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Freelancers-How to Plan for Inconsistent Income with a 3 Account Approach

Freelancers face unique challenges. I should know, having spent the past 30 years in the music business, as a guitarist, composer, and arranger.  While everyone’s situation and experience are different, there are universal questions we’ve probably all asked ourselves at one point or another:  

  • How much will I work this week, this month, this year?  
  • Will I get the important calls, the ones that will lead to other good calls? 
  • If I turn something down because of a conflict, am I setting myself up to be excluded from future calls?
  • If I don’t get called for something, is this the beginning of the end?

There’s so much anxiety built into the normal day-to-day functions of freelancing, that most freelancers don’t have the energy or mental strength to think about saving, investing, or planning for the future. Everyone wants to do these things, it’s just that the nature of the work leaves so little mental energy to put toward developing and implementing a solid plan.

An approach that can help secure your financial future is to create 3 individual accounts: 

First, and important to know, all three accounts should be funded in the same way, by taking 10% of the gross amount of any gig, whether it’s a session, a live gig, a teaching gig, a sideline, a royalty check, etc. 

1. Start with Emergency Fund:
 As titled, this is intended for an emergency and should have 3 to 6 months of your living expenses as it’s balance. You can estimate your living expenses by adding up fixed costs like rent or mortgage, car payment, gas, insurance, utilities, food, union dues, etc., plus discretionary costs like entertainment, travel, gifts, etc. It’s ok for this to be a rough calculation. Just getting close is good enough.

The Emergency Fund shouldn’t be invested in anything that could lose value. It should be in a money market fund, or a series of CD’s with varying maturities, or T-Bills or something similar. This money will be used if something unexpected happens that stops the income flow. It’s a bit like an insurance policy you hope you never need it but it’s good to have just in case

2. Next, The Short-Term Fund

Once the Emergency Fund has 3 to 6 months of living expenses, stop sending money to it, and instead send money to the Short Term Fund and the Long Term Fund, in equal amounts.  The Short Term Fund should be invested somewhat conservatively. The short term is intended for life’s milestone expenses, like buying a home.

3. And Finally, The Long Term Fund should be invested aggressively, with the objective of long term growth. A good investment advisor can properly diversify your long term holdings so that over time, your money can grow and compound. The long term is intended for life’s longer decisions, primarily retirement.

Taking 10% of your gross income and sending it to one of these accounts may feel difficult at first-after all, you now have less money to spend than before. It may take about 3 or 4 months before things start to feel like they did before you did this. But most people adjust to this new normal fairly quickly, and now you will have the benefit of having a system in place that takes care of you in a big way. You will be surprised at how good it feels.