Today’s question comes from Holly. She asks:
I’m a 31-year-old graphic designer who’s been working for herself for more than a year now. Working independently has forced me to come to terms with a lot of bad financial decisions in the past, along with the renewed ability to set good habits for the future that keep me in control of my money.
Right now, managing my money with variable income often leaves me frustrated. My first year was very lucrative, so I was just tacked with a rather large tax bill from good ol’ Uncle Sam. That, coupled with quarterly tax payments, maxing out my Roth IRA, health insurance, HSA payments, student loans, credit card debt from health care bills, and monthly living expenses, often make me feel like I’m losing my mind. There’s always something demanding my money.
There’s a reason I’m a designer — managing finances is one of my least favorite things. Do you have any tips for making money management easier? How should I be divvying up paychecks as they come in? How would you manage your money if you were me? I think my biggest complaint is that I feel behind all the time. I’d love to feel on top and ahead of things with a larger money cushion, instead of feeling like I’m just getting by.
Sometimes when there are so many small fires, you can’t see the big fire. And that is you need to raise your rates. But you’re probably not thinking about this because you’re worrying about where to get the money to pay your bills.
But first, let’s talk money management. For salaried employees, to go from living paycheck-to-paycheck to building up savings is easier because they have a steady paycheck. This means they can automate their finances.
I did this myself. Twice.
Back when I was saving a down payment for a house, I set up an automatic monthly transfer that took $1,000 from my checking account (where my paychecks went), and put it into a high interest savings account. I saved up $40,000 this way without doing any work.
Then I did the same thing when I wanted to become financially independent. The difference here was that the automatic transfer was rerouted to my brokerage account to be invested.
Because your paychecks are variable this is more difficult. Here’s what you do instead.
- Have clients pay your LLC, and deposit this money in your business checking account.
- Immediately transfer 25% to a business savings account you’ve created for paying quarterly taxes.
- Immediately transfer 10% to a business savings account you’ve created to build up savings.
- On the 1st of the month write yourself a paycheck from your LLC, and deposit this money in your personal checking account.
- From there map out where your money needs to go (same as a salaried employee).
Taking this approach delineates your business and personal finances and will restore your sanity.
More importantly, saving 10% of every client payment builds the cash cushion you want. This amount might seem insignificant. It’s not. Starting small and building the habit builds discipline, and that’s how great things can happen.
Now let’s talk your rates. Yes, you didn’t even ask about this but raising your rates will have the biggest impact on your finances.
Most freelancers I know go about pricing like this, “Well, so-and-so charges this much, and I do the same thing as them, so I’ll just charge what they charge.” (Or worse, they charge less to “get more business.”) What’s wrong with this? You signal to clients that you’re the same as everyone else.
Let’s pick on wedding photographers. How can some of them charge 5X, 10X, even 50X more than others? Do they have 50X better gear? 50X the experience? No. The reason they can charge 50X more is because they’ve positioned themselves as a premium service. Sure, they have the skills to back it up, but they also have strong positioning.
Here, let’s take a look at some actual wedding photographers where I live.
Wedding photographer #1: $150
Why would you hire this person? Put yourself in the mind of the client — this is the most important day of their lives. When you play in this sandbox it’s a race to the bottom, and you’ll attract shitty clients who haggle on price, and don’t value what you do.
Wedding photographer #2: $3,250+
Just based on price, what do you think? Yes, this is a professional providing a premium product. In fact, clients are so excited to work with this person that the price is a mere triviality (I know because she’s a friend). She has the skills, but more importantly has nailed positioning.
Working independently you’re probably afraid that raising your rates will scare away clients. So what happens when you double your rates and lose half your clients? Right, nothing. You make the same amount of money, and get half your time back. And when you fill that free time up with clients who pay your new rate (because they value your work), then you’ve just doubled your income.