Self-employment is a roller coaster.
You probably didn’t start a business for stability, but it’s still surprising how volatile things can be for freelancers. One month, you’re turning away contracts because you’re too busy. The next month, you don’t hear from a single client.
Your business will have slow periods. It’s inevitable.
Last year a couple of slow periods (and some dumb decisions) nearly took me out of freelancing. But before I let dry spells put me out of business, I started looking at money differently and following a simple rule:
I lived on last month’s income
Does the thought of saving and budgeting sound painful? I don’t blame you. If you ever want to kill a lively conversation, just mention “budgeting” and watch the enthusiasm fizzle.
However, if you’re interested in outlasting slow periods, I haven’t found a simpler way than living on last month.
Here’s what we’ll cover:
- Why you need to save
- How living on last month changes everything
- What you need to start beating dry spells
It’s all about savings
You can’t have too much money saved up. 3, 6, 9 months worth is a great goal. Not everyone is at that point. I’m definitely not.
Every time you think you’re going to save a big chunk of money, a new cost comes up. A few familiar examples:
- Appliances break
- Clients cancel
- Your son tries flying, misses the bean bag landing pad and needs to go to the hospital
But having lots of savings can be tricky. For example: Do you know how long you can live off savings?
If you have a nice chunk of money in the bank, it might feel like a long time. But how long, exactly?
Famine and more famine
I was new to freelancing. After finishing a project, the work stopped coming. Crickets.
The logical freelancer would start hustling to find new clients. But I had some savings. And savings made me dumb.
I spent 2 months working on a personal project, followed by a 1 month vacation. 3 months of almost zero income.
I returned from vacation to nothing: No contracts, no leads. With savings drained, I was suddenly wondering how rent was going to be paid.
Truthfully, I don’t remember ever feeling out of control. I had savings.
In the 2 months after vacation, I invoiced $3,000. I live in Idaho, which is an awfully affordable place to live. Even so, $3,000 doesn’t pay the bills long for a family of 4.
And then, YNAB
The next month, everything changed. That fateful month, I discovered You Need a Budget (YNAB). I enrolled in their course on budgeting.
All of the YNAB rules are great, but rule number 4 is the inspiration for this post. Here’s rule 4 in my own words:
This month, only spend the money you collected last month
A quick example just to make it concrete:
In January, you collect $4,000 -> In February, you can spend $4,000.
In February, you collect $5,000 -> In March, you can spend $5,000.
Simple, right? Wonderfully so.
How does this make a difference?
1. It forces you to constrain your spending
Your spending is tied to your income. You’re not allowed to spend savings. So your savings will stick around.
2. It eliminates your feelings from your money.
Have you ever signed a big $$$ contract? It’s a lovely feeling. You feel like you can afford anything. How about that yacht you never dreamed about until now?
Remember that 1-month vacation I mentioned earlier? Guess when that was booked: The same month I signed a $17,000 contract.
(For the record: That contract was estimated for 2 months, but ended up taking 6 months. And I utterly failed to help my client be successful. Gargantuan fail.)
Your spending decisions should be tied to the money that’s already in your bank account, not to the contracts you’re signing right now.
3. It saves you stress on paying this month’s bills
Will you be able to pay all of the bills this month?
When you’re living paycheck-to-paycheck, you may not know the answer. When you’re living on last month, you know in advance.
Also, you don’t have to stress about the timing of payments. Have you ever worried about a bill due on the 15th? Will your clients pay in time? You don’t need to worry – you have money from last month.
4. The biggie: You can walk away from bad projects
This is huge.
When you have no way to pay an upcoming bill, you lose the ability to say “no”. You lose the ability to negotiate. You don’t have the time to find another (better) project – you have to take what’s in front of you.
When you have 1 month of runway, you have the option to walk away. You have 30 days to find another project.
Don’t underestimate how much stronger your negotiating power will be. You’ll never be able to talk yourself into a higher rate if you’re constantly in danger of missing rent.
Wait, isn’t this just savings?
Sorta. This is, at the heart of it, just saving 1 month of income.
But the important part is that you’re saving last month’s income.
Why? Your income & expenses vary month to month.
Living on last month differs from “just saving” because
- Your spending is tied to recent income.
