ThriftyGal of the blog Chasing Prosperity made a good point on my retirement post about $20,000 being sort of conservative for someone who makes $100k/year.
(Read: “Just stick a fork in me when I’m 50-ish!“)
And she’s totally 100% right.
However, as a freelancer, income is a bit trickier to pin down as a confirmed amount than working for a company and getting paid bi-weekly.
Therefore, $20,000 to me, is a good goal as a bare minimum even though I am making more than $100,000 a year right now.
Here’s the reasons why:
I am being realistic, rather than conservative
I don’t always work full-time.
This contract is a rare opportunity that is not even guaranteed to last either!
They could boot me out at the end of March and my plans for my future earnings could go up in smoke.
I am not mad about it, I am just trying to be really conservative and not expect what hasn’t been confirmed.
See, without statistics, I cannot say: “I will make $60,000 this year, and $20,000 can FOR SURE be set aside for savings.”
There are months where I won’t work, and there are months where I will work a lot.
I need at least 5 years of stats for that, and I am currently pushing 2 years.
- From Aug-Nov 2008: $90,000 as a freelancer (note: I was with a company before)
- All of 2009: $0
- Now, am earning a confirmed: $34,500 which is really $24,000 after expenses
I am hoping to stay on and work until end of 2010, but nothing has been put on paper yet or signed, so I can’t count my chickens before my eggs have hatched.
My real “secret” plan is to save as much as possible
With uncertain and unsteady income, I have to save as much as possible. No ifs, ands or buts about it.
So for example, if I work for the whole year, I will gross $190,000, or $154,000 net.
Note: I am taking out January because I started a month into 2010, and July because I am going to Europe for a month. In a full year, it’s really $230,000 gross taking into account holidays, or $186,300 net.
I am going to save as much as I can of that $154,000, because…..
…I have my priorities set in a laddered system
This is something I’ve done, even earning much, MUCH less than that (on minimum wage), because you should always know how to prioritize where to put your cash which means paying for shelter, food and warmth.
The rest is just bonus.
Since I cannot count on that income as being confirmed yet, having my money priorities set out beforehand are so much more important!
Therefore, I cannot say: 25% of my paycheque will go to savings, 30% goes here, and so on.
I need to allocate the money on a laddered system based on when I earn/get it.
If I don’t have enough banked to move on to my next priority, then I don’t move on until I do.
And they go a little sumpin’ like this:
Here’s a handy chart and my notes will follow.
Priority #1. Expenses for the whole year = $20,000
I need about $25,000 net this year, so all of the money that I make (net) up to $25,000 will go towards living expenses for 2010.
That, is just cash in the bank to pay for expenses so I don’t have to worry about having saved/spent too much on other priorities.
This is my true #1 above all the others.
Last year, I spent $30,000 in net expenses, but this year, I have a plan to spend $20,000 as I am going to try and control that this year.
Priority #2. Expenses for two Emergency Fund years = $50,000
Like in 2009 when I didn’t work*
*As rightly pointed out by ThriftyGal:
Yes, I could have worked another job, but aside from my French not having been strong enough to work in even a minimum wage job for most of 2009, the bigger thing is that I also chose not to work a minimum wage or a 9-5 job because I had the financial savings and the option to do so.
I will need another $25,000 for one year, but I am actually shooting for $50,000 as my emergency fund because I feel good with 2 years.
I am saving an extra $5000 over what I expect to spend, because I like having some extra room.
I am putting it all into high interest savings accounts and other safe, super conservative investment vehicles.
This does a double duty, because it’s subtly a part of my retirement plan as well, but I won’t consider it as such.
Priority #3. Retirement Savings = $20,000
Max out my RRSP.Put the rest in laddered savings.
My TFSA is already maxed out with Priority #2.
This is my bare minimum for retirement for 2010.
Priority #4. Fun = $10,000
Ahhh! FUN!
I honestly cannot think of anything I’d like to buy, but I like leaving myself some breathing room after being so serious with my earnings.
Need to have a break once in a while!
I’m probably going to spend some of it in Europe, eating wonderfully foreign candy, and buying foreign products.
We’ll see.
Priority #5. More Savings = $54,000
Anything left over = bonus to be banked as savings.
I can draw on this to help pad up my retirement funds in future years, or for whatever I’d like within reason.
But it’ll all stay as savings.
So, that’s the plan.
It’s a bit unusual, but I think everyone follows the same principles/strategy in theory, just perhaps not as regimented or as conservative.
Everyone spends their money on what they value the most.
Just look at your spending for last year (if you have the stats), and see where you spent the MOST money.
The top 3 spending amounts are what you value most in life, and hence where you put your cash.
