This isn’t fancy or a formal essay just more of a ‘jotting down some thoughts I had after reading a few blog posts a month ago and then a few recent tweets’. Maybe you’ll find something useful here. I hope so.
There have been a few blog posts lately on being “Indie” mostly in the software game developer’s net circles and I wanted to put down some thoughts I had on the topic after >20 years as an independent software design & development consultant. In particular, a scary tweet by an indie developer who ended up in the hospital due to stress from taking on too much work and another tweet by a fellow who was noting the feast or famine nature of consulting work as an independent.
This feast and famine roller-coaster characterization rings very true and the nature of this type of dynamic is such that you can easily end up feeling like you can never say “no” (as your inner voice of fear says, “but this might be the last contract that shows up for a year!”). This can devolve into a genuinely dangerous reality such as the tweeter who ended up visiting the hospital. For others it’s been completely debilitating back pain. Family time can easily be eroded by this pressure and I once when I was younger I found myself calculating the cost of going to a movie based on the “loss” of billable hours : “fancy dinner and a movie? Let’s see, $100 for nice dinner & dessert, $25 for the movie, $40 for the baby sitter, 1.5 hrs for dinner, 2.5 hrs for the movie, 1.5 hours driving time, that’s 5.5 hours of lost work @ $100/hr… so all together that’s more than $700 for dinner & a movie! *Crazy*!!! ” Be funny if it wasn’t so sad. 🙂
The blog post Indie Challenges, a follow-up to I’m Indie, and I’m Proud by Owen Goss (both well worth reading) combined with the sub-text of Farewell 2010 by Steve Streeting really underline for me that it’s easy to get caught up rush of work and take on too much.
The start of this post was a comment I started to write on the Indie Challenges post. Two of the challenges Owen mentions are ones I’ve seen cause problems for people going freelance or indie and struggled with myself in the early days: Discipline & Cash flow management. (ok, I still struggle with discipline sometimes :-)).
In thinking about it over the years there are two areas I see people getting stuck with (and with which I have felt the challenge of), and they both have to do with discipline.
- The first is work discipline: as an Indie, you ARE the boss, so if you can’t keep yourself focused and motivated and tell yourself what to do, you might not have the right personality to run your own business. This applies both to working and not overworking (keeping a balance).
- The second is fiscal discipline: as Doug points out, your income will vary beyond anything you likely will have experienced as an employee (hopefully!). The biggest challenge I see here is that many people are not used to a varied cash flow and this is particularly problematic on the good months when big checks come in; often when a big check shows up, they think – “yay! new computer time!” and spend it, all of it (!). And then when there is no check the next month they are hitting the credit cards to pay the electric bill and whatnot.
I like Doug’s advice for the first one, and it’s one element of what has been most successful for me: establish a routine that gets you working the right number of hours.
Step 1: Keep a log, set parameters
The second thing I do is set requirements for myself similar to what an employer might set for me if I were their employee: I must work X hours each week, on average over the month. The averaging over the month gives me a little wiggle room but also sets clear boundaries.
For example, when Geek was born, after an initial few months I took off work completely, I had an average 20 hour per week requirement for myself for the rest of that first year (I’d decided to work half-time so I could participate more in the parenting during his first year). I set this as an average weekly number so that I could have some flexibility on a given week, but that over the course of a month I needed to get in this much per week so I’d earn enough to cover our monthly bills. So effectively I had a monthly total also that I tracked. I did this so that if one week was slow (I got a head-cold or had out of town guests, or whatever) I could make it up the next week and if the first weeks of the month went really well I could take the last week off if I chose to.
The key for this for me is keeping a log that is updated daily. Mine shows weekly total so far for this week, and monthly total so far for this month. I use this to push myself when necessary and give myself permission to goof off for a day if I don’t feel like working.
Step 2: Cash Flow – Know your Monthly Cost
As for cash flow, I read somewhere long ago (don’t know where, sorry) about getting 6 months operating expenses in the bank and using that to provide your own “credit line” rather than getting one from a bank. As a kid I watched one of my family members with their own business have to mortgage their parent’s condo, max out all their credit cards and their large business credit line to try and retain employees and keep their business alive – very stressful and something I would really like to avoid. It worked out and the economy came back and all the debt was paid off, but it took years to recover. Anyway, that was part of my motivation to come up with a system that would hopefully keep things from getting that bleak. I took this 6 month idea and made the following system which has served me very well over the last couple of decades.
The first step is to determine what it costs you to maintain your family and business each month – both the minimum and an average that is calculated from the entire year’s actual expenses divided by 12. This latter number takes into account those one-time unexpected things that always happen in one way or another: fridge breaks down, computer blows up, tires fall off the car, you know, that stuff :-).
The second number is always higher than the first, but it’s the real monthly cost of your current lifestyle and it’s the important number. This is what you have to earn, on average, each month to avoid going into debt on an annual basis. And to make money and grow financially, you have to earn more than this each month, on average. Let’s call this your “Monthly Cost.”
