When you have a regular job, the trickiest part of cash flow management is budgeting for unpredictable expenses. Whether it’s a parking ticket, a pay-your-way invitation to a destination wedding or a leaky roof, life has a way of wreaking havoc on the best-laid budgeting spreadsheets.
But as freelancing and side-hustling become more common, cash flow management is getting more complicated. When you’re working for yourself, you have busy months and slow months — not to mention the fact that there’s often no telling when you are actually going to get paid. More than 70 per cent of independent workers in Canada say they don’t get paid on time and have to spend time chasing outstanding invoices, according to a recent survey conducted by Environics Research Group for Interac.
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For Elizabeth Shepherd, a Montreal-based jazz musician, that’s a familiar issue.
Often, she added, contracts do not specify when payment is due, which leaves Shepherd wondering when it’s OK to start inquiring about it.
Sometimes the delays mean she has to dip into her own funds to pay the other four musicians who play in her band. And sometimes that means she and her husband, who have two small children, have to tap their credit cards or ask family for help to paper over the temporary cash crunch.
Although they’re always able to pay their debts quickly once the money comes in, it’s a stressful way to live. It’s also expensive, as carryover credit card charges come with high interest, and Shepherd makes it a point to pay a small interest for family loans as well.
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Few protections for unpaid freelancers
The law provides few avenues for independent workers faced with late or missing payments. With the exception of the construction industry, where unpaid contractors can register a lien against the property they worked on, freelancers and side-hustlers are largely left to their own devices, according to Andrew Monkhouse, a Toronto-based employment lawyer.
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Sure, freelancers and small businesses can take their payment grievances to court, but the process itself may cost over $100 and drag on for months, Monkhouse said. And then, of course, there’s the implicit cost of spending time chasing payments instead of working. For small sums of money, small claims court is not worth it, he added.
Canada is far from alone in its regulatory neglect of freelancers, said Jack Graham, policy editor at Social Capital Partners. New York City’s Freelance Isn’t Free Act of 2017 is one of the few examples of legislation that enshrines the right to a written contract for larger sums of money and timely payment. Within a year of enacting the law, the city had helped freelancers recover a quarter of a million dollars in payments.
But other governments have been slow to follow that example.
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Cash flow strategies for the gig economy
For gig-economy workers, then, budgeting becomes a game of matching both fixed and variable expenses to a predictably unpredictable income. It’s an exercise that requires next-level budgeting strategies like the ones devised by Jackie Lam, a Los Angeles-based full-time freelancer and godmother of the website Hey Freelancer.
Lam shared with Global News some of the money-management tricks she’s learned over her 10-year freelance career:
1. Keep a month worth of living expenses in cash
Lam said she makes it a priority to always have enough at hand to cover both her bills and routine expenses for the next month.
“It’s April, and I already have what I’m going to need for May,” she said.
That’s her most powerful strategy for avoiding money stress, she added. And while it may seem an ambitious goal, it’s also a one-time savings target.
In a blog post, Lam suggested gradually socking away “extra” money from especially busy months, cash gifts or side hustles into a dedicated savings account. The funds will help cushion any temporary cash flow shortages or small spikes in spending.
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2. Maintain a bigger emergency fund
Lam also has a larger emergency fund, which said should be worth at least three months of living expenses.
This money is for true emergencies like car repairs, she said.
3. Keep building up your emergency fund until you can move money to a retirement account without fear
When it comes to saving for long-term goals like retirement, Lam said the traditional rule of thumb of setting aside a percentage of your income every time is usually impractical for freelancers.
Instead, she builds up her emergency fund until she feels comfortable skimming some money off the top and moving the funds to a segregated retirement account —the equivalent of a registered retirement savings plan (RRSP) or tax-free savings account (TFSA) in Canada.
She advises doing so between one and four times a year.
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4. Ask your clients for a shorter payments cycle
While the standard payment term is 30 days, it doesn’t hurt to ask for a shorter cycle. You could try to ask for 14-day or even seven-day payment processing.
Of course, you may feel more comfortable inquiring about this with clients with whom you have an established relationship. Some will have to adhere to pre-set invoicing processes they cannot change. But “a client might surprise you,” Lam writes.
5. Try to align your billing cycle with your payment cycle
On the expenses side, you can try to ask if your bill cycle can be modified to better align with your more regular paycheques.
“See if they have any wiggle room with your bill,” she said.
Credit card companies, insurers and utilities providers may be open to moving your billing cycle, especially if you have an established history of paying on time, Lam said.
6. Automate your smaller bills and some savings
With a month of living expenses set aside, Lam says she’s been able to automate many of her bill payments, which streamlines money management and often comes with discounts meant to motivate customers to choose that payment option.
Lam encourages freelancers to cautiously set even some of their savings on auto-pilot.
“Even if you cannot automate a huge chunk of money, I would suggest … even $5 or $10 a week,” she said.
Over time, she noted, it adds up.
Still, Lam acknowledged that for some freelancers, especially those working in the arts, staying a month ahead of one’s living expenses is “a pipe dream.”
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That’s what it feels like to Shepherd.
“We do set (money) aside,” she said, but the emergency fund can be quickly eaten up if a client delays payment and there are four other band members to be paid.
“It’s incredibly tricky to budget and to live,” she said.