Recently I purchased a $234 solid state hard drive.
I’ve been waiting for almost three months to buy it.
Before that, I knew I didn’t have the wiggle room. I knew I wouldn’t have it for another month, unless one of a handful of promised windfalls due to fiction writing would show up.
The windfall showed up, I got to get it early.
When I left my job in 2006 I threw myself into freelancing and writing with a sort of white-hot energy. And that elbow grease paid off. By 2008 I was posting big numbers every month. I made enough I could travel as needed to promote books, I lead a fairly cheap life based out of Ohio.
The old way of handling my accounts
I’d always balanced books using Quicken software, and sort of forecast finances by manually adding upcoming bills (using Quicken’s bills window as well). I usually had some idea of what the next two weeks looked like. During deadlines I’d let things lapse for a month or so, but the solid money and lines of credit made sure no disasters happened. I mainly avoided balancing the checkbook under deadlines because I’m slightly dsylexic. Balancing takes me as long as 4 hours, because my mind plays tricks on me with long columns of numbers (6 and 9 are a bitch!).
All that was thrown upside down last year when I ended up in the hospital. For one, when I got out I was struggling to get the energy to do freelance work. I was working in twenty minute shifts then lying down on the floor. After three months of paying the first round of medical bills, I’d chewed through the very comfortable buffer of savings I’d built up because I was only able to work a few hours a day.
I realized I needed to reapproach things and create a system that ticked along with minimal oversight (not 4 hours a week), automatic if possible, and simple for me to comprehend where I stood (after four months, tackling the balancing, understanding where I stood financially, all of that just made an already dark situation worse).
I realized that in addition to the downsides of my system only forecasting a 3-4 weeks out was that, in addition to not being able to lose myself in deadlines, this system meant I had a tendency to spend or lose large infusions of cash as they showed up, as they didn’t fit within my 4 week snapshot.
For years I’ve been reading books on personal finance. Now the need for ‘automation’ began to make sense (some concepts are hard for me to understand, this one always puzzled me).
Another trick I found somewhere was the idea of using lots of different accounts for different types of spending goals.
Multiple accounts for multiple activities
I realized I had three types of outgoing flows in my life:
1) repeating, forecastable, monthly bills. Things like my mortgage, a car payment, a credit card payment, a student loan payment. I also included power bills, because they’re roughly the same month to month. Gas varies wildly based on season, but I took the highest month available and set that as the monthly amount. I know with certainty that $x,xxx comes out every month.
2) variable monthly spending. Things like groceries, dining out, gas for cars, personal spending cash, clothes.
3) writing related outflows. Monthly webhosting, travel to conventions, computers, office supplies. I could divide it into two like above, but it works for tracking purposes.
So these three accounts were created. On my first month I did the following:
- Put all the repeating bills into an excel spreadsheet that I’d paid the previous month, and the date they were withdrawn from my banking account. I added up the total amount for the month that they were going to cost and put that total amount on the first of the month into that account.
- Did my best to figure out what we spent on clothing/groceries/dining out/entertainment/personal cash and other variable spending items and seeded the account with a month’s worth of that amount.
- Seeded my writing account with a small amount of money.
So here’s how it currently works:
My repeating account slowly ticks down, but it’s where I deposit money I make and Emily makes. Because there’s a month’s money in there, I don’t worry about it getting low. At the first of the month, the sum of the variable account needed for its month also comes out of the repeating account and so is thus auto-refilled.
Because the repeating account is automated, I don’t need to worry about whether the mortgage bounces or things will get too low. Variable is where my consumer spending impacts the budget. Going out to dinner too much will only invoke stress about the variable account, not the monthly repeating.
I balance the variable account against the bank once a week or so, by bolding things as they clear. But it’s not a stressful experience, I’m just checking things off, really. With the variable, it’s easy at the halfway point of the month to see where we are. Is half the money in there? If not, we need to slow down…
As extra money above and beyond trickles into the monthly account, the buffer grows visibly. I even made a chart, and it visually made clear to me how monthly income comes and goes: it looks like rolling waves. In the old days I’d log in and see $4,000 and think, wow, I have $4,000. Now I look at a chart and see that the waves bounced between say $2,000 and $4,000 and I think, there’s a usable buffer of $2,000 in the monthly account.
Here’s what the sheet looks like with made up numbers.
When starting out, to seed the account, I had to use some money from a line of credit, but it was worth it. I initially linked the monthly account to a credit card, scared about overdrafting. The system worked, so I now delinked it, and as I’ve started to build a savings, linked it to that.
