or needs an ad budget.  For example, freelance writers never advertise on the radio.  Plumbers sometimes do.  Lawyers  never used to, but they seem to own late-night television now.  (Do they think the sleepless are more inclined to sue?)

But we all have to generate new business, whether that’s through designing and maintaining a website or handing out business cards at the local Rotary luncheon.  This doesn’t go into overhead because, for most of us, it’s not a consistent expense, but it does have to go somewhere, which is why I put it here.

3. Advice.  Many freelancers engage the services of other professionals to help with particular business matters.  They hire freelance accountants to handle their year-end taxes.  They hire attorneys to handle a particularly annoying problem.  They hire real estate agents to help them buy a new office complex.  Freelancers can often go months without paying for advice, but they rarely go years without it.  Again, amortize the cost of the advice, and include it into your monthly expenses.

Of course, that’s not all of the costs of doing business, but that’s enough for a general start.  You know what your business entails.  Sit down and make a list of all the costs—again, from the smallest expense (the cost of the newspaper you buy for fifty cents every day at lunch) to your largest, and then break down those expenses by month.  That will give you the monthly cost of doing business.

Subtract that cost from your monthly gross income, and you’ll get (I hope) a net income.

If you don’t, look at last week’s essay.

Notice how many fixed costs there are to running a business?  More than most people expect, especially when they started making quilts for friends and then decided to go fulltime with an entire business. 

For first-time freelancers, the expenses are often a big shock.  As I mentioned in one of the early sections, when you work a day job, you never think of the overhead expenses.  The office exists.  The lights are on. The phones work.  Those things don’t really matter to you, the employee, so long as you get your paycheck on time.

As a fulltime freelancer, you’re now responsible for the phones, the lights, and the office, as well as everything (and everyone) in it. That’s quite a change, and it’s often a difficult one.

Now let’s note what I did not include in expenses.

I didn’t include your house payment or the payment for the car your spouse drives exclusively.  Nor did I include the cost of your kid’s ballet lessons.

Personal expenses come out of your salary.  Got that?  They don’t come out of the cost of doing business.  Here’s a pretty solid rule of thumb for you:  If you can’t legitimately deduct the expense from your business’s income tax, then you can’t pay for that expense with business funds.

Think of it this way.  If you still had a day job, would you ask your boss to buy your groceries?  Your boss would laugh at you and remind you that’s what you get a paycheck for.

I can’t be more specific than that.  If you’re a fashion designer, then clothing is a business expense, just like theater tickets are when you’re an actor.  Each business is different and has different needs.  For me, books are a legitimate business expense.  But all books wouldn’t be a legitimate business expense for a gardener.  Only books on gardening and related topics would be a business expense for him.

Why am I tell you this?  Because freelancers horribly intermingle their personal finances with their business finances.  You have to keep them separate.

I know most of you work at home.  That’s where the trouble starts.  You work at home, your family lives there, and you think nothing of intermingling your expenses with theirs.

You can’t intermingle.  It has to remain as separate as it was when you had a day job.

You’re going to have to start thinking in percentages.  Figure out what percentage your office is of your house’s square footage.  For easy math, let’s say that your office is 25% of your family’s house.  You only use that office for your business.  You don’t store exercise equipment there, or keep your son’s drum set in the back closet.  Just your business.

Then 25% of your house payment is your rent for your office.  Just like 25% of the electric bill and 25% of the water bill and 25% of the heating bill make up your utility costs for your office.  Got that?  Be scrupulous about this—and take pictures of your office, so that at tax time, you can prove that you use that office only for your business.

(Please remember here that I am not an accountant or a tax attorney.  I’m just a humble freelancer with too much life experience not to share some of it.)

 Try to have a car that you only use for your business.  Otherwise you’re going to have to figure out usage either by project or daily use.  You’ll need a contemporaneous log.  That goes for other items with shared uses.  Try to keep shared items to a minimum.  I know you can’t always do that, but do your best.  And when you must share, be very, very clear about how much you used that item.

The personal items problem is the very reason I’m telling you to take a salary from your business.  It makes things very simple.  The easiest way to do this is to keep a separate business bank account and never ever use it for personal items.  Write yourself a salary check every month, and put that money in your personal account.  Treat it the way you would treat your paycheck from your day job.  When that salary money is gone, it’s gone, even if there is extra money in the business account.

Believe me, that accountant you hire at tax time every year will be much happier with you if you do things this way.  So will the IRS auditor if you are ever have to face that music.  (And let me tell you, as a person who has had two full audits, it’s really not as bad as the press makes it out to be.  Yes, it takes time from your life, but if you’re organized and diligent in your record-keeping, you’ll survive just fine—and live to freelance another day.)

If you subtract those costs of doing business from your gross income, and come out with a net loss, then you need to make changes.  The change you cannot and should not make is to cut your own salary. 