I think mine was Retirement/Savings, Rent and then Food.
The rest were considerably smaller amounts in comparison, except for the shopping & electronics part that scared me.
Just a girl trying to find a balance between being a Shopaholic and a Saver.
I cleared $60,000 in 18 months earning $65,000 gross/year.
Now I am self-employed, and you can read more about 
I like the laddered approach. Lately, since I've just changed countries, (left US moved to France) economies, retirement systems etc.
DH and I just aggressively save our money when we have it so that during times like these (where I have yet to find a job in France) we don't have to sweat it. But it's all kind of in one lumped together pile of money–not organized (or invested) in terms of how accessible we need it to be. We need to work on that!
I'd like to ask (as an Aussie who hasn't travelled very far or wide):
is it more expensive to live in Canada or in the US right now?
It seems like there are many more opportunities in the US but more long term, specific and upmarket ones in Canada.
Is that really how it is? Or am I only seeing one side of the picture?
It’s a tough question to answer because it depends on where you choose to live.
Toronto = quite expensive.
Montreal = not so expensive.
Ottawa = quite cheap.
Dallas = not sure, haven’t gone there to find an apartment yet.
As for living in Canada, things are fairly cheap for some things like rent and utilities (depending on if you compare us to L.A. or NYC), and our ever-coveted universal healthcare… but we pay dearly through the nose for basic necessities like food ($8.99/kg for tomatoes, I saw once!!) and the quality isn’t that great.
When we were in Dallas, the food was QUITE cheap compared to what we pay here in Canada, the quantity was larger and the quality was much better.
Cost of living seemed a lot lower in Dallas than here. I think the apartments might be the same price as well — in the same price range.
Plus things in general — books, clothing, makeup.. it’s all more expensive no matter what. The currency exchange doesn’t matter in this case, because prices are printed long before the currency fluctuates, and one day, it could be CAD = USD at perfect par, but we pay a 15% premium on goods.
They say it’s because they have to also ship everything across the border, pay duties, taxes.. and all of that gets tacked onto the price as well as the currency exchange, but .. I don’t really buy it.
Also, there’s a lot more opportunities for discounts and free shipping if you are into that.
That being said, I would be earning in USD not CAD, which gives me an advantage on the currency, with lower costs of living, and even without healthcare if I were a freelancer, it’d be cheaper to live in the U.S., especially in Texas as there aren’t any state taxes.
So I’d earn more money charging the same rate per hour, pay less for living, pay more for healthcare (which would come out of the earning more in general versus currency exchange in Canada), and not pay any state taxes.
Did I also forget to mention that sales tax here is 13%? I think in Texas it was 5% or 7%. I’d save money there too!
There are many more opportunities in the U.S. for my area. More than Canada, and more chances to make money than in Canada. Canada is great for a stable sort of economy where you aren’t a freelancer and/or you are lucky to land a client who is going to basically keep you forever. But those opps are few and far between. The States is much better for IT in my opinion.
Great post, Me! You've definitely got your act together. I am of the school that you can NEVER save too much early on in life. The savings you are accruing right now are buying you buying you freedom down the road in the form of more lifestyle choices and options that you wouldn't have otherwise.
Great job!!!!!! (!)
All the best,
Len
Len Penzo dot Com
Haha you can call me FB 🙂
me is just the actual “me” as in “me, myself and I”? 🙂 Thanks again for featuring me on your Black Coffee post!
Hi,
My ultimate goal is have a budget for what I spend on foods. I love to eat out a lot and rarely finish what I order. I am doing quite well on 401k and savings. People do not know but eating out adds up and if I can stop that or learn to cook more, I think I will be Ok.
Tawa
But eating out does cost a lot of money. It’s at least a 200% markup on the ingredients bought, because they account for labour and overhead in the restaurants.
Hey I'm not sure if this is an appropriate comment on this post.. but issnt not working a year detrimental to your resume? I know in my area, many things get changed and updated in year so a year out of work is quite a long time. How do you/ do you need to explain your absence in the work force or is it none of the company's business that's going to give you the contract?
No problem re: appropriateness.
Normally, yes. But it was an exceptional year for IT, and NO ONE worked for a full year, much less a month or two out of the year.
So everyone knows this, and doesn’t take that year into account because of how bad it was as a market in general. Freelancers are held to a different standard than employees at a company. Everyone knows we don’t work full-time, but as long as we have the general experience (past 3-4 years) to back us up, and our price is right, we’ll get hired.
We don’t need to explain anything to the client unless they ask, and start counting the months of actual work — which some do, but I haven’t come across that yet.
It is not exactly none of their business, but they also can’t really verify that you worked/didn’t work unless they call and talk to someone to get all of the exact dates, and then count each day minus holidays.
