Freelancer’s Survival Guide: Money, Part Two

Freelancer's Survival Guide On Writing

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.


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.

You can now order either an e-book copy of the Guide or a trade paper copy of the Guide. It’s in slightly different format and has been organized, so that related topics are in an easily accessible place.

You can get the print version here.

For those of you who’d like to buy an ebook, here’s the Amazon link as well as the Barnes & Noble link. The e-book will also be available on all the other e-book sites. If you want it in your favorite format, and the book hasn’t yet been uploaded to your favorite site, try Smashwords. You’ll be able to download in a variety of e-book formats.

11 thoughts on “Freelancer’s Survival Guide: Money, Part Two

  1. Hi, Kris and Everyone!

    I’d like to throw out a couple of ideas here. The first goes back to Kris’s formula:

    Revenue – Expenses = Profit.

    The area that most people think most about (and I include myself in that number) is Expenses.

    If we end up in debt, where is the first place we turn? What are we counseled over and over again in financial magazines and by talking heads? Cut expenses.

    How can I provide my goods or services cheaper? How about if I print on both sides of the paper? And I can remember one instructor at an beginning writer’s seminar urging us kids to go out and find really thin paper — the kind that was used between sheets of carbon paper to make multiple copies as you typed. (See how old I am?) because it was sold by the pound and typing paper was sold by the sheet and you could get 4 times as much.

    It’s obvious, it’s under our control and since it is one half of the equation, its logical.

    But it is generally very difficult for a small business (and writing _is_ a business) to cut costs in any meaningful way. If a small business can cut costs 20%, that’s _huge_!

    And then they’re done. It is very unlikely to be able to cut costs another 20%. Maybe 1 or 2%. So there’s a limit (a floor, if you will) to the return on the effort expended on this part of the equation.

    Instead, it can be far more productive to consider the other side of the equation: Revenue. As a freelance programmer, can I sell the piece of code I just wrote to someone else? Who? And how many times? How do I find new buyers and how do I sell to them? In theory, the audience or customers are clients is very large. Much more potential return on the effort spent on this side of the equation.

    The second idea is that every small business person needs their own personal board of directors — small circle of people who can guide you through decision.

    If I were planning on becoming a freelance writer in 3 years, I would start forming my Board now. And I would poll them about how to make my future business effective.

    You don’t have to take their advice — I frequently don’t. But the decisions that I vet with them are always, always, always better decisions.

    They don’t have to be in your industry. My circle includes a lawyer, a contractor, a writer, two film makers as well as a bunch of programmers who were all my peers when we started out.

    Phone numbers go in your cell phone. Call often.

    Best regards,

  2. Good points, Peter. I agree with most of them. I’ll deal with assets in Money Part 4 (or maybe Part 5). I’ll discuss income later this week (Money Part 4).

    But your overall point–don’t delay savings–is right on. Thanks! Kris

  3. Kris

    Good rules, but of course me being an up and coming freelance writer would add some more discussion, like what are assets and liabilities, can we reach reaching critical mass, and how it is so important to save? I’ll expand and hope someone can benefit, if I go on and on just delete or just stop reading.

    Assets are savings in the bank, bonds, stock or any income generating device that does not require excessive demand from the owner. We strive to obtain assets for real savings. Liabilities e.g., cost of doing business, are any item that cost you. Many believe their house and car are assets, but no, they cost you money to maintain and if you sold them then other costs would occur. One must still sleep and travel. It is important to know the difference.

    Critical mass is obtained when ones assets generate enough income to be independent of work. Many in America have reached critical mass and many within this set still strive to work. But true critical mass lifts the fear of hunger, insurance costs and housing. Therefore one must ask, how we can reach critical mass, it is simple, save, save and save.

    The best way for most to save is not to see your savings, e.g., direct deposit from your bank account to a mutual fund. You get a statement, but it’s harder to cash and it becomes paper in the present. As it grows, (compound interest) one can’t seem to believe it’s real. I believe we all can save 10 percent of what we make; it is not hard to save 10 percent. Skip the wine, the cheese, and that $6.99/pound steak. Make do with ground beef, shop only sales, and stock pile when able. Your bank or the fund can set this up, recommend a no load mutual fund, like Janus or Franklin. Surf the web and you will find many good no load funds. If 10 percent is too much, start with 5 percent, but use direct deposit, if you don’t see it, then it is likely you will not spend it. Just start at one hundred dollars per month is not much, increase as time and income allow.

