I’d like to throw out a couple of ideas here. The first goes back to Kris’s formula:

Revenue – Expenses = Profit.

The area that most people think most about (and I include myself in that number) is Expenses.

If we end up in debt, where is the first place we turn? What are we counseled over and over again in financial magazines and by talking heads? Cut expenses.

How can I provide my goods or services cheaper? How about if I print on both sides of the paper? And I can remember one instructor at an beginning writer’s seminar urging us kids to go out and find really thin paper — the kind that was used between sheets of carbon paper to make multiple copies as you typed. (See how old I am?) because it was sold by the pound and typing paper was sold by the sheet and you could get 4 times as much.

It’s obvious, it’s under our control and since it is one half of the equation, its logical.

But it is generally very difficult for a small business (and writing _is_ a business) to cut costs in any meaningful way. If a small business can cut costs 20%, that’s _huge_!

And then they’re done. It is very unlikely to be able to cut costs another 20%. Maybe 1 or 2%. So there’s a limit (a floor, if you will) to the return on the effort expended on this part of the equation.

Instead, it can be far more productive to consider the other side of the equation: Revenue. As a freelance programmer, can I sell the piece of code I just wrote to someone else? Who? And how many times? How do I find new buyers and how do I sell to them? In theory, the audience or customers are clients is very large. Much more potential return on the effort spent on this side of the equation.

The second idea is that every small business person needs their own personal board of directors — small circle of people who can guide you through decision.

If I were planning on becoming a freelance writer in 3 years, I would start forming my Board now. And I would poll them about how to make my future business effective.

You don’t have to take their advice — I frequently don’t. But the decisions that I vet with them are always, always, always better decisions.

They don’t have to be in your industry. My circle includes a lawyer, a contractor, a writer, two film makers as well as a bunch of programmers who were all my peers when we started out.

Phone numbers go in your cell phone. Call often.

Best regards,
Alan

But your overall point–don’t delay savings–is right on. Thanks! Kris

Good rules, but of course me being an up and coming freelance writer would add some more discussion, like what are assets and liabilities, can we reach reaching critical mass, and how it is so important to save? I’ll expand and hope someone can benefit, if I go on and on just delete or just stop reading.

Assets are savings in the bank, bonds, stock or any income generating device that does not require excessive demand from the owner. We strive to obtain assets for real savings. Liabilities e.g., cost of doing business, are any item that cost you. Many believe their house and car are assets, but no, they cost you money to maintain and if you sold them then other costs would occur. One must still sleep and travel. It is important to know the difference.

Critical mass is obtained when ones assets generate enough income to be independent of work. Many in America have reached critical mass and many within this set still strive to work. But true critical mass lifts the fear of hunger, insurance costs and housing. Therefore one must ask, how we can reach critical mass, it is simple, save, save and save.

The best way for most to save is not to see your savings, e.g., direct deposit from your bank account to a mutual fund. You get a statement, but it’s harder to cash and it becomes paper in the present. As it grows, (compound interest) one can’t seem to believe it’s real. I believe we all can save 10 percent of what we make; it is not hard to save 10 percent. Skip the wine, the cheese, and that $6.99/pound steak. Make do with ground beef, shop only sales, and stock pile when able. Your bank or the fund can set this up, recommend a no load mutual fund, like Janus or Franklin. Surf the web and you will find many good no load funds. If 10 percent is too much, start with 5 percent, but use direct deposit, if you don’t see it, then it is likely you will not spend it. Just start at one hundred dollars per month is not much, increase as time and income allow.

Why is it so important to save, to reach a critical mass? Because when you’re old and gray, then one can eat human food versus cat food, not to be dependent on the government or ones family and to have the ability to take care of others. But the best reason is that one can enjoy early retirement and do what he or she desires.

It goes fast, life, don’t delay savings.

Thank you, Peter

PS My goal is to write like you. Thanks for letting me write here, I need the practice.

My wife and I have had a couple of freelance businesses over the years, so I’ve seen that side of it. I’m considering making her get a job with insurance coverage when I’m ready to go full time writing. 😉

So the budgeting, cash flow analysis, expense assessment, all that — it’s become part of my day job. Good practical practice for my own business, but it’s not quite the same thing because it isn’t my business. I can’t do anything to boost the business’s income or decrease draws against that income. I can see the effect of those decisions in my boss’s business and apply those lessons to the money I make from part-time freelancing.

It’s funny, though — I’m much more frugal with my freelancing income than I am with the salary I get from my day job. Maybe because I feel I worked harder for it? Or maybe because I’m too used to getting a paycheck twice a month, even though there were lean years at my day job when I couldn’t count on that regular paycheck. I’ll have to think about that.

That’s a great decision, Amanda, and if you’re good at planning, you might make the switch quicker than you think.

What you and Mike posted is exactly why I’m doing this. You need to know what you’re facing BEFORE you quit, if possible. So many folks have already made the leap, and I’m trying to help with that as well. But if I can catch you before you make the choice, then you’ll make an informed choice which means you’ll make the best choice for you.

Thanks for the post Kris. The more you write about these, the more I know I want to be absolutely, 100% covered before I go freelance. I want to be the ODD freelancer that has 3 years of income saved up and a dozen back up plans. That being said, it might be a very long time before I go full time freelance.

Thanks, Mike. 🙂

Yes — I was just thinking about this the other day, before I read this post! Just LIVING is expensive. And once you get behind in the bills — man, you’re hosed.

I don’t have anything deep to add here, other than to say thanks for writing this series, and thanks too for making me really appreciate my Day Job. 🙂

Great post, James. Folks, if you haven’t read my post on insurance, go read it and all the comments now. He’s absolutely right.