I’m sure many of you wondered how month after month a fulltime freelancer subtracts the cost of doing business from his gross income and comes out with nothing.  The way most fulltime freelancers make that second equation work is by cutting out their salary and letting their spouse handle the personal expenses.  All of the personal expenses.

The freelancer’s business—without the cost of the salary—breaks even.  Which means, that if you add the salary back in, the business is operating at a net loss.

Which cannot and should not be sustained over time.

I’ve gone two weeks now and I have not discussed that lovely phrase net income.  So let me simply say here that most long-term full time freelancers have a rather large net income.  We wouldn’t stay in the business if we didn’t.

But a net income creates its own problems.

I’ll deal with those problems—and the positives of freelance income—next week.

Notice above I mentioned that a freelancer should consider the time spent on every project as part of the cost of the project?  I decided to do this project without any guarantee of income at all, which is ironic when you think about it, since I’m writing a guide that insists freelancers treat their business like a business.  The only way I can justify spending my time writing this guide is to add this little donation button at the end of each installment, hoping that some of you will spend a few dollars for this advice, just like you’d do if you bought the Freelancer’s Guide as a book in your local bookstore.  Thanks in advance—and thanks for visiting the site.

“Freelancer Writer’s Survival Guide: Money, Part Three” copyright 2009 by Kristine Kathryn Rusch.

The anthology Swordplay has just appeared with my story, “The Japanese Sword.”  I blame this one on Ray Vukcevich.  There are a lot of good writers in this anthology.  You can find it here.

Artwork donated by Pati Nagle.

The Freelancer’s Survival Guide:  Money, Part Two

Kristine Kathryn Rusch

I remember the exact moment when I learned how pernicious expenses were.  I was nineteen years old, six months married, and exceedingly naïve.  My parents, as I mentioned in Money, Part One, never discussed money.  Not ever.  I had no idea they made house payments.  I didn’t know that electricity cost money.  I had a vague idea that they paid for groceries because I watched my mom whip out the checkbook every week.  But the costs of daily living simply did not exist for me as I grew up.

I didn’t live away from home until I got married.  By then, I knew intellectually that people paid rent and utilities, but I didn’t understand the implications of that.  I remember being terrified to go to the phone company and sign up for service.  The questions these people asked—people who didn’t know me!  They wanted to know where I lived, how much I earned, what my social security number was.  I answered everything with trepidation and for successfully completing their little application, the phone company gave me a black rotary dial telephone that was so heavy I could have used it as a cudgel to beat someone to death.

The apartment we rented on the eighth floor of a high rise (very Mary Tyler Moore, I remember thinking) included all utilities, but all utilities didn’t mean telephone.  (Honestly, I’m still confused about that one.)  All utilities did include heat, electricity, and water.  The city paid for garbage collection (hear that, State of Oregon?  In civilized places, the city pays for garbage collection).

We had to pay rent, which was (as I recall) a whopping $180 per month.  We also paid for insurance, phone, and food.  We did not have a car.  I’m positive our monthly bills were less than $500.  We had $3000 in the bank when we got married.  $1000 of it went to first semester tuition, another $250 went to books.  My then-husband and I both got jobs which, as I look at it now, covered more than the monthly expenses.

But…

We depleted the last big part of our savings at the beginning of the second semester.  We had enough to pay for the third semester and the fourth was going to be interesting.

Without the savings in the bank, I panicked.  I had always had savings.  I didn’t have expenses, I rarely spent my allowance (yes, I was one of those kids), and I got a good job at sixteen. 

By late April, we had less than $1000 in the bank.  I sat on the outside terrace at the Union South cafeteria at the University of Wisconsin-Madison on the first warm day of the year, and fretted about money.

Because at that moment, that very moment, I realized that no matter what I did, the expenses would recur, month after month after month.  We had to have a roof over our heads.  We had to have food. We could live without a phone, I supposed (but I didn’t want to), but in no way was I going to go without insurance.  (We went without insurance for one week as we switched over from our parents’ plans to the university’s plans, and I was convinced that that would be the week we were going to get the Martian Death Flu or get hit by a bus.  Neither happened, of course, but I still vividly remember the fear I felt until the new insurance kicked in.)

Until I was nineteen years and ten months old, I had no idea that expenses happened even if you did nothing.  Especially if you did nothing.  As long as you ate and slept and had a place to do those two things, you were spending money.

That realization set me on a quest to earn more money and to reduce expenses.  By May, my husband and I had become resident managers of an apartment complex, trading work for rent.  I worked full-time that summer for the realty company that managed the apartment complex.  My husband became a full-time janitor at a building downtown.  We saved enough for the next year’s tuition.

We did fine, until we got the 1099 in January.  The 1099 in which the realty company (quite properly) declared our rent as income to us.  Income we had to pay taxes on.

