“Let’s talk about money, baby…”
(A different rendition of the Salt N Pepa classic?)
Money, everyone’s not so favorite topic. As a former financial advisor, money isn’t a big deal to me. I mean it is, when it comes to feeling secure, ensuring I earn enough to provide for my family (I’m the sole income earner, remember?) and making progress towards our own financial goals.
But it’s not a big deal for me to talk about it.
And I get that’s a bit rare. It’s getting to be a lot less so, but many people (including my husband) were raised not to talk about money. It’d be considered beyond rude to ask someone their annual salary.
Due to my former profession (and maybe my own upbringing being different), it was commonplace for me to ask “How much do you make?” and “Tell me about your assets and liabilities.” I.e. do you have a cash reserve, are you saving for retirement and give me the down and dirty on your debt.
Talking about finances is just “normal” for me. And it’s a pretty darn helpful topic, especially if you’re thinking about taking the plunge into full-time freelancing. Am I right?
Table of Contents
“What did you do to prepare for full-time freelancing?”
I get asked a lot about what I did right and what I’d go back and change in relation to my journey moving from a lucrative and stable full-time job to that of freelancing and building an online business. (Sometimes I think I’m crazy too!)
I almost always say I have no regrets and I wouldn’t do anything differently. I’m a believer that all of the successes and failures that I’ve wracked up along the way are part of my journey, my story and have taught me lessons that have brought me where I am today.
But looking back on what I did right, one big thing sticks out.
We got financially fit.
You’d think that since my job was in finance that we’d have already been there. But we weren’t.
We were like everyone else that spent a bit above our means, financed our wedding on credit cards, bought too expensive of a vehicle and used credit instead of cash for things like home repairs.
It is what it is and again I wouldn’t decide to change that part of our story.
But before we started planning for our family, we decided to do something about it. We paid off all of our debt (student loans, auto loans and credit cards) and started to pay cash for things, instead of financing it.
We cut all unnecessary expenses, started sticking to a budget and ate in more at home. We shopped around for insurance, started tithing (a big change) regularly and letting God direct our money.
And this is what enabled first Wade to quit his job to become a SAHD and then me to transition from a regular paycheck to the variable income that comes with freelancing. And even though we’ve added some expenses back in, we still try to run a pretty lean budget, allowing us to feel confident during times of uncertainty.
If you’re thinking about quitting your dependable job to freelance full-time, you need to get financially fit too. But how?
1. Take an inventory of your situation.
If you haven’t already, list all of your assets (what you own) and your liabilities (what you owe).
Is there anything that is costing you more money than it’s worth? Consider selling it or decreasing the associated expenses (like going from comprehensive coverage to a travel policy on a third vehicle if it’s paid off).
In conjunction with calculating your net worth (assets – liabilities = net worth), list out your income sources and your expenses. This is better known as a budget. (Are you cringing yet?)
Side note: Many people think that budgets are just for poor people, when in fact many rich people get to be rich by budgeting and living within their means. Budgeting is really just that – figuring out what you make, subtracting what you spend and saving the rest (and you might want to do the saving part first and live on the rest). So budgeting = being financially savvy.
2. Cut out unnecessary spending.
Do you really need cable? Or to eat out more than once per week? How about those Target runs (speaking from personal experience, Target likes to take too much of my money…)
Do you know where your money is going? Are you giving direction to each dollar – controlling it, rather than letting it control you?
I’m not going to tell you what to cut – you’re an adult and can prioritize your life all by your big girl (or big boy) self. The brass tax of the situation is that you should try to create leverage – try to spend less than you bring home and I’ll tell you what to do with the difference in a moment.
3. Start saving.
Have you ever heard cash is king?
Cuz it is. Even now in 2016.
The reason that cash is king, is because it gives you choice. I.e. paying down debt is important, imperative really in your journey to self-employment, but doing a bit of saving first is smart.
And having a cash reserve (a buffer really set aside in checking, savings or both) allows you to change your financial life. How?
The next time something unexpected comes up, you can pull the money from savings, not put it on your credit card. And then pay yourself back in the next few weeks or months.
And just for the record unexpected isn’t always negative. Unexpected could be a vacation, it could be an opportunity, like buying something normally very expensive second-hand for a steal. Unexpected is just unplanned – i.e. not a normal monthly expense in your budget.
I’d encourage you to get at least one month’s worth of expenses (not income) set aside prior to going hog wild on the next step – your debt repayment plan. And if one month’s expenses is a real stretch, start with $500 or $1,000 instead (Dave Ramsey style).
4. Annihilate that debt!
Do you think dumping debt is fun?
Probably not. Since I love unpopular things like pitching, it’s probably no surprise that I find paying off debt to be a fun “extracurricular activity.”
But it really is. You know why?
It enables you to get closer to your goals. And helps decrease your stress level. Both of which are helpful when planning a big career change.
So snowball that debt. Take your liability inventory from above and payoff the smallest debt first. I know the interest might be higher on other debts, but paying off the littlest one first will give you a quick win, which will then give you confidence to keep going and tackle the next one.
After your first debt is paid off, take the payment you were making to that one and add it to the payment you’re making to your next smallest debt. This is what’s called “snowballing” your debt.
Rinse, cycle and repeat until all of your consumer debt (auto loans, credit cards, etc.) are gone. I’d probably throw in student loans there too, even though it’s not technically consumer debt. If you own your home, payoff everything but the mortgage. If you don’t own a home, aim to pay it all off ASAP.
5. Increase your income.
This step by no means needs to come last.
It’s hopefully something you’re already working on. But I want you to continue to work on increasing your side hustle income as a piece of your financial fitness training plan.
Any extra income you make should go first to that mini savings goal and second towards debt. Then when your debt is gone, you can kick up that savings goal and try and stuff away as much as possible before quitting your day job.
How much is enough?
“They say” (and by “they” I mean financial gurus) that the average individual or family should have 3-6 months of expenses set aside. For the self-employed, that should be more like 6-12.
I say figure out what you’re comfortable with and increase it as you can!
The goal here is to grow your income to help you get financially fit in as little time as possible. But it’s also to build up your self-employment salary enough to be able to live on it when you give your boss the pink slip.
I.e. don’t quit your job before you’re making some serious cash as a freelancer. Or you better have one hell of a runway!
Go ahead, quit your job!
In the perfect world, you’ll have organized your finances, created a ton of leverage in your budget, paid off all of your debt, have a nice little nest egg in savings and be crushing it as a part-time freelancer.
But sadly, we don’t live in the perfect world. So all of your ducks might not be in the perfect little row before you leave work behind. And that’s okay.
It really is.
By no means am I saying to go quit your day job today without doing any of the above. I’m just saying that although you’d like to have a ton in savings, minimal expenses, no debt and a thriving freelance business, you might not have it all before you’re ready to cut ties.
Hopefully you’ll have done some debt repayment, some savings, some budgeting and be semi-killing it as a freelancer though. Some is better than none.
When you’re ready – whatever that looks like for you – go out in style. Not in the flipping your boss the bird, burning bridges type of way mind you. More of the “I’m confident I’m gonna be a success dammit” kind of way!
Celebrate. Then get your pitch on!
Do you have plans to leave work behind? If so, when is D-day – tell us in the comments!