- It sets a hard limit on this month’s spending. If you go over last month’s income, you’re officially living beyond your means.
How do you get started?
So now you believe in the power of living on last month. You’re ready for action. What steps do you take?
If you have at least one month of savings, getting started is pretty simple:
- This month, only spend the amount you earned last month.
- Next month, only spend the amount you collected this month.
If you don’t have any savings, it’s not much more complicated:
- Spend less money than you earn, until you’ve saved a month’s worth of income.
- Follow steps 1 & 2 from above.
Make a simple budget
I use YNAB to do my budgeting. I highly recommend it, but it’s absolutely not necessary to get started. If you’re serious about living on last month’s income, all you need is a pen and paper. Here’s how you do it:
- At the start of a month, add up all of the income you collected last month. Not pending payments; only money actually in your bank account.
- Subtract tax estimates.
- Subtract known expenses – things that you know the exact amounts for. Examples: Rent, recurring debt, and fixed utilities like internet & phone.
- Subtract a rough estimate for variable expenses. Examples: Electricity, groceries, and gasoline.
What’s left after subtracting expenses can be loosely thought of as “spending money”. Obviously, we’ve left a lot of categories out of the equation, but now we have a basic budget based on last month’s income.
Now that you have a budget, you follow the last step:
5. Put away a big chunk for savings, and don’t spend more than what’s left.
When will you start living on last month?
YNAB says that it takes a few months (on average) to save up enough money to start living on last month.
If you don’t have enough savings to start this month, now is a wonderful time to start building those savings.
What do you have to lose? A few months of saving, a few minutes of budgeting, and you’ve got a new weapon to do battle with your next dry spell (which, by the way, I hope never happens).
Contact me on Hacker News or Twitter if you have any questions!
This Post Has 4 Comments
Ishan18 Dec 2014
I agree with you about YNAB. It is a wonderful software. I got it some time back and so far, it has been ONLY software that kept me tracking spending and income successfully. It’s everywhere and fast.
I have yet to start living on last month but I guess I should start now. 🙂
Jordan Prince18 Dec 2014
Hey man, I’m glad you’re trying to fix your finances. That’s a good thing. I don’t think you took it far enough, though.
I’d recommend instead of “living off last month”, design a fixed budget that requires you to live a little less high on the hog than you do now(say 2000$/mo), and then stick to it no matter what contracts you get. You’ll find, living on less, that you will naturally accumulate many months of savings. Yes, you may not be able to get Starbucks as often, but you’ll find you’ll get used to it.
As a freelancer you probably bring in around 60k a year(based on some numbers you threw around), and so that comes out to around 3500$/month after taxes. If you always live off 2,000$, naturally over the period of a year you will put away 20,000$!
If you keep doing this for 10 years, when you account for compounding, you’ll have about 300,000$ in the bank!
Alternatively, if you just live “off last month”, you will never have more than 5,000$ in the bank over a ten year period. On what do you plan to retire? SS?
This is a well-intentioned post, but honestly “live on last month” is actually not that great of an idea, and I hope this illuminates why. For more on this kind of stuff, check out
My guiding light on such matters.
Andy Adams18 Dec 2014
Thanks for your comment. From the response, it seems I wasn’t clear that this *isn’t the final step* in freelance finances. So for anyone who has read this far: Living on last month is only the start.
I’ve read some MMM, and though I like his sentiment, when you try to apply it to a family of 5 it falls apart. $24,000 per year can work when you own your house outright and have 1-ish kids, but not when you’re paying a mortgage and have to deal with food allergies, emergency room visits, and all of the other unexpecteds that come with a family :). That doesn’t mean you don’t save, it just means that the formulas don’t quite work for many lifestyles.
Living on last month is a great first step for people living without a budget. It was a huge positive for me. For some reason, people reading this think that I’m suggesting you don’t save anything beyond last month, which is *absolutely crazy*. I obviously need to clarify my point. I still stand by what I wrote, but you may not be the person I’m writing to. Thank you regardless.
TC15 Jan 2017
Thank you for sharing this informative article. I really like the idea of living on last month. As a first time freelancer, I hit my first dry spell and it was similar to how you did yours. Thanks again for sharing your experiences and being open about what you went through. It’s valuable to see how others do things with specific details laid out. Looking forward to more articles from you!