We go on an honour system that we don’t lie to the client about how long/when we worked, but a lot of people abuse that and get away with it because the client doesn’t check.
Anyway, once we get in, we have to prove ourselves on the system…. so there’s no problem because if you can’t do the work, they’ll get rid of you in a couple of months once they realize you have no idea what you’re doing. That has happened to a few liars on the market.
I think I'm sort of on the same page as you. We're nearing the finish line for the credit cards — even if it doesn't quite feel that way at times. And there's this big blank page starting around July (hopefully) that needs to be figured out.
We'll still have debt that we owe on Tim's student loans (around $3500) and some to family members.
Once the student loans are out of the way, we'll start paying off our family members in small amounts, so that we can also start doing other responsible stuff like contribute to our IRAs. I would like to put at LEAST $2,000 in this year. Preferably $2,500.
I also want to start saving an emergency fund. I don't know exactly how much we'll put in each month, but I'd like to save up at least 6 months' worth to begin with — about $9,000.
On a much smaller note, Tim wants a dog. I want to have the pet deposit plus dog cost (whatever that will be) plus vet money saved up before we actually get one. The deposit is $250, and dog costs vary wildly. We'll get one from the Humane Society, I'm guessing. But those can still be pricey. So I'm assuming around $700 needs to be in the fund before I'm fully comfortable getting a dog.
So all that is sort of being put off until we know a little more about what is going to happen in the next few months. It looks like I may hold on to my contract work a little while longer (fingers crossed) which would allow us to keep up our current pace. If so, we could knock out Tim's student loans and at least one family member's loan in under four months. Though I promised Tim we could also enjoy a little spending money once the credit cards are out of the way. So things are a little unclear. But I, like you, tend to think more in amounts than percentages.
I am definitely thinking in amounts rather than percentages.
It just makes it better to be more concrete because percentages make me think: Is that $10 over a big deal or not? It’s too vague.
Sounds like you have a good plan – you know what's important to you.
Our 5 year plan is to finish paying off the mortgage, finish saving for 2 kids' private university tuition, and have a good amount of nest egg. Our strategy is: save automatically & stay within our budget, which we make at the beginning of the year.
My ultimate goal is to have a solid financial foundation that only gets stronger with time.
My strategy is to:
1) Pay off debt
2) Build 3-6 month emergency fund (based on expenses & estimated to be $12-15K)
3) Maximize retirement by contributing a combined 15% of income to 401k & Roth IRA (I secretly hope to max out according to government regulations)
Once I complete these steps I will start saving for things I want with big price tags, like a big screen TV, future down payment on house, etc, etc.
I am glad to see you are traveling and having fun, it is important in complete happiness. I have made money available for fun and will continue to do so, but I make sure to do the things I will enjoy the most and pass on the things that I don’t find to be that valuable. For example, I would rather drop a $1000 on airfare and a cruise, instead of eating out for lunch everyday. Some sacrifices are not that big of deal.
I do agree that $1000 on a trip is worth WAY MORE to me than eating out everyday. Which is kind of where I am trying to balance right now, as I don’t have a kitchen where I am working (yet.. perhaps in 3 weeks), and I’d much rather bring my food for the whole week rather than spend $40/day which is what I was doing initially.
I kind of have a similar system – commit to a minimum level of savings and throw any leftovers in there as well. Like rannieb I contribute through payroll allotments. the automation gives me peace of mind as I never see the money.
My spending strategy is not to pay full price for anything if I can help it. I try not to spend without planning and ordinarily I watch items I like until they go on sale. I do need to cut back on my road trips though
That’s a good policy to not pay full price. Or at least use points or something!
This is one of the best posts I've read on thinking about your money. I know that I have been focusing weekly, as that's how my unemployment is paid out to me. Before that, I thought monthly. But I love looking at a plan like this.
Thanks.. 🙂
I normally think about my expenses for the month. Like $1000 –> what I can spend in total.
But for long-term stuff, I don’t like fussing with it, so I just set up priorities and that’s it.
Did I miss the post on planning your trip to Europe? That's great. Where are you planning on going? I think Budgets are Sexy is going to Europe too…maybe you guys might run into each other. ____Anyways, my goal is to account for expenses first and then save second. I am very much like you in that I don't have too much (or really nothing at all) budgeted for FUN!!!! I set aside my fixed expenses from each paycheck, and the leftover goes to my savings account or my Roth. I also have an amount deducted from each paycheck to go to my 401K…____Once I have more of a cushion with my salary, I think I'll be more active about FUN, but for now, let's just say I have a really generous Entertainment and Miscellaneous Budget, lol!
I am planning on going in July 🙂 For the whole month.