I’m pretty sure that the guy who hired us explained all of this.  I also know that to me and my husband, the guy sounded like the adults in A Charlie Brown Christmas.  Everything the poor guy said went in as blah-blah-blah-blah-blah.

We survived.  We made money.  We started businesses and worked for a variety of people.  I freelanced.  We managed, just like most people do.

But we were frugal.  Not that we had a choice.  In the early 1980s, only the upper middle class and wealthiest Americans had credit cards.  People with low incomes couldn’t get any kind of credit, not for car loans and certainly not for home loans.  We bought our first two cars used.  A couple from our church co-signed our first new car loan, taking quite a gamble.  (Fortunately, the worst of our money troubles happened after we got their names off that loan.)

If we wanted something, we paid cash for it.  If we didn’t have cash, we didn’t buy.  Many Fridays, I scurried to the bank to cash one of our paychecks so that we would have enough money to buy groceries on Saturday (our grocery shopping day).  When we didn’t have enough money for gas, we took the bus. When we didn’t have enough money for the bus, we walked.

(Up hill, both directions, in the snow.)

I realize how all of this sounds now, but I’m not exaggerating.  The culture has changed a lot in thirty years.  Because of the recent economic meltdown, we’re returning to a cash-based society, especially for our moderate to lower income members.

And personally, I think that’s a good thing.

I write this on Wednesday.  On Tuesday night, one of the network newscasts had an in-depth piece about the changes people are making to cope with the new economy.  They talked with one young single mother (we must always have an example!) who had $5000 in credit card bills.  She was paying them down slowly, with the help of a credit counseling agency.

The piece ended with her saying sadly that she only spends cash these days and if she can’t afford something, she doesn’t buy it.  The implication was that we should feel sorry for her.

I turned to Dean and said, “So it’s news now that someone is living within her means?”

He replied, “I was just thinking the same thing.”

But it is news. 

From the late 1980s on, we lived in a society built on easy credit.  We moved from a cash-based economy to a credit-based economy.  A lot of old-timers either laughed or complained when George W. Bush exhorted Americans to go shopping after 9/11, but he was serious.  Because he knew, even then, that any decline in the spending habits of Americans would have a dire effect upon the economy.

We saw that dire effect from September of 2008 through February of 2009.  Spending more or less stopped. And the economy spiraled downward.  Spending has risen slowly since then, but I doubt it’ll return to its peak any time soon.

People who were used to augmenting their salaries with their credit cards suddenly had to learn how to make choices about where to spend their money.  Their 401Ks had already taken a large hit. Their home values declined.  The loss of wealth in this country (hell, the loss of wealth in the world) in the last nine months has been staggering.

All of it has consequences.  Everyone has to trim, from the major corporations down to the smallest households.  Unfortunately, some of those cuts came in employment, which is why the unemployment numbers shot up so drastically.  Many people who lost their jobs had no savings at all.  Those who did have savings watched the money evaporate as it went to large credit card bills, adjustable-rate mortgages, and unbreakable leases on oversized cars.

The jobs ended, the savings vanished, but the expenses kept building up, month after month after month.

Sometime in December, Dean said to me, “You know, most of America is living the freelance lifestyle now.”

And damn if he wasn’t right.

It’s the rare freelancer who has a reliable monthly salary.  Most people who work for themselves have an irregular income.  The income generally works like this:

Gross income – cost of doing business = net income

Some freelancers are lucky enough to count their own salary in the cost of doing business.  All freelancers should count their own salary in that cost.  But most do not.

Those who do not usually wait for the net income to pay themselves. That’s how most freelancers live. 

But in a business’s early  years, income generally works like this:

Gross income – the cost of doing business = zero

Or, worse:

Gross income – the cost of doing business = net loss

If you started your business with the three years of expenses mentioned in the segment titled “Things You Need Before You Quit Your Day Job,”  then you probably have enough cushion to handle the second and third scenarios.

If that’s the case, and you are lucky enough to have the first scenario, a net income, then you’re supposed to take a (small) salary and thread the rest of the money back into the business itself or to continue to increase your rainy day fund.  Eventually, you’ll end up with too much capital, and you’ll need to invest in something other than the business itself.

That’s a problem you want to trade up for, and we’ll deal with it in a later segment.  But for now, let’s deal with scenarios two and three.

If you started your business haphazardly, the way most freelancers do, you don’t have a cushion at all.

How do you survive?

Good question.  The correct answer is that often your business doesn’t survive.

There are many reasons why, but let’s do this in general, starting with the third scenario.

If your business operates at a net loss month after month after month, then you have to make drastic changes.  You must decrease expenses without harming the business itself (and that’s a real trick) and at the same time, you must increase income.

If you can’t do both, then your business is doomed.

Remember, how I mentioned in the early segments of this Guide, that most freelancers fail the first few times they go freelance?  This is why.  The freelancer underestimates the cost of doing business and overestimates the income he’ll receive from his work.

