Money Management and Living on a Budget for Freelancers – Part 4: Savings and Investment Accounts, Final Thoughts

In the previous posts of this series, I’ve discussed sources of income, ways of keeping down expenses, and how I send and receive payments. Here, let’s talk about the other accounts I have, those for savings and investments. While I’ve mentioned these in passing throughout the previous posts, now they deserve more detail. Then I’ll close this post with my final thoughts.

Mint’s free budgeting software is awesome for tracking my savings and the goals I’m saving for. In its Goals tab, I’ve set targets for things like retirement, emergency savings, travel, moving to a new home or buying a new car, and custom goals I can choose and name for myself (examples could include “Buy a new laptop” or “Hire a copyeditor”). Each goal is connected to an account, and I can watch my progress toward achieving my goal as the balance in that account grows. Viewing my balance makes saving feel concrete, which is way more motivational than viewing it as a matter of not getting or doing things: I could spend $20 on a new top, and see it in my closet, or I could put the $20 in my savings, and watch my Goal come that much closer. And the latter often sounds even more appealing!

Mint does require a separate savings or investment account for each goal—which I have, but in practice this means having quite a few accounts. I already had several accounts because of keeping my emergency savings in a CD ladder, i.e. 5 separate CDs with rotating maturity dates. This enabled me to earn a high interest rate while also being able to withdraw money on a predictable, regular basis if I needed it.

However, I’ve recently started shifting my savings to an online account with Ally. Ally offers an equally high interest rate while letting me access these funds at any time. That’s helpful, because a lot of my savings are my emergency fund.

My archetypal examples of emergency-fund emergencies are (knock on wood, god forbid) if I slip on a banana peel and through comic but severe injuries am left unable to work for six months, or if my car gets totaled and I need to buy a new one. My emergency fund would be large enough to handle either eventuality. It can also help smooth over the “famine” times of the feast-or-famine freelancer cycle.

No matter your walk of life, everyone should keep an emergency fund. Because of the inherent uncertainty of self-employment, a freelancers’ emergency savings should be bigger than most. Common recommendations are for 3-6 months of expenses; my own balance is a bit larger, equivalent to 6 months of income. Any emergency savings balance can make a difference—aim to build at least $1,000. It’ll mean less scrambling, more time to consider your options, or the chance to repair or replace a problem before it becomes catastrophic (and more expensive). A savings account also gives you somewhere to build up—and earn interest on—larger balances to make big payments such as insurance (as I mentioned in my previous post, paying this in one lump sum can bring a discount), quarterly taxes, or annual IRA or HSA contributions. Regarding the Health Savings Account: some might consider this part of the emergency fund, since it could pay medical expenses. I’m currently treating my high-interest, tax-free HSA as an investment, but plan to use it in future years when my health expenses grow higher with age or if my luck runs out (knock on wood). But my IRA is not and never will be an emergency fund.

Even though interest earnings are low right now, emergency funds belong in savings accounts, not investment accounts. If you’re going to spend the money in less than five years—and emergency savings should be free to use tomorrow (or to pay the credit card bill with if you’re able to put emergency expenses on your card and earn those reward points)—keep it as money, not stocks or bonds, which can lose value in a sudden market swing.

So, where and how should you start a savings account, if you don’t already have one? I recommend either a credit union or an online bank (such as Ally), because they offer much higher interest rates on your balance—it can mean an extra few dollars a month in passive income. For even higher interest rates on larger amounts of savings you won’t need immediately, you might consider a CD ladder over a savings account. Be aware this means you have to wait for the CD to mature before you can withdraw funds (or withdraw with a penalty, often the last few months’ earned interest).

I was able to open my savings accounts with comically small amounts. I’ve then connected my accounts to Draft2Digital, Amazon Affiliates, and some other passive-income sources so as to save that “bonus” income automatically—a small-scale way of banking my windfalls.

Speaking of windfalls, whether you win the lottery or receive an inheritance from your mysterious late maiden aunt, Bogleheads has a good list of what to do next  (and in no hurry). One of the first tips is to set aside some of the money in your savings accounts.