The variable account presented the most issues, as we do occasionally go over. I had it overdraft protected. Near the end of the month, because I only check thing occasionally, I would let a bunch of overdraft fees hit the account. I now let it draw from a savings account. I’m reconsidering the monthly variable amount now that we have kid expenses, as I seem to be about $200 off in my estimates.
What’s fantastic is that I have forecasts in the monthly account that go out for a whole quarter, and for the year. After a year of paying off tremendous amounts of medical debt I’m down to my last couple bills, and I can glance at the future and let out a sigh.
I can even use the spreadsheet to now game scenarios. Doing that led me to cancel most of my con travel over the year in order to pay for things more important, and I’ll be repeating some of that for next year as well.
I was also able to see the impact of shaving down various monthly bills that were adding up, and was able to take back almost $350 a month we were wasting.
In 2008 I had a buffer of money, but no idea outside of a month what was going on. Just recently I received a nice subrights check. A quarter of it went to the savings account that backs the three other accounts. $234 went to a new harddrive. Half of it is set aside to write the last couple healthcare bills checks that even me out, a year later. The remaining bit goes into the monthly repeating buffer, and which, forecast out a year, means I don’t have to worry about the monthly repeating bills (as long as Emily’s and my monthly repeating checks continue) for a year.
I would never have been able to forecast that far ahead, or understand all that, a year ago.
It also lets me do other interesting things too, this system. The variability of writers income is renowned. Since I can’t count on some payments arriving on a set date, I keep them off the monthly chart in a column of expected payments. When they arrive, they go into the buffer of the cyclical monthly account, or into savings.
This is all super technical, but I’ve run into a bunch of writers who ask me how I set up my accounts. One writer was very intrigued by my spreadsheet, as were some friends, so I promised I’d explain this system.
Looking to the future
I do need to tweak my writing account. Right now I use it so that I have a virtually idiot proof business system. All writing related purchases go through it, making it easy to collect my writing expenses for taxes at the end of the year by printing out my bank’s yearly summary for my accountant. I toss what receipts I’m able to keep into a box (I mainly eyeball big receipts. The IRS allowance on dining out for business is bigger than what I spend, so I only need receipts for the big purchases or non-eating purchases, which are in email, I’m virtually paperless at this point).
I do need to figure out how much to keep in that account each quarter and develop a ‘budget’ for the writing. Right now my writing account is empty and anything I spend via it basically comes out of the savings that its linked to, because savings is built out of irregular writing income that comes in and gets socked into there. Being able to forecast writing expenses better would be a good tool.
I also toy with getting two personal accounts for our personal cash spending, but at that point wonder if I would be adding too many credit cards to the wallet. I need to just accept that I need to add a couple hundred more to variable and relax.
I also am now working on savings goals (I’d like hardwood floors in the house, a Subaru WRX Sti, a large flat screen TV, a surround sound system, and my garden landscaped this spring) and creating a second savings account at SmartyPig that will withdraw a set amount a month toward these goals out of the monthly recurring account. I’m also learning to enjoy what I have, based on seeing that not spending allows me write more, freelance/hustle less. That’s the power of the graph!
The for sure next step though, will be ‘occasional large expenses’ account that works just like variable. This is for things like medical bills, car repairs, plumbers, taxes, etc. Right now I take those out of the monthly account, keeping an eye on the buffer and savings. It adds a bit of admin upkeep to the monthly account. Setting up a monthly ‘occasional’ withdrawal of X amount will add an account, and add a checkbook, but I think will be the final leg of making my system easy to eyeball and run automagically for the most part.
The last 12 months have been extraordinarily challenging, both physically, mentally, and personally. But out of that crucible, I’ve come up with a few interesting systems for handling stuff.
Barring a black swan event, a year from now I’ll be in a much stronger position than I was a year past.
It says so right here on the chart.
And if a black swan event does hit (lose a gig, someone loses a job), I have a buffer and a way to forecast my way out of it, one that requires 10 minutes a week to oversee instead of 4 hours, and that I can forecast a year out.
As more and more of my income comes in via fiction, being able to put those lumps into the savings, and let it dribble out monthly via the monthly recurring account, also gives me a methodology for handling a freelance lifestyle and figuring out my cash flow.
It’s just one way of doing it, a reply to a common question.
Here’s the sample spreadsheet:
If you’re a freelancer and have a system, post a link in the comments, I’ll add the link under here.
Links to other people’s freelance money management systems:
Catherine Schaffer uses a form of zero-based budgeting