That scenario leads to an inevitable monthly net loss.

And here’s where the perniciousness of expenses comes in.  If you can’t pay June’s expenses, then you won’t be able to pay July’s expenses.  If your expenses are, say, $2000 per month for your business (irregardless of personal expenses, which we haven’t even discussed yet), then by the end of July, you’re $4000 in the hole.  On the first of August, you’ll be $6000 in the hole.

It’s easier to come up with $2000 than it is to come up with $6000.  And if you couldn’t come up with the original $2000, then it’s unlikely you’ll ever find the $6000.

And none of that counts the cost of deferring expenses.  Every business adds a late charge onto the bill.  Usually those are ten percent of the bill.  So by August first, you’ll owe $6400 (you’re not yet late for August, so that $200 hasn’t tacked on). 

A lot of small business owners deal with June’s (drastic) shortfall by charging it on their credit cards.  Then they  have a similar shortfall in July and face another in August.

Charging expenses compounds the problem, quite literally.  Instead of the 10% late fees charged by the service providers, the freelancer who can’t pay gets charged anywhere from 15 to 20% on the money.  So they’ll owe either $6600 or $6800 on the first of August.  Not counting the monthly payments, which you can’t charge, but which either come off another credit card or from some other loan source.

Eventually credit dries up.  It’s not as easily available now as it was a year ago, and I suspect it’ll be even harder to get a year from now.  As a culture, we’re returning to the tight credit markets of the late 1970s.

If you borrow without making changes to your business, always hoping that things will improve, you’re dooming your business.  Things will not improve, and you’ll have to close the business (or drastically reduce it) and return to a day job.

If you return to a day job with all of those business expenses filling your credit card, you’ll need a rather large salary to pay off the debt and pay your living expenses.

This is not a gamble that anyone should take, yet so many do.  When I was a young writer, I was in a business information sharing group with other young writers.  One writer had the promise of a Hollywood deal.  He charged his living and business expenses on his credit cards, expecting a big payoff in the near future.

Unfortunately, he did not understand the nature of the writing business or the unreliability of Hollywood promises.  Before he had to return to a day job, he had racked up $50,000 in credit card bills.  I can’t even imagine what his monthly payments were, and how many years it took him to pay off that one mistake in judgment.

So how do you deal with scenario 3?  Let’s look at it again.

Gross income – the cost of doing business = net loss

First, you have to catch this problem in the very first month that it occurs.  You can’t let it compound for even one more month, as I mentioned above.  Because expenses continue, month after month after month.  They grow like snow drifts in a blizzard, and it seems like nothing you can do will stop them.

That’s not true, of course. You can stop them.

Your first step to solving this dilemma is to take clear-eyed view at your entire business, and ask yourself some questions.

1) Was the business undercapitalized in the first place? 

In other words, did you start with less money than you needed to run the business?  If the answer is yes, then that’s where the problem began.  Most businesses fail due to undercapitalization.  You start behind, and you never really catch up.

But if you weren’t undercapitalized, then you need to figure out what happened to the money you had when you started.  So you ask the next question:

2) Are your business expenses too high?

Did you rent an office when you could make do with an office in the home?  Do you have employees who are doing work that you could do but prefer not to do?  Are you paying those employees too much?  Are you paying them benefits?  Are you paying too much for materials? 

You need to evaluate each expense with an eye to getting rid of it altogether.  The only standard you have now is this one:  Can you run your business without spending that money?

If the answer is yes, then the expense is unnecessary. 

Watch out for the “yes, but” answers.  Those are the most pernicious.  “Yes, but my business won’t be as efficient.”  “Yes, but my products won’t be of the same quality.”  “Yes, but Suzy has worked for us for ten years.”

Believe me, I’ve lost entire businesses because I didn’t realize that “yes, but” is the worst possible answer.  It makes you keep the expense even though you know you shouldn’t.

If any part of the answer is yes, then you must cut that expense immediately.

I do realize that cutting expenses immediately is often difficult for many companies.  The company signed a lease, for example, or made a contract with a supplier.  Each lease and contract should have an early termination clause.  Those clauses often contain penalties.  Examine if that penalty will cost you less than maintaining the expense for another year.

Or negotiate with the company holding the lease or contract.  Often the penalties can be waved or paid over time, mitigating the worst of them.

Put yourself in survival mode here, and cut, cut, cut.  As many leaseholders are learning in this recession, it’s better to get some money on a broken lease than no money on a delinquent one.

Cut your expenses to the absolute bone.

If that doesn’t mitigate your net loss, then you have to ask the next question:

3.  How can I boost the business’s income?

Often you can do that by becoming more efficient.  As a business grows, it occasionally creates a lot of make work.  Make work seems like real work, but actually has nothing to do with income generation.  By trimming make work and concentrating on real work, you can usually boost your business’s income.