Other ways to start a savings cushion, or to build one faster, without needing to slash your budget:

• Sign up for BillFixers and upload as many bills as you can—phone and internet are a good place to start. Once BillFixers negotiates a discount for you, take the amount you’re no longer paying thanks to that discount and redirect it to your savings account as a monthly contribution.
• For more bonus income, join MyPoints. You can earn points just by clicking their emails when they send them, plus by taking surveys, using coupons, and taking advantage of their advertised sales for stuff you already planned to buy. Cash out points as you earn them and put that cash (or the $ equivalent if you take out gift cards instead) into savings.
• Also check out survey websites, Mturk, affiliate accounts at Amazon or Bookshop.org, and opportunities to sell stuff you’re no longer using through Poshmark, Ebay, Amazon, and other sites. For this latter option, be sure to budget for shipping. But after that, anything you make is extra dollars to save.
• Look closely at your budget—do you have a monthly subscription that you could cancel or downgrade, at least for a while, for funds to redirect to savings?
• Consider cashing out your credit card rewards and putting them into savings (with my own selection of card rewards, this can mean saving the equivalent of 1.5% to 4% of everything I spend).
• Along with windfalls, consider saving birthday or Christmas cash, tax refunds, any money you get back on a returned purchase, or unexpected rebates (such as the one I received from Common Ground last year).

Using automatic transfers will make it that much easier to build savings. Even if irregular paychecks make it a little tougher to schedule automatic transfers (though we can often manage small ones), freelancers should consider paying themselves first, as discussed at the end of my previous post.

Retirement and Investment Accounts

Self-employed people can’t get a 401k through our workplace, but we are able to open accounts such as solo 401(k)s and SEP IRAs. I’ve also opened a Roth IRA—Roth accounts have tax advantages depending on your income level, namely you invest money in them post tax and the value they gain is tax-free. I’m not an expert in this area, so please click the links for more information on these kinds of plans before deciding on the best option for you. I can say that I’ve found my solo 401(k) through Schwab and my Roth IRA through Vanguard relatively simple and inexpensive to open and manage.

And there’s no need for a retirement/investment account to be expensive. Look for low management fees. Highly diversified mutual funds and indexed funds (rather than actively managed ones) are good choices. I’m a fan of the Bogleheads “Three fund portfolio”: one fund for US stocks, one fund for international stocks, and one fund for bonds. In practice my portfolio is a bit more complicated than that—for one thing, I practice Green/Sustainable/Socially Responsible Investment with a portion of my retirement fund savings—but it doesn’t need to be complicated to earn a return. And getting too complicated or bringing on so-called “strategy”, trying to predict an inherently unpredictable marketplace, makes it much more likely that your portfolio will have worse-than-average returns.

Image source: https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy

A common saying among Bogleheads is “Time in the market beats timing the market.” By which they mean: invest your money early and often, and then ignore it. At times stocks will plummet—now, as I’m writing this, is one such time. Historically, stocks have recovered their value again. Alternatively, if they never recover, our society might be drastically reorganized and retirement savings will no longer be a priority to worry about. You might find that idea comforting.

I started a Roth IRA in college, soon after I learned what one was in an economics class. I didn’t have a lot to stash away the first few years—maybe a few hundred dollars from my writing and part-time student jobs—but it was still something, and it slowly grew (and, being in a Roth account, it grew tax-free). Especially when you start young, that growth over time can be impressive. And you’re never going to be younger than you are today. Currently, I try to make the maximum contribution as early in the year as possible, saving up a portion of my earnings over the entire previous year so as to have it handy come January 1st.

Tracking what you have

Between my credit cards, PayPal, checking, and multiple savings and investment accounts, I have a fair bit to keep track of (even though I might not always have, or want, a large balance in any one account). Rigorous organization is necessary, but it doesn’t have to be complicated. In fact, the simpler it is, the better organized.

I used to use Personal Capital to track all my accounts, and it’s especially helpful for investments and long-term savings. It’s free to sign up for, though Personal Capital also offers wealth management for a fee (if you follow the Bogleheads rules you won’t need this, but you may have reasons to want it, and you certainly could do worse). In any event, because I’m a Personal Capital member, I have a referral invitation link, and if you sign up with it and their terms & conditions are met, we might both get $50. I have nothing against Personal Capital, but I’m also not an evangelist for them, even for a potential $50, so you may take it or leave it. Here’s the link. (Also, if you’re a MyPoints member, you might earn a few thousand points for starting a Personal Capital account.)

