Cash Flow

You need a "cushion"

I worked for big companies for nearly 30 years prior to going freelance full-time. Naturally, I did a lot of research before making such a big change, trying to make sure that I considered every possible problem before making the leap. I interviewed dozens of freelancers, asking about pitfalls and hurdles. Every one had the same advice: You need a financial cushion.

Every freelancer had a different explanation about why an emergency fund was pivotal to surviving self-employment. One had a medical issue that meant she was out of work for several months; another had a scofflaw client; another was simply unprepared for the shock of paying income taxes in lump sums, rather than through employer withholding. Another lost a key client and had a lean stretch trying to replace the income. In every case, having an emergency fund — a financial cushion — was the key to making it through.

The only certainty is uncertainty

How much of a financial cushion do you need? That’s always a tricky question to answer. Financial planners suggest anywhere from three months to a year’s worth of living expenses, depending on the other circumstances of your life. If, for instance, you’re married to a supportive person, who has a day job that pays most of your bills, you might not need as much — unless, of course, that relationship (or job) is tenuous. If you are young, single and able to couch surf, you can also get by on less. But, if you’re the main breadwinner, and trying to make your side hustle your full time job, you’ll need a lot. Having young children adds to the uncertainty — and to the necessary size of your emergency fund.

To set a number, think of what might go wrong; what it could potentially cost you; how likely that is; and what other resources you could tap to pay the bills during that time. Err on the side of caution, setting aside more than you think you’ll need. No one has ever complained about having too much money.

However, realize that cash flow challenges aren’t just sparked in emergencies when you work for yourself. Self-employment rarely provides anything close to regular income, which means you have to do a lot of planning to pay your regular bills on irregular wages.

Regular Bills + Irregular Wages = Trouble

Even if you’ve never bothered to budget before, now is the time. Put together a list of your regular expenses, from rent and insurance, to food, entertainment and travel. Then jot down the irregular, but big, expenses such as income and property taxes and home and auto insurance. Divide those annual costs by 12 and set aside the requisite amount each month so that the cost doesn’t land like a bomb later in the year.

Also budget for savings, putting at least 10 percent of your wages into long-term retirement savings and another 10% into shorter-term emergency savings to build your financial cushion. And, don’t forget about vacations. Even though your employer isn’t going to pay you to take time off, you may want to anyway. And the cost of plane tickets is likely to be dwarfed by the cost of not working for a few weeks.

All this budgeting may seem like overkill, but it’s really an insurance policy against panic. This sort of planning allows you to navigate upsets calmly, and upsets are all too common when you work for yourself.

Personal Confirmation

I suffered my first such upset only a few months into my solo career. When I left the Los Angeles Times in September of 2008, I expected a $10,000 parting payment from the parent company, Tribune Media, which appeared to be dithering with writing the check. Then, in December, I learned that Tribune had filed for bankruptcy and that check was indefinitely delayed. Had I left without a financial cushion, I would have been devastated. With it, I could be patient.

If your side hustle is a part-time job that just earns you extra dough, you don’t need to worry so much. But if you’re planning to strike out on your own full-time, build the financial cushion first. You’ll thank me later.