Another way to boost income is to examine all of your income sources.  Examine them this way:  time spent versus income generated.  Often one income source takes less time and generates more income than other income sources.  Trim the income sources that take a lot of time and bring in very little money in favor of income sources that take less time and bring in more money.

A third way to boost income is to try something new—generate a new income source.  If this takes capital (money), now is not the time to do it.  But if the change takes no capital and very little time, then it’s worth the try.

However, if you can’t decrease your expenses and you can’t increase your income, ask this question:

4.  Is the problem cash flow?

Cash flow is exactly what it sounds like:  how quickly money arrives at your business.  For example, if Client A owes you $2000 and pays within thirty days, then Client A meets  your monthly expenses.  But if Client A is suddenly paying on sixty days instead of thirty, you can’t pay your monthly expenses either.  You’ll, of course, charge Client A for his late payment, but as you’ve learned with your own paying of expenses, the late fee doesn’t matter until you’ve actually written (and received) the check.

I would hope that Client A isn’t your only client.  If he is, then you need other clients to cover the shortfall.  If he is one of many clients, then maybe you might be able to cover the shortfall using money from other clients.

A cash flow problem can be as serious as no income at all. Because it snowballs in just the same way that a net loss snowballs.  If you’re not charging Client A enough in late fees to cover your own late fees, then you’ll be losing money on Client A’s business. 

So many freelancers just hope that Client A will go back to paying on 30 days.  But Client A might be in financial trouble.  Client A might be going out of business.

And unfortunately, the freelance or small business often gets paid last in those situations.  As I said earlier in the Guide, you’re not the person who is getting Client A’s rent so that he can keep his storefront open nor are you the person getting Client A’s utility payments to keep his lights on.  You’re down the food chain, and you might never see a dime.

When a client starts paying late, you have to worry immediately, and start planning for the loss of that income immediately or the loss of Client A’s business might mean the failure of your business.

Finally, if the problem isn’t cash flow, and you can’t decrease expenses or increase income, then you have to ask this question:

5.  Is my business going to fail?

Be realistic. The answer is probably yes.  If it is, cut your losses immediately.  The last thing you want is all the debt incurred by the continued monthly expenses.  Shut the doors, turn off the lights, and search for a day job.

Freelancers who don’t have a storefront often have the most trouble with this because their expenses seem low.  They’ll hang onto the freelance gig too long, hoping for improvement.

You have to be an optimist to be a freelancer, but in this situation, your optimism will hurt you instead of help you.  You need to be a clear-eyed realist here, or maybe even a pessimist.

Chalk this attempt up as a learning experience, cut your losses, and go back to your day job.  Continue freelancing on the side.  Then figure out what lessons you’ve learned, fix the mistakes you’ve made, and when you’re ready, try again.

Those of you in scenario 2 need to do same self-examination that the people in scenario 3 have done.  But first, let me remind you what scenario 2 is:

Gross income – the cost of doing business = zero

scenario 2 is nasty.  Because nowhere in that cost of doing business do most freelancers include a salary.  The cost of doing business equals the gross income of the business, with nothing left over.

So how does the freelancer live?  By finding a supportive parent, spouse or friend.  Someone who’ll pay the living expenses while the freelancer conducts her business.

This scenario takes horrible advantage of the parent, spouse or friend.  In reality, all the freelancer has in that instance is a spouse who indulges them.  If the freelancer gets a divorce or if (God forbid) the spouse dies, then the freelancer is immediately thrust in scenario 3.

If you’ve lived the scenario 2 lifestyle for years now, it’s time to reassess.  You need to do the same analysis outlined for people in scenario 3.  You have to change that zero at the end of the equation to a net income, and you have to do it before life circumstances force you to make the changes or to shut down the business.

In the next post, I’ll talk in detail about good expenses versus bad expenses.  In the next few money posts, I’ll also examine the choices that a net income forces upon a business, and how sometimes success is the worst thing that can happen to a freelancer.  I’ll also explore the importance of the financial end game, which I mentioned in the last post.

As I mentioned last week, money is a vast topic.  If there are things that fall under the heading of money that you want me to address, please e-mail me or put your question in the comments section.  I’ll do my best to get to those queries at the appropriate place in the Guide.

Most information comes with a price tag. Business books have a price listed on the back cover.  Seminars have a set fee.  Business websites often ask you to subscribe before you can see the really important stuff.  I decided in April to put the Guide up and to ask my readers to respond on the honor system—a few dollars in exchange for some information.  That’s what the donation button is for.  If you can’t donate money, please donate time by forwarding these posts to people who are trying to freelance or by promoting the Guide on your own website.  Thanks!

The subscription copies of the August Asimov’s have just hit mailboxes, with my story, “Turbulence.” The newsstand copies should be out soon. If you can’t get the issue on your newsstand, you can order it here. Or you can find it on Fictionwise.com, or Amazon’s Kindle.