What I am feeling evangelical about is Mint, a free budgeting website from Intuit. Again, these blog posts are partially based on my budget, goals, and account tracking in Mint. I find the website easy to navigate and use. It’s really good at helping me visualize my bills, goals, and expenses. Because it’s free, Intuit makes money from this website through affiliate offers (also, it doesn’t have a referral option)—this means it advertises various financial services to you. These advertisements aren’t terribly distracting; you can minimize them with a click, and some of the offers might even be useful if you’re planning to open a credit card or investment account. But remember to research any fees or conditions that might be involved first.

Lastly, if you’re a spreadsheet fan, some financial nerds/geniuses have created numerous budgeting forms and shared them on Google Drive. Here’s some recommendations, along with an in-depth guide to using these templates. In my experience, these sheets can be especially useful when you’re testing out a plan and want to experiment with different scenarios—I helped a friend create a Google Sheets budget template when he was making the choice to plunge into freelancing, for instance. Or you can use one to determine your minimum monthly expenses, which you can multiply by 3 or 6 to determine how big your emergency savings fund should be.

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Whether you’re viewing them through Personal Capital, Mint, a spreadsheet, or in pen on paper, I encourage you as a freelancer to get comfortable with looking at numbers with dollar signs in front of them.

Yes, money can be complicated and scary. But in my experience, the really scary thing about money is not having it when you need it. Budgeting can help you use money when you have it in a way that makes it less likely you won’t have it when you need it.

For a freelancer, it’s especially important to have a budget so you know where you are compared to your goals and so you can name your rate with confidence, knowing it will cover your time and living expenses. Yes, the first few times you hit “send” on an invoice or claim a business expense on your tax forms it feels like a plunge on a roller coaster. But you can do this.

Remember to pay your credit card monthly and your estimated taxes quarterly. Put this on your calendar in whatever way you’ll find easiest to notice (oh, being good friends with your calendar, whether it’s on Google or hanging on your wall, is also important for a freelancer. It’s impossible to schedule your work without one). I also suggest updating your budget every few months, or at minimum once per year.

When you make a budget, you’re not going to get it perfect on the first try. That’s perfectly fine. Especially for the first year, making a budget is more about paying attention to where your money is coming from and going, rather than perfectly predicting it. But as a hint: pad the numbers for expenses. It’s a much nicer surprise to have budgeted $100 in a category and spent only $80 than to budget $70 and spend $75. And hey, that’s $20 to either cover a different expense where you went over budget, or to put in your savings, or to splurge on a reward, because you’ve earned one!

Last thoughts

It’s been very helpful to rent somewhere with a low cost of living. I’m also aware, thanks to my parents’ support when I was starting out (I include in this an inheritance from my late father), that I’ve been able to build up a reliable savings cushion faster than many. Even if you follow all of my advice and more, you still may find yourself struggling, and it’s not because you’re lazy or foolish with money. Our economy does not work perfectly, and its results are not fair to everyone. And to put it bluntly, $h!t happens that nobody deserves or can control. I don’t think anyone can look at the news these days and disagree (if you’re reading this in 2035, I hope some of my comments are obsolete).

Still, I started writing these posts because I realized people from all walks of life often overlook options that can help them financially. I had a good friend who used a single credit card opened a few decades ago and didn’t realize credit cards could offer cash-back rewards until I helped him sign up for one at Costco. People miss the chance to clip coupons, buy generic, or take advantage of sales. People have recurring subscriptions to websites they never visit and storage units they haven’t stored anything in for months. My fellow Wisconsinites don’t know they can receive energy-efficient lightbulbs for free through Focus on Energy. People who don’t have MyPoints might not realize they could earn points for shopping at sites they use routinely, or for clicking a few emails each week. People dread the thought of having to negotiate with their phone company and don’t realize services like BillFixers exist. After reading these posts, I hope you’re more aware of your options. For every line item of your budget, there’s probably at least one way to reduce its costs that many people aren’t aware of (and I’m not talking about $5 lattes, although as a freelancer, try making friends with the coffeemaker in your kitchen. Then you might have money to eat avocado toast, if not a house. I mean, even Bill Gates doesn’t have enough money to eat a house. Apples to oranges comparison there. And this is your copyeditor, signing out.).