Note that you’ll need to keep tracking your expenses and adjust your Monthly Cost number regularly to keep it up to date. Observing these changes is a good motivator for keeping expenses down. I’ve used Quicken for this for more than a decade, maybe 2 (?!). Anything will work but a computer program that lets you generate reports and filter things in and out really helps (for example, I generated a report that removed the house down-payment and initial purchase related expenses as they are, for me, a once-a-decade (or more) event and not reflecting something that needs to be in my annual analysis and Monthly Cost figure, in general).
Step 3: Create an Emergency Account
Then create a special savings account – I call this the “Emergency Account” – and work on getting 6 months buffer into it; that’ll be your Monthly Cost times 6, easy enough. Yah, easy to calculate, but challenging to accumulate! That’s ok. It took me almost 10 years to get all this fully funded for myself what with paying of school loans, buying our first house and figuring this all out. The key is to start and have a clear understanding of where you are going. Starting is often the hardest part for people because it can seem like an impossible goal. Just do it! Open the account, put $20 per wk into it initially, more if you can. Just get into the habit of depositing money there regularly and then, and this is key, translate the balance into time. When the balance equals your Monthly Cost – congratulations! That’s one month of freedom! Great! Now let’s get another one in there! Then another! Before you know it, you’ll be at 6 months. Sweet!
Note that there are two ways to power on this equation: 1) earn more money and put more money into the account each month, and 2) sculpt your lifestyle to reduce your Monthly Cost! Each amount you reduce the Monthly Amount reduces the amount you need in this account by 6x that reduction! Cutting your expenses pays!
Aside: For my Emergency Account, I use a reduced Monthly Cost that reflects the non-catastrophic reductions in lifestyle expenses that we’d do if we got to this point in our financial situation. It’s a little complicated to calculate this, but for me it involves figuring out which monthly things I’d do without and how much they’d save me, then subtracting that amount from the Monthly Cost calculated above. These days I’ve generally cut those things already so the two numbers are converging.
Step 4: Create a Business Cash Flow Account
Once you have the Emergency Account funded to the 6 month level, set up another one – I call it the “Business Cash Flow Account” – this one replaces what most business use a Line of Credit or credit cards for: smoothing out the variations in income. Build this account up as fast as you can, but know that it might take a few years, that’s ok! Just start because until you get started, it will not happen!
So, when I have a good month financially and a big fat check comes in, the rule is: if the Business Cash flow Account is full (6 months worth), then I can consider buying new computers and such (but don’t forget about setting aside money for taxes and funding your retirement account – that’s in part 5 below). If it’s not full, then any extra goes into the Cash flow account.
This of course assumes that the Emergency Account is full – fill that first and once it’s full, don’t spend from it until it’s actually an emergency. This shouldn’t happen often once you have the second account funded and if you understand your expenses.
Since my business is mostly doing freelance software design and development, once my two 6 month accounts are full I generally let any extra build up in the business checking account until there is enough for me to take a break between contracts, either for a vacation (spend the summer with Geek!) or to build something entrepreneurial. I also have a mental threshold that says when the Business Cash Flow Account gets to the 2 months of bills level, I have to go get a “real job” – this is very good motivation for getting the indie cash flow moving again if I’ve been slacking off! 🙂
This model has served me well for over 20 years now. Find a model or a system that works for you and be disciplined and stick to it!
Step 5: Other accounts
I keep a couple of other accounts and you might find them helpful to consider as well:
A Tax Account where 1/3 of every check that comes in is put immediately (you may need a different percentage based on your tax rate, etc). I once watched a relative get his paycheck diverted and bank accounts frozen by the IRS who thought he owed them money (he didn’t, in fact, they ended up owing him money!). Nasty nasty. The have the power, you do not want to run afoul of the tax collectors! SO, make sure you put their money aside first and then eat out of the rest. My first year receiving money as an independent, I was a student at the time, the tax bill came to $1400 which was a LOT of money to a college student just scraping by in 1986. I had to sell guitars, stereo equipment and books to get the money for the tax bill – not fun!
Note that the need for this may differ depending on your business type. Now that my main business is a corporation and I get my money out of it via payroll which takes out the taxes I’ll owe, I don’t need this account any more. As a sole-proprietor or LLC operated as a sole-proprietor for tax purposes, this advice is more pertinent. As always, consulting your licensed tax professional for tax matters. :-0
I also keep a personal savings account where I save up for stuff that I want or need (replacement car, vacation, new guitar, toys etc). This savings account is important. While building your Emergency Account and your Business Cash Flow Account, don’t forget to put a little something in this “fun” account every month also. This the account you can spend from, not the Emergency Account! I’ve seen people fail because they have tried to impose unrealistic discipline on themselves by not putting any “fun” money aside and then they break down and spend the emergency money on something just for fun. Psych your self out; make it hurt to take money out of the Emergency Account. This is your freedom you’re spending! But be realistic, give yourself a bit to spend – even $20/month into a “fun” savings account might be enough. new DVD every so often. Donation to charity. Vacation with family. Whatever works to keep you feeling good about what you’re doing.
Then there’s the retirement account. This one is the longest term one and the one where I really need to do better. You may want or need to stop working at some point, do you have enough wealth built up to fund your bills until you perish?
Well, this has gotten far longer than I’d thought it would, so I’m stopping here.
Wishing you all good fortune and low stress now and in the future,