Enjoy!

Artwork donated by Pati Nagle.

The Freelancer’s Survival Guide:  Money, Part One

Kristine Kathryn Rusch

As you could probably tell if you’ve been reading this Guide since I started it, I’ve been putting off this topic.  I’ve been putting it off for several reasons.  Money is a difficult topic to discuss.   Most people don’t want to think about it.  Most of us don’t know how to discuss it.  Most of us consider financial information private—even more private than our sex lives (and you know how you are, you TMI people, you).

And yet money is probably the most important topic of all for freelancers.

Because money—the lack of it or, oddly enough, an abundance of it—is the primary reason most freelance businesses fail.

I am going to spend at least two more posts on financial issues, maybe three, depending on what I need to discuss.

This is a preliminary post, mostly to get you thinking about your own financial preconceptions.

Consider this:  In the United States, we insist on remedial skills for our children.  At minimum, we want them to read at a high school level, to do basic algebra, and to write well enough to communicate their thoughts.  They often don’t achieve these minimums, which is why every president in my lifetime has had some proposal for “fixing” education.

No matter how education is fixed—and each generation has things it must put up with from its elders—it always fails in one big important area.

American public schools do not teach money management.  Some private schools do.  Colleges occasionally do in their business schools.  But oddly, I think, most colleges expect the business majors to have basic  money management skills—and most of them do not.

Whenever Dean and I teach the Master Class, a class designed for professional writers who have plateaued in their careers, we begin with a financial quiz.  We want to make certain that we use terms everyone understands.

The classes, composed of already established professionals, have an average age of 40.  The quiz has ten questions—basic questions such as “define net worth” and “explain cash flow.” 

Most of the students fail.  They get one or two questions right, and that’s it.

One or two. 

These are fully functional adults, many with day jobs.   Most have children.  Most have lived away from their parents and have managed their own finances since they were eighteen years old.

The public school’s original rationale for failing to teach money management was that kids should learn how to handle money at home.  Some kids do.  Some get allowances to buy what they want, and when the money’s gone, it’s gone.  Some learn how to save, either with an account or with a piggy bank.  Some (if Kiplinger’s is to be believed) even manage their own stock portfolios—or did, before the debacle last fall.

Most of us, however, got haphazard money management training at home.  My ex-husband, for example, got an allowance. But when it ran out, his mother would just hand him a $20 to cover whatever he needed.  By the time I met him, he didn’t realize that money was a finite commodity.

Even with that problem, however, he was better off than I was.  My parents never discussed money.  They encouraged fiscal responsibility, since they were both products of the Depression, and I do remember the day my mother took me to the bank to open my own savings account.

But when the school sent home a form for family information, my father refused to fill out the money sections.  He wouldn’t tell anyone what he earned. One of my grade school teachers made me bring the form back to my father and ask him again to fill it out.

My father scrawled “None of your damned business” across the form, and handed it back to me.  I didn’t find out what the man earned until he died, and my siblings and I made certain my mother had enough money to live on.  She had more than enough—she was happy to tell us how much—and I was a bit stunned.

By the time I was thirty, I was out-earning my father.  I had always thought my parents rich.  My friends thought them rich.  My parents just pretended very, very well.

(The reason we didn’t have a second home at the lake like my wealthier friends [my mother told me when I asked] was because we didn’t want one, not because we couldn’t afford one.  In fact, I never once heard my parents say that we couldn’t afford something.  My parents left me with the impression that we could afford everything.  We just didn’t want very much.)

Our perceptions about money—what we learned from our parents, our grandparents, our friends, and the world around us—have an impact on how we handle money.  Most of us just do what we were taught.  We work 9 to 5, have a “secure” job, and pay our bills on time.  If we have investments, we hire someone to take care of them for us because (we were taught) it takes specialized knowledge to handle money.

Money management has become an arcane science in American society.  We all get by, but only a few hold the keys to the kingdom.

We’ve seen, in the last six months, what giving the keys to that very important kingdom to people with specialized knowledge brings.  It brings economic ruin and chaos.

I’m smart about money.  I still make mistakes (jeez, do I), but I’m a very, very good money manager.  If I’m not paying attention, I’ll tell you I was always this way.

But I wasn’t.

I learned about money from the school of hard, hard, hard knocks.

Let me give you a few examples.

I married the first time at nineteen.  I had never lived on my own.  You’ve already heard about my parents’ magical approach to money.  I spent my eighteenth year in a private college on a full scholarship—one that paid for room, board, expenses, and tuition.  I didn’t want for anything that year.

I gave it all up for love.  So romantic.  (So dumb.  My favorite prof said, “Marry him after you graduate.”  My divorced older sister said, “If you want to sleep with him, sleep with him, for god’s sake.  You don’t need to be married for that.”  In my nineteen-year-old wisdom, I thought she was being cynical.  I thought my professor was “liberal.”  If only I had listened….)

