Freelancers tend to be impulsive and risk-takers. We like to set out on our own and often crave excitement. But there is a difference between excitement and impracticality. If you've just signed your first contract with a client or just created your first design as a freelancer, it can be tempting to say "I'm going to start my own business" and jump right in. But one thing you should have before you start is an emergency fund.
What is an Emergency Fund
An emergency fund is a savings account with enough money to cover your living expenses (and that of your family or dependents) for at least 3 months. It is a cash account that you can access without penalty.
Why Do You Need an Emergency Fund?
An emergency fund does more than serve you during an emergency. It also provides some peace of mind. When you have that money available, you have some security. You're not as dependent upon the vagaries of your clients and you can use that security to negotiate better deals for your business. After all, if you know you have enough money to not work for 3 months, you can turn down the 50-page site that would require hundreds of hours of work, but will only pay $50. If you didn't have that cushion, you might feel compelled to take it, just to have some money coming in.
Opportunity Costs - an emergency fund allows you to evaluate every client and every job offer and decide if it's really worth it. After all, say you took the 50-page site project, and then the next day were offered a 5-page brochure site with the client offering $100 per page. Because you took the 50-page project, you don't have time to take on the 5-page project, so you ultimately lost $450. That is an opportunity cost.
How to Set Up an Emergency Fund
- a bank account - preferably one that is online only and doesn't have a checkbook or ATM card associated with it. You need to save the money, not have it available for the first "emergency" font pack you find to buy.
- save at least 3-6 months of living expenses. Some people say to save 3-6 months of your salary, but really you should tally up how much it costs you to live and save enough so that if you had no income for 3-6 months you'd be okay.
Don't be daunted by the amount. If you're just starting out and you can only save a tiny bit per month, that's still better than nothing. Just don't quit your day job until you've got the full cushion. You can still start freelancing without the emergency fund, but I don't recommend doing it full-time until you have it filled.
Suggestions for How to Save the Money
It can seem like an overwhelming amount, especially if your bank account is closer to zero than to 1zillion. I'm not a financial adviser, but here are a few ways you can save the money:
- Give up an indulgence for 1 month and place the money you would have spent into your emergency fund. If you're addicted to coffee, stop drinking lattes for a month. If you must have the most recent paperback (my personal addiction) try out the library for a month.
- At the end of that month, evaluate how you did and either continue giving that one up or give up something else instead. If you're feeling really virtuous, you could try giving up a second item in month 2 and a third in month 3 and so on.
- If you can't give them up completely, find a cheaper alternative and do the trade for longer. Switch from lattes to a drip coffee. From Scharffenburger to Hersheys.
- Increase your auto insurance deductible. By raising your deductible, you can often reduce your rates by a significant margin. Yes, if you get in an accident, you will have to pay out more, but that's what an emergency fund is for!
- Get a better rate on your credit cards. When you get an offer for a lower interest rate than you're currently paying on your card, save it and call your card company. Ask them politely to lower your rate because you've been a good customer for __ years.
- Make a meal plan and stick to it. If you plan your meals for the week you'll not only have a healthier diet, you'll save money.
- Get rid of your TV, or at least cable. Okay, maybe that's too much for most people, but if you keep track of the TV channels you actually watch on a regular basis, you might be surprised. You might be able to get rid of most or all of the premium stations and never miss them. And if you're a member of a movie rental service like Netflix, you might consider dumping TV altogether. We did that several years ago and haven't missed it at all.
The Keys to a Good Emergency Fund
- It's easy for you to deposit money into, but somewhat harder to get money out of.
- The fund is liquid, meaning cash, so that you can access it immediately without penalty.
- It's in a savings account so that it's earning some interest.
- It has an automatic deposit set up, so that you're always saving at least a small amount.
- It (ultimately) has enough money in it that you can feel secure. Whether this is 3 months of living expenses or 12 months of your salary or some arbitrary amount.
- If you do have an emergency, you start replenishing it as soon as you can.