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.
The benefits
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
Great post, great advice. I have bookmarked the hell out of this one.
My mother’s a CPA, which gives me an unfair advantage, I think. She would love this.
I organized as an LLC a couple of years ago and all my writing income and expenses go through there. I pay myself a salary, as well as profits as “owner” of the business.
My personal side is not nearly so well organized, but I did start throwing everything into Quicken around the same time I set up the LLC. That let’s me eyeball things pretty well.
One thing that’s been very important is keeping the year’s worth of living expenses stashed in an interest-bearing savings account. I made sure I had at least 6 months stashed before I even started freelancing full time. But I’ve got that safety net account, and nothing comes out of there.
Okay, here you go.
http://cathshaffer.livejournal.com/43649.html
Carrie: keeping the large stash was what I did, though since I was tossed into full timing, I couldn’t quite do that. I used a line of credit equal to 6 months, and then fought my way into a savings worth 3-4 months of income by Nov. 2008, which getting sick wiped out. Getting back to 0 forced me think about how to reimagine everything. 🙂
I think, after my last bills, I’ll have 1 month’s saved at the end of this month. Hurrah. It’s nice to have a buffer growing again.
Catherine, yeah, the envelopes of cash didn’t work for me either, but I’m slowly just adding accounts to do something similar LOL. Like, I need to add in a tax account, as right now I yank the tax money out of savings, which doesn’t let me forecast it very well. Something I’m changing in the next month or so with my ‘occasional expenses’ account I mentioned.
That’s the thing about a stash — it’ll be there for things like getting sick. (The thing I think about is being so sick or injured that I can’t work for a stretch of time, start missing deadlines, etc.)
The thing to avoid under normal circumstances is scraping by on ramen and hope between checks. Since as we all know checks are mighty unpredictable. 🙂
I’ll have to time look at the details of yours and Catherine’s, although my thought at yours is, “Gee, Tobey sure likes to complicate things.” Or maybe you just like dealing with spreadsheets.
I basically keep 3 separate Excel spreadsheets related to my business. One is simply a few columns: Date Item Expense Client Amount
Simple enough. This is a straightforward spreadsheet that I enter every penny in and every penny out and who it came for or what I spent it on.
The second spreadsheet I call Running Totals. This is basically to deal with quarterly taxes. Date Amount Federal State
I enter the date the check came in, how much it was for, then I multiply that amount by 24% for federal and 4% for state. Fed’s been fairly consistent, but state often needs adjustment. Leanne essentially handles the household money so I regularly print it out and give it to her so she knows how much money we’re going to need to pay the gov’t.
I keep a third spreadsheet, and it’s a running sheet that I’ve been keeping since I started freelancing. It’s probably less important than the other two, sort of. It actually has 11 columns.
Date published, Project Type, Client, Title, Fee, Deadline, Date Sent, Date Paid, Amount Paid, Date Assignment Accepted, Invoice Number. There’s room for comments. When I get paid, I fill in the date paid, then highlight the column in yellow so I know it’s over and done with. If I’ve got projects that have multiple deadlines and/or payments, like a novel or a market research report, I typically highlight in some other color with a note indicating when the payout for other parts will happen.
Now. I’m, what, 2 years ahead of you on this freelancing thing, but maybe about 14 years ahead of you on the kids-eat-your-money thing. I’ve found–and your mileage may vary–that every couple years some crisis of some sort forces us to re-evaluate some aspects of how we handle the business. The Running Total sheet came about because, a week before a family trip to Disney World (actually, about 2 days before), I realized, Oops, I forgot, we need to pay quarterly taxes.
This year we had some economic problems (somewhat milder than the rest of the country, but business slowed down for long enough to make both of us uncomfortable) that coincided with extra expenses. That made us seriously re-evaluate how well the household is capitalized, ie., how much cash we keep in the bank. The answer to that is we were trying to keep $10,000 in the bank, but often dipped below it. Now we’re aiming for $20,000, because, unfortunately, it doesn’t take many things–like a new roof that cost us $6,000, followed by a $1500 car repair, which coincided with a bunch of extra expenses for the kids, a tree that had to be taken down, and 6 weeks in which I didn’t receive ANY money–to rip through $10G. Our credit card bills, both business and home, went thru the roof (so to speak). This slow-down also coincided with my attempt to pull together an e-publishing company that, ultimately, was a good idea well executed, but undercapitalized because I couldn’t afford to keep marketing it. Long story short, I’m back to focusing on sure-things and reliable, well-paying business (which I generally like more than e-publishing anyway). I’m currently swamped with work. So we consolidated some money to drive down the credit card bills and are working to keep something closer to $20G in the bank, if at all possible. I’m also adding a 10% surcharge to all my income that will go into the TIAA-CREF account, which is long overdue.
My oldest son just turned 16, so in 2.5 years we’ll be working on figuring out how to pay for college, which, becuz of the boys’ age spread (4 years), we can expect to run for 8 or 9 or… well, let’s just not dwell on how we’re going to figure that out.