The minister who performed the ceremony gave all of the starry-eyed young couples a questionnaire of his own devising.  It went on for pages, and tried to ferret out compatibility.

He called us into his office in two months before the ceremony, and said he had never seen such a compatible couple.  Our answers matched on 80% of the questions.

The only area we didn’t match on at all was money.  We disagreed on every single question.

He said, gently, that this could be a serious problem in the relationship, and we might want to rethink the marriage.  He thought some counseling on financial issues would be in order before we said I do.

We disagreed with him.

We married two months later.

We divorced seven years later.

The main area of contention?  Money.  Not that we fought.  We didn’t.  We just mismanaged our way into marital hell.

But the first steps in my financial education came in those years.  For example, I was raised traditionally.  I was taught that the man handled the financial affairs in the family, so my new husband handled the money.  Until two years in, when we started bouncing checks.  I learned that my ex balanced the checkbook “in his head.”  He never wrote anything down.

I spent Christmas through New Year’s that year, going over each and every bank statement, and balancing them by hand.  I’m dyslexic.  Sometimes it took me four and five hours per statement, and I had 24 of them to go over.

I couldn’t find $200.  It had completely vanished.  So on the first banking day of the new year, I went to the bank with all my statements, and explained my problem.

The bank president took me aside (scaring the crap out of me) and offered to put the $200 back into my account.  It turned out that an employee had embezzled from every mismanaged account she could find (ours being one of them), and the bank was reimbursing to avoid the information being made public.  I had to sign a confidentiality agreement.

I could’ve blown the whistle on the whole deal.  There would’ve been court cases and arrests and lots of publicity.

I didn’t blow any whistle.  I signed the agreement. We needed that $200.

Lesson 1:  If you want your money handled well, do it yourself

Lesson 2:  People with fiduciary responsibility embezzle.  I was shocked.  Shocked!

[Note: this would not be the last time that someone embezzled from me.  Sometimes you need to be hit over the head a few times before the lesson sinks in.]

Lesson 3:  Desperate people can be bought off.

I became tight with money.  I had leaks, though.  I bought books as if I was wealthy.  I ate out even when I was broke.  I had to learn to budget for those things. More on that later.

As for my ex, we remained married for another five years.  During that time we started and lost a business because we didn’t know how to handle money (more on that later too).  After that, we borrowed $500 from my parents so that my ex could take a class on finances.  The class taught him to be a financial adviser.

The B student who never graduated from college.  The man who balanced the checkbook in his head.  That man took a two-week course at a hotel in Milwaukee, Wisconsin, so that he could work for a financial services firm, giving people financial advice and selling them securities.

I was appalled.  I still am.  My ex was (and probably still is) a good man.  He had a great heart and really wanted to help people.  He was also a great salesman. 

But in those days, he was the last person to give anyone financial advice.

To his credit, he knew it.  He read everything he could about finances and he bought one of the first computer games, one that simulated the stock market.  We learned from that game how risky stock investments were.

Unlike most couples with one spouse working at the financial services firm, we didn’t buy any of the securities my ex sold.  We knew we didn’t understand them well enough.

Lesson 4: The “experts” might know less about finances than you do.

In those years, as I realized I knew nothing about money at all, I did what I always do.  I researched it.  I became a business reporter because I could go to “experts” and ask them money questions—and get paid for it.

For nearly five years, I wrote articles on movers, shakers, and financial whiz kids for publications from In Business to Entrepreneur.  I did not write financial advice columns.  I didn’t feel comfortable advising people about something I barely understood.  I was attempting to get my own financial education, one expert at a time, and I was managing to get paid for it.

At the time, I did not make the connection between the experts I interviewed and my ex-husband, the financial services expert.  I figured the experts I interviewed knew more about money than me and my ex.

Now I wonder exactly how much smoke got blown up my ass in those years.  Still, my financial education was (finally) beginning.

I do owe my ex and his money management skills a great debt, however.  He found two thousand dollars in scholarships and other donations to get me to Clarion Writers Workshop in 1985, and I will be forever grateful.

At Clarion, Joe and Gay Haldeman gave a three-hour lecture on money and business.  In my six weeks at Clarion, those three hours were the only mention of the one thing that makes or breaks a writer’s career.   Joe and Gay filled those three hours with great advice.  They had a long list of dos and don’ts. 

I took copious notes.  I listened attentively.

Then, in the next few years, I proceeded to do every single financial thing that they said to avoid.

The one I remember the most:  Don’t pay your bills with your credit cards in anticipation of a big check.  Gay said that, and she may have actually shaken a finger at us as she did so.  I do remember the serious frown on her face as she spoke.