    Why is it so important to save, to reach a critical mass? Because when you’re old and gray, then one can eat human food versus cat food, not to be dependent on the government or ones family and to have the ability to take care of others. But the best reason is that one can enjoy early retirement and do what he or she desires.

    It goes fast, life, don’t delay savings.

    Thank you, Peter

    PS My goal is to write like you. Thanks for letting me write here, I need the practice.

  4. Not much to add other than anecdotes for emphasis. When the bottom fell out of the software development biz locally (Denver) in 2001, I was unemployed for 18 months. I did all kinds of odd jobs to keep the money coming in (shades of my student days), and the insurance got paid first. When my wife had been pregnant with our twins, she’d been on hospital bed-rest for almost three months, and the bills were in the quarter-million-dollar range (of which we paid $50, our insurance copay at the time).

    My wife and I have had a couple of freelance businesses over the years, so I’ve seen that side of it. I’m considering making her get a job with insurance coverage when I’m ready to go full time writing. 😉

  5. It’s odd. I’ve been reading all your posts, and remembering all the stuff we talked about during Master Class all those years (sheesh!) ago, and I realized that money planning is basically a good portion of what I do at my day job. It’s not what I trained for, lord knows, or what I particularly want to do, but my boss is a sole practitioner and he only cares about the business end of the business once or twice a year (or when his wife asks him something he doesn’t know).

    So the budgeting, cash flow analysis, expense assessment, all that — it’s become part of my day job. Good practical practice for my own business, but it’s not quite the same thing because it isn’t my business. I can’t do anything to boost the business’s income or decrease draws against that income. I can see the effect of those decisions in my boss’s business and apply those lessons to the money I make from part-time freelancing.

    It’s funny, though — I’m much more frugal with my freelancing income than I am with the salary I get from my day job. Maybe because I feel I worked harder for it? Or maybe because I’m too used to getting a paycheck twice a month, even though there were lean years at my day job when I couldn’t count on that regular paycheck. I’ll have to think about that.

  6. Check your state laws before switching insurance. Some states mandate that ALL insurance plans cover maternity care regardless of whether or not it’s a “pre-existing” condition, along with other health problems. Insurance is tricky.

    Thanks for the post Kris. The more you write about these, the more I know I want to be absolutely, 100% covered before I go freelance. I want to be the ODD freelancer that has 3 years of income saved up and a dozen back up plans. That being said, it might be a very long time before I go full time freelance.

    1. That’s a great decision, Amanda, and if you’re good at planning, you might make the switch quicker than you think.

      What you and Mike posted is exactly why I’m doing this. You need to know what you’re facing BEFORE you quit, if possible. So many folks have already made the leap, and I’m trying to help with that as well. But if I can catch you before you make the choice, then you’ll make an informed choice which means you’ll make the best choice for you.

  7. “…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.”

    Yes — I was just thinking about this the other day, before I read this post! Just LIVING is expensive. And once you get behind in the bills — man, you’re hosed.

    I don’t have anything deep to add here, other than to say thanks for writing this series, and thanks too for making me really appreciate my Day Job. 🙂

  8. Great posts. I’d like to chime in about insurance because even with insurance, you have to be carfeful.

    I decided to go full-time freelance writer in 1980. We were covered by insurance from my wife’s job, but I was making good money, we had a cushion, and we could afford a very good private insurance plan. So she quit her job, and we signed up for the best insurance plan we could find just a week later.

    What we didn;t know was that my wife was already pregnant. The insuirance from her job wouldn;t cover cots because she quit the job. The new, wonderfully expensive insurance wouldn’t cover it because it was considered a pre-existing condition that we didn’t tell them about.

    So we had to pay for it out of pocket. The doctor told us it should cost no more than $1,500, all told. A lot of money for us, but by scrimping just a bit, it would have been no problem.

    Except for the pregnacy complications no one saw coming. A ten day hospital stay with special care, then a five day stay later on. Wife and baby came out happy and healthy, but the anticipated $1,500 morphed into a bit more than $25,000.

    That’s a lot of money today, but in 1980 it may as well have been $25,000,000. It took ten years to pay that bill.

    If you don’t have insurance, get it. Turn off the cable, trade your new car for an old one, skip the restaurant meals, do whatever it takes, but get insurance, and make darned sure it covers whatever you need covered from day one.

    1. Great post, James. Folks, if you haven’t read my post on insurance, go read it and all the comments now. He’s absolutely right.

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