Planning for a new financial paradigm
I'd tried and occasionally gotten by on very much less, and I'd shuffled small freelance gigs and guiltily spent windfalls instead of saving. But I just couldn't figure out a long-term way to make my rather meager freelance income work for all my non-household-bill expenses; food, child care, coffee shop goodies, lunches for my boys, the limited-but-still-precious entertainment expenditures, home office costs, clothes, and the rest of it. I was considering finding some more small jobs; I'd like to start paying back my student loans, which I've been avoiding thanks to income-based repayment. I was also a little (or a lot) stressed out about retirement savings, which had peaked in my late 20s. I'd emptied my account for a down payment on the house, at the time, figuring it would be fine; I was 28 when I made the purchase. Plenty of time.
Enter the decade of scraping by with a variety of situations in which either my husband or I was always unemployed or underemployed. My husband has been doing well with his military retirement savings, but, with my education and experience, it seemed a shame (if not a downright personal finance crime) for me not to have my own retirement savings.
I had recently started doing more consulting, but lots of it was for trade or for very small start-up businesses, some of whom couldn't pay me on time or couldn't pay my actual value. If only, I'd thought so many times that thought had worn a track in my head, I could somehow go back to investment banking without leaving the life I have now — without forsaking the magazine and my writing!
Enter the paradigm shift
Last week, my neighbor and founder of the nonprofit on whose board I serve as president drove me to the board meeting, and we were chatting about various things, including money. My immediate concern was the money to print our next issue of the magazine, but I had these other longer-term issues in the back of my mind. “I've been putting it out there!” I said, meaning, I had been posting about it on Facebook, I had been talking about it, I was sending off emails.
“One of my friends believes that,” she said. “That if you put an intention out to the universe enough, you'll make it happen. It works for her! She's been very successful!” I knew well that was true; this woman, a playwright, had a lot of success, including an Emmy-nominated screenplay.
“Well,” I said. “Here I am! Saying to the universe that I need money to print the next issue.”
The next afternoon one of my dearest business school friends messaged me on Facebook. “Do you want to do some MBA-style work?” she asked. “Yes!” I said. “Tell me more!”
By Friday, I had filled out a W-9 and sat in on my first conference call. It was investment banking work, part-time, from home. My first month's pay would be enough to print the spring issue of the magazine. It seemed hardly possible.
Making a plan with a new paradigm
It's hard not to get ahead of yourself when you enter a new financial paradigm. It's a bigger version of the conversation that goes on in your head when you have a financial windfall. Sometimes you've come up with a way to allocate four times the amount before it ever enters your bank account. So my first advice is going to be obvious (but I'll say it anyway, as much as a reminder to myself than anything):
1. Don't make any commitments until the money's in the bank. My first month's income is already committed for the magazine. I won't start allocating the rest until month two. Of course, not making commitments doesn't mean you can't budget and plan, but don't have automatic checks coming out of your account on the 31st if that's your first paycheck. Even if everything in the job is working out swimmingly, paperwork errors and delays happen, and besides, why do that to yourself? Give the new financial situation a few days or weeks — and check-clearing time — to sink in.
2. Try to live under the old financial regime for at least a month. After just looking at the headshots on one of our clients' web sites, it's tempting to go out and buy myself a new suit, or at least get a fancy haircut! But visiting clients in person is on the distant horizon (and maybe my circa-2000 wardrobe, still in my closet, is as timeless as I told myself back when I was buying it). The only expense I can rationalize is a replacement for my cracked iPhone, already in my budget. I am thinking of April as my first month with a new budgetary world order.
3. Make a prioritized list of needs. My list of needs starts with “groceries and babysitting”; that's about $1,200 a month. I'll change to a phone plan that allows for more talk and data time, as the new job will mean lots of phone calls, and some of those will be away from home. But other than as-yet-to-occur emergencies (I'm wondering if my water heater is showing signs of wear, for instance), there are no other needs.
4. Paying down debt and savings go hand-in-hand. I've been slowly developing an affinity for the concept of the Balanced Money Formula, but it's been hard to implement with so little money left over after “Needs.” As I understand the concept, the 20% for “savings” can be also spent on paying down debt. For me, the thing that makes the most sense is to do it halvsies: pick a number — for me it's pretty big, about 65% of my new income — and allocate half to savings and half to paying down debt. I don't include my mortgage in that figure, as my husband is paying that (and we have ample equity and a low, comfortable payment). Like Adam Baker at Man Vs. Debt says, paying down debt IS a “Want” for me.
Because I've been going so long without a properly-juiced emergency savings fund, my first savings goal is that; when it's reached the “three months of expenses” level, I'll start putting half of my savings in retirement funds, and half in a “want”; a travel fund for me and my boys.
5. Don't burn bridges. It crossed my mind for a few minutes that I might give up on a few freelance gigs I have ongoing (n.b.: I never thought about giving up this blog!). But I quickly discarded that idea. As when we talked about risk, any new financial paradigm is a lovely uncertainty. If at all possible, keep the other income streams coming in, even if you have to reduce your commitments a bit for the time being, just in case.
6. Plan first for taxes. Even though this is #6 on my list, it's #1 in importance. I'm a freelancer and my income has been so low the past few years that I haven't needed to pay estimated quarterly payments; this will change immediately. Your new financial paradigm will surely cause new tax consequences and require new tax planning. You may want to run your last year's taxes through one of the online tax prep programs, with the new financial information added, just to see what happens. One thing I'll do, for instance, is take a home-office deduction; I've never done that, before, even though I believe I could easily have justified it.
7. Don't lose your old self in your new finances. Remember how I wanted new clothes? I believe firmly in not buying too many (if any!) new clothes. So I promised myself I'd buy one new pair of fancy boots, and then do a review of my existing wardrobe, taking some favorite shoes to be repaired and some favorite suits to be taken in, or out, or hemmed. Luckily, I have a “naked mama party” (a clothing exchange) planned this week already. I'll take it as an opportunity to purge the things that won't work in the life of either eccentric writer Sarah or part-time investment banker Sarah, and wait until I actually have a need to fill it with new clothes. If I'll be meeting clients face-to-face as seldom as I think I will, I'll have time to make new clothes, which would be as Old Self as anything.
8. Use just a little money to make your new paradigm work. After my waiting period, I'm going to find someone to help a few hours a week with keeping the house clean. It's already more than I can handle, with my husband overseas, and my new income means I can finally afford it. First on my list: organizing paper. Maybe that will be my next post…