Freelancer here - How old should my money be?
I am a freelance musician and have been using YNAB since I became freelance in January to help me see my money clearly with my variable income. Since I teach most of my students during the school year, I wanted to make sure I aged my money to 60 days before June so that I knew I would have enough money to make it through the summer. I was able to reach that goal, and I am excited that I have maintained enough gigs this summer to (so far) keep the age around 60 days.
My question is this: What is a good goal for the total age of my money? I am anticipating having a good teaching year starting in August and pulling in more cash than last spring. At what point should I start putting that money into savings or helping to pay off my student loan faster? A few months is a nice buffer to have as a freelancer, but what is overkill?
All opinions welcomed--thanks!
Hi, Hot Pink Disk
Here's a link to the series on variable income:
the blog article: Slaying the Variable Income Dragon
and a link to the You Can Budget with Any Income workshop
Personally, I would not rely on the age of money number in your situation. It will not tell you how long you can live without earning income. The AoM will be inflated or skewed by any large annual savings for planned necessities. Say, for example, you are setting aside funds for your annual car insurance renewal, a brake job for your car (because your mechanic warned you it was imminent), saving for Christmas gifts, some medical/dental savings, and your annual transfer to retirement investments, just to name a few items from my own budget. The savings for these categories in addition to emergency funds and other personal discretionary funds will also contribute to your age your money, but all the funds are already earmarked for some pretty important items and have been assigned to budget categories. I would have to be in financial crisis mode to reassign these funds or not pay for some of these expenses.
If you rely entirely on self-employment income, and it is variable, I would encourage you to build an income stabilization fund so that any month in which the income is less than the baseline budget needs, you can supplement from the income stabilization fund, and a month in which the income exceeds the baseline budget needs, you can send the extra funds to the income stabilization fund. How big an income stabilization fund you need will depend on:
- your baseline monthly needs
- your lowest income month
- your highest income month
- the frequency of these low months and high months.
That number will be different for everyone.
Personally, I would not rely on the age of money number in your situation. It will not tell you how long you can live without earning income. The AoM will be inflated or skewed by any large annual savings for planned necessities.
Also AOM goes up when no income is coming in. I was unemployed for 5 months and living off of a severance package. Throughout that period my AOM shot up because there was no "new" money coming in to offset the old money going out. Obviously I was aware of the fact that I had no income, but AOM did not (nor has it ever) provide any useful information to me when it came to budget or financial decisions.
If you haven't checked out the independently developed YNAB Toolkit, you might want to take a look; it has a "Days of Buffering" metric. I think the basic gist of that metric is that it looks at how much $$ you spend in a given month, then calculates how long you could expect to live on the money in your budget accounts if you suddenly ceased earning income, assuming you kept your current spending habits.