It *sounds* complicated, I know, trying to explain it to people, maybe I’m failing, because it’s actually hands off, so therefore actually easier for me. The spreadsheet just bolds stuff as they get paid, and forecasts, the various accounts automate all the elements of my life.
Maybe it is complicated, but using the ‘simple’ accounting method I had to spend hours and hours, so to me this ‘feels’ like cake LOL.
As for the buffer, yeah, we both do that. My system was almost identical to what you just described for excel outflow/inflows. I also had about 10,000 in mine until the health shit hit last November. Losing my ability to work, and take hours a week to look at the household budget made me think hard on how to create a system that runs along automatically in my background.
Now, Mark, your system sounds just as complicated to me as Toby’s! 🙂 I think these things take a lot of words to explain, but if they are designed well, you can just sit down and do it without having to think about it too much.
Yeah, I’m on top of the taxes, but so far haven’t made much progress getting ahead of vacations, gifts, and car expenses. Someday… 🙂
Man, I read this the other day, and set it aside to study it. I love this idea! We used to do the Quicken thing… I’d put in our bills and incomes for a year ahead, so I could see what’s happening.
I’m not quite getting your approach yet, but I think it works much better than what I’ve been doing. (I’m going to read again tomorrow. Seriously, I used to rock at math, but…)
I’ve tried everything. I can’t seed this at the moment, but I think this would help. Especially for my husband. I do love him, but gosh… he may have an MBA, but he doesn’t “get” it. He’s always had regular paychecks. So these are actual physical accounts at banks? Wow, this would be great… I could actually do ING a bit better. I love ING, but they make it hard to deposit money unless you have another bank account. They have great sub-accounts, I hear, which appear like separate accounts.
Do you do these accounts at separate banks? Or where?
Thanks for this. Insurance coverage changed on the 1st, so “re-do budget” is on this month’s to-do list, and I’ve been looking for some better solutions to our old spreadsheet.
Check to see if your local utilities will allow you to pay a set amount monthly. That helps smooth out the monthly outgo.
You know, as a professional accountant that works advising people that are new to business how to set things up, I like this system, Toby. Want to know why? Because YOU set it up and YOU like it and YOU can use it.
I tell all my clients that the best system is the one that they like, will use and know how to maintain. If I can ask you “how much did you spend on ____ this year?” and you can tell me with a minimum of hassle, we are golden.
Came here via Scalzi. This looks like an excellent system. Thanks for sharing it.
I work a regular day job and supplement with out of hours freelance stuff. Simple? Not really: like you I use spreadsheets to try and second-guess the future and, even with one fixed income it gets hairy some months. No matter how you try you can’t predict everything that can go wrong. The only saving grace I have is that being in Canada I’m unlikely to get sideswiped by medical bills like you did. Mind you there are plenty of substitute diasters waiting in the wings to trip one up.
I have a steady monthly income and live in Finland, so this might not be directly applicable to someone with income that changes month-to-month and/or living in the US.
I used to log and categorize every single expense we (that is, me and my wife) had into Quicken, but got tired of it, so we simplified our setup so that we have a total of five bank accounts set up between us: one each for our private accounts, one for longer-term common savings, one for variable monthly spending plus predictable monthly bills, and one for repeating & forecastable bills that do not occur monthly. We’ve seeded the last two with an amount ($300) that should handle minor fluctuations.
Over the years, we’ve figured out the amount of money we need to store to the monthly spending account by simply seeing whether the balance on the account trends up or down. Because I get my salary on a fixed day of the month, this is pretty easy: I just look at the balance just before our monthly payments are deposited on the account.
We have a second account for less-than-monthly repeating but predictable expenses, such as electricity (we get billed every two months), insurance (yearly and quarterly fees), membership fees (generally yearly), etc. This is a separate account because otherwise it’d be too easy to forget that upcoming insurance bill and overdraft the monthly spending account. The amount we transfer onto the account is determined by an Excel sheet that lists each of these bills (and in which months they are due; there are about 35 of them). The total of these bills is then divided by 12, and this is the monthly sum we transfer (with some rounding up for fee hikes etc).
We revisit the Excel sheet on any major changes (changes in insurance, for example), or if the account has an unexpectedly high or low balance. The months the bills are due are used to calculate an estimate of the running balance of the account over the year so that we can determine when the balance is ok or not.
The longer-term savings account is used both for saving up money for that vacation somewhere or simply to buy a new whatnot, and for any unexpected major expenses, so we try to keep a reasonable balance there. Again, we store a set sum of money on that account monthly.
We further divide the amount to be transferred to the various accounts between the two of us according to our net incomes. Again, when these change, we revisit this sheet of the Excel sheet to determine who transfers what sum to which accounts.
I’ve always had a system, but it’s just been for me. Then I moved in with my brother and built an elaborate system for tracking and dividing shared expenses and payments.
Now I’ve moved in with my fiancee and we’re getting married next summer. I needed a simpler system for the two of us. I spent the last couple weeks building it.
It looks almost exactly like yours. I find that reassuring.