Step one is to create a revenue stream that serves as a retainer.
A retainer is an agreement you set up with a client that ensures a fixed payment each month. For example, a graphic designer could offer a client three to six designs per month for a flat rate of $500 per month over six months. If you are a consultant, you could offer two sessions per month plus ongoing support for $1,500 for month over the period of six months.
Typically these contracts last six to twelve months, or the duration of a project. When setting up these engagements, there are a couple of things to keep in mind.
- Ensure that there is a thirty day clause that requires each party to notify the other if they are cancelling the engagement.
- Thirty or sixty days prior to the end of the engagement, schedule a meeting with the client to go over the progress and whether or not it makes sense to extend the contract. This meeting will help you decide if you need to find a replacement client or if you can count on this revenue for the months ahead.
Step two is to know your number.
A few years ago, I had the opportunity to chat with Suze Orman about her advice for freelancers. Her number one tip was to calculate your fixed monthly expenses, for your business and your personal life, and know that number like the back of your hand. You should know how much it costs to live your life and run your business, so that you have a benchmark of how much you need to earn each month to cover yourself.
Step three is to save, save, save.
When times are really good and the cash is flowing freely, be disciplined about putting extra into your savings. As a freelancer and independent contractor, we have to be extra mindful of stashing cash for times when gigs are low or unexpected events arise.
Step four is to develop a percentage system.
After step three, you may be wondering how much should you save. When your income varies, it’s tough to have a fixed amount that should be saved or invested. Therefore, I recommend using the 50/20/30 percentage system.
- 50% of your income should be devoted to covering your fixed costs as you calculated in step two. This also includes the amount money you need to stash away for tax payments.
- 20% of your income should go towards your money goals. Savings, investing, paying down debt.
- 30% of your income can be devoted to living life. This can be travel, shopping, enjoying the luxuries of life. If you have big money goals, or want to be cautious in case you have a slow month as a freelancer, you may want to decrease this percentage to pad your savings account.
Managing your finances when your income varies is a skill that’s much easier to master when your finances are organized and consistently monitored during your weekly mimosa and money date. When you work with a bookkeeper like Bench, you get financial statements that show you how your income has varied in the past, so you can plan for the future.
Danetha Doe is the creator of Money & Mimosas and the host of the Future of Accounting podcast. She has been named a millennial thought leader by the Hong Kong Institute of CPAs and the Ohio Society of CPAs. Sign up for their weekly newsletter for more tips on how to manage, save and grow your money.