Because…five years later, I paid bills with my credit card in anticipation of a big check.  And when I found myself in serious financial hot water because of it, that frown on Gay’s face came back to me.

Over and over and over again.

I wasn’t being perverse.  I wasn’t trying to prove Joe and Gay wrong.  I wasn’t trying to ignore their advice.

The problem is that you can tell someone not to do something, and they will remember that advice.  After they’ve made the mistake themselves.

Dean and I relearned that lesson when we taught the first Master Class in 1999.  We told students not to make the same mistakes we did.  We delineated what those mistakes were.  In the intervening years, each student told us that they made those mistakes, and wished they had listened to us, just like I wished I had listened to Joe and Gay.

Dean and I tried to figure out how to give students actual experience with these problems without having the real-life consequences. Subsequent Master Classes have had a role-playing game that we call (unoriginally) the Game, designed to mimic the business conditions of a freelance life.  Dean, Loren Coleman, and I designed it.  Loren, a well known writer who also owns Catalyst Games, made it work.  (He’s our assistant at the Master Class; we couldn’t do it without him.)

Now students tell us they wished they’d listened, but they do so far less.  More often they tell us the mistakes they avoided because they “made” those mistakes at the Master Class.

I wish I could find a way to have all of you make the mistakes in a pretend environment.  Because I know so many of you will read these next few posts, all on money and finances, and then remember the lessons after you’ve made the mistakes.

The only thing I can tell you is this:  We learn by making mistakes.

I would not be good with money if I hadn’t had the experiences listed above.  And some others that I will discuss.  Two failed businesses, several successful businesses.  Living below the poverty line for two years straight and yet somehow managing to survive.  Living well above the poverty line and not being able to pay my bills for the first time in my life.

Learning that making money was only the first step.  Financial success did not mean, as a Clarion friend of mine once said, “becoming rich and never having to work again.”  It meant learning how to live within my means—and figuring out what those means really were.

Learning about cash flow, and liquidity, and the difference between investment and savings.  Learning how to differentiate uncertainty and risk.  Learning how to illusive security really and truly is.

Some of this came through life lessons.  Some through reading.  Some through watching and avoiding the mistakes of others.

I wish I had a copy of that quiz the minister gave me and my ex-husband.  I’d post it here right now.  Because you and your significant other, the person who will live or who is living this freelance life with you, need to take a quiz just like it.

If you haven’t already figured out your differences about money management, you need to learn it.  You need to figure out your own hidden preconceptions about finances.  You need to learn exactly what you believe about money and what your significant other believes.

You also need to figure out—and this is extremely important—what your financial end game is.

Would you be happy making $100,000 year in and year out?  $50,000?  $500,000?

Or is there no dollar limit on your happiness?  Is your financial end game tied to things instead—a paid-off house, a car you own, enough money to send the kids to college, and enough to maintain a comfortable (by your definition) lifestyle.

Or do you want a 24,000 square foot house like Dean Koontz just built?  http://www.usatoday.com/life/books/news/2009-06-08-dean-koontz-cover_N.htm

Money doesn’t buy happiness, but money can get in the way of happiness.  You need to figure out all of this stuff, preferably before you go freelance.  But if you’re one of my readers who already freelances, then you should stop and figure out what your financial desires are.

Because they motivate you.

Let me give you one more personal example.  In 1985, at Clarion, I would have agreed with my friend:  I wanted to be rich and never have to work again.

Now I know that if I were filthy rich (J.K. Rowling rich), I would still work.  I can’t not work.  I love what I do, and I’d do it even if I never had to make another dime.  I’d be like Nora Roberts, writing several books a year, whether my fans wanted to read them or not.

Several of my friends would quit work if they achieved their financial dreams.  They’d manage their money or tour the world or spend time with their grandchildren, like one of my favorite romance writers, LaVyrle Spencer, who retired in her sixties to spend her remaining years with her family.

You need to figure out what you want out of life, out of your freelancing, and out of your finances.  That’s the first step in this money discussion.

Figure it out by next week.  And then we’ll talk some more.

Speaking of money, I decided in April to post the Guide on my blog instead of going through traditional publishing venues.  Since I’m a businesswoman who doesn’t write for free, I have added the donation button at the bottom of each post, hoping that those of you who can afford it will pay for the Guide as if you had bought it in book form at your favorite bookstore.  No matter what you decide about the donation button, please do forward this to others who would be interested.  And if you have comments or questions, please post them below.  I do read them all.  Thanks.

First, here’s the link to the entire Guide.  You can also select this under monthly columns off to your right.

The Entire Guide

Now here are the individual pieces, in order:

1. Introduction

2. Priorities

3. Workspace

4. Illness

5. Vacations

6. Job Description

7. When to Quit Your Day Job

8. Things You Need Before You Quit Your Day Job

9. Staying Positive

10. Insurance

11. Discipline