I recently read two finance books that might be of interest to freelancers.
The first is The Money Book For Freelancers, Part-Timers, and the Self-Employed by Joseph D’Agnese and Denise Kiernan. I was pleasantly surprised to see a finance book aimed directly at people with sporadic income. This book is written in an easy going style, with examples drawn from the author’s lives, as well as those of their friends.
The major takeaway is that you should pay yourself first–when a check comes in, allocate a percentage for taxes, a percentage for retirement, and a percentage for an emergency fund. Do that first, so you aren’t even tempted to spend it. I do this because of my corporate structure and SIMPLE IRA, but if you’re a new freelancer, or someone who is a schedule C worker, then it’s great advice.
Then, after a while, when you’re comfortable with the system, you can start to save for other goals. One of the strongest parts of the book was when they encouraged you to sit down and write out your particular financial goals. It’s tough to do, because when you do so, then you’re confronted with the hard work of trying to achieve them, but it’s great advice.
While this book was full of tips for dealing with the income side, I felt like the outgo side was covered as well. They had advice about breaking up your expenses into required (taxes, retirement, emergency), overhead (rent/mortgage, food, insurance), and variable (eating out, classes). Once you know your overhead and required expenses, if you get a windfall (that big client finally paid!) you can siphon that off into a separate account and use that for future months of expenses. The authors also did a good job talking nuts and bolts, going down to the details of what type of bank accounts you need.
They didn’t really cover some things that are on the periphery of financial concerns–corporate structure, handling employees and contractors and types of insurance, for instance. But doing so would probably have distracted from the main point of the book, so I understand.
If you’re a freelancer, and this strategy doesn’t work for you, you probably want to check this book out.
I also read Are you a Stock or a Bond by Moshe A. Milevsky. This book is a fascinating look at the best way for modern savers with 401(k)s and IRAs to replicate what the WWII generation had–a pension.
The hook of the book is that savers should consider their lifetime earning potential and job prospects when planning a retirement asset allocation strategy. Those who are in a more stable job (the author uses himself as an example–a tenured professor) should consider their earnings more bond-like and thus invest more in stocks (to the point of borrowing to buy stocks). Those in a more tenuous job (farmer? I don’t remember his example) should do the opposite.
The hook, while thought provoking, is not really the focus of the book. In fact, I was a bit disappointed that he didn’t spend more time telling you how to determine if your income stream was more stock like or more bond like. Instead, he charges off into what you should do with your accumulated savings when you retire.
The short answer–buy an annuity. The reason for this is that the guaranteed income from an annuity is impossible to replicate from the same amount of capital invested individually. Why? Because an annuity spreads payments across a population in which some will die before others. Annuities essentially transfer wealth from those who die early to those who die later. This asset class reduces your greatest financial risk at retirement–running out of money. Just like a pension.
Definitely a thought provoking book, and one that would be especially useful to people approaching retirement.