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Moneysplained’s Guide to Finances for Freelancers

Moneysplained’s Ally-Jane Ayers is here to help freelancers and creatives figure out how to use their money wisely.

There might be nothing in the world more frustrating than trying to get your finances in order, especially if you’re a freelancer and working in creative fields. The information that is available isn’t exactly accessible for those who haven’t been educated on how the economy and banks and taxes work, and even those who do have a bit of a grasp on the financial world still constantly find themselves at a loss for how to best navigate it. But there are people who are trying to break down those barriers.

Ally-Jane Ayers used to be a senior editor at Bandcamp. After some time interviewing bands and wrangling freelancers, she took on a second job at the company as their publicist, adding to her responsibilities and increasing her salary. It was the first time she’d really made money as a freelance writer, and thought it would be wise to use what she was earning carefully. But there were no resources out there that really spoke to her as a creative person. “I was like, ‘I’m a smart person, and I don’t understand any of this. I don’t even understand why they’re telling me to buy ETFs and index funds. No one’s really breaking it down, and I want to understand what these words mean,’” she says over the phone from her office in New York City. So she decided to start a podcast.

That podcast is Moneysplained, where Ayers digs into a new financial topic each episode, presenting it in ways that are easy to understand and talking to experts who can explain things further. I can tell you, as a freelancer who is woefully undereducated about this stuff, within the first couple episodes it felt as if a weight had been lifted—like learning about how to deal with financial issues wasn’t only not as scary as I’d thought, but there was even a chance it could be enjoyable.

When Ayers started the podcast, she had been considering a career change sometime in the future, but she met CPA Shane Mason during the production of an episode and together they ended up launching Brooklyn FI, a financial planning service that geared toward freelancers that focuses on helping clients get out of student debt.

Ayers also recently became an enrolled agent for the IRS, which not only allows her to file tax returns but also to represent individual clients in front of the IRS. “A lot of people in my generation don’t have assets yet because they’re still paying down debt,” Ayers says. “They’ve got great jobs, they’re starting families, things are happening, but they’ve got this black cloud over them.”

Here, she offers some information on how freealncers and creatives can head toward clear skies.

What do you most often get asked about personal finances?

Investments. Everyone wants to talk about investments. That’s how I started the podcast, and the answer is: I’d love to talk about investments, I’d love to explain how it works, but especially with clients and friends, my words of caution are 'slow down.’ Before we start investing, we have to make sure someone is set up for something bad to happen. Something bad could be you get a flat tire and can’t get to work. Your landlord raises the rent $600 without explanation. You have to have some kind of fund in place, savings account, emergency fund—it has a lot of different names—before jumping into investing. That’s a boring, practical answer, but it’s so important to have that little cushion. For some people, starting out with one month of living expenses is enough. In our financial planning practice, we like to recommend at least three to six months of cash saved away in an easy to access place, and then we can talk about investing.

It’s all about being comfortable. I think a lot of people are already investing and they don’t even know it. In the US we’ve got 401(k)s through employers. Oftentimes, grandma or grandpa or an aunt or mom and dad have set up some kind of fund somewhere, even if it only has a couple hundred dollars in it. Education funds, things like that. So a lot of people will come to us and say, ‘I want to start investing,’ and we’ll say, ‘Well, you have $20,000 in a 401(k), so you are investing! It may not feel like it.” But I think it’s pretty important to make sure the emergency fund is in place before leaping into the market.

The 401(k) is a blessing and a curse. It came around because pensions—where companies would just put away money for you, and when you retired, you would have a monthly allotment to pay your rent and buy food—got too expensive and just went away. So then 401(k)s came along, which is great, because then the individual can invest and they’ll be in control, and it’ll be better. Which is nice, but it is your money. Often companies will match, so if you put in 6% of your salary, they’ll put in 3% or something like that. In some ways, there is free money, but not all companies offer a match. But a lot of companies will do automatic investing. They’ll put it in a default retirement fund for you, where you’ll fill in your age and how risky you think you are, and they’ll just stick you in a fund. If you do nothing, it’s a pretty good strategy. At the point where you have a couple thousand dollars in there, it’s probably wise to look at it, talk to a financial advisor, and come up with a strategy. But the basic, barebones 401(k) in a target day retirement fund is a pretty great strategy for success.

Once you get to the point where you’re ready to start, what would be the number one thing you tell people to go to?

For starting out, when you don’t know anything—maybe you’re just starting out with, let’s say $500—I really like companies like Betterment or Ellevest. The media has termed them 'robo-advisors,’ and they’re really great at explaining the basic concepts of investing, and just making it really easy. They don’t make it complicated. You can click three buttons and your money is in the market.

Are there any issues that come up a lot, that people feel anxious about, that are actually more easily fixed than a lot of us think?

I think it’s just general anxiety about one’s financial situation. A lot of people will come to me and say, ‘I’m not sure if I’m doing it right. I read some things and my friend told me this and my dad told me this. Is it okay?’ More often than not, it’s okay. A financial planner or advisor can make suggestions to really increase your wealth, but honestly, the most anxiety-producing thing is student loans and crushing debt. And being frozen by the idea of making the wrong decision, because it’s so much money. I think one thing that will maybe make people feel better is that most decisions you make are reversible. There’s a lot of fear about paying taxes—'If I can’t pay is the IRS going to throw me in jail? If I go on the wrong student loan repayment plan, I’m gonna screw up everything!‘—and more often than not, if you make the wrong decision, we can go back and fix it. Making choices should be less scary, in a financial space.

If you earn money and you live in a society, you owe taxes. There are paved roads, there are police departments. Taxes pay for things you use, as much as you don’t want to admit it, so the IRS is just there to collect what you owe them. We have a lot of clients who come to us and say, 'I think I’m going to jail, I think I owe a million dollars, I haven’t filed in five years,’ and it’s so nerve-wracking. The answer is usually, ‘No problem! We’ll file the five years, you’ll probably owe a penalty, the IRS will come up with a payment plan, the interest rates are really low, and we’ll figure it out.’ The biggest mistake you can make is just waiting and waiting and waiting. Rip the Band-Aid off, and just go talk to someone and sort it out.

I know you’ve probably learned a ton from doing the podcast, but what are a couple things that stick out?

The thing that stuck out the most is how incredibly complicated the world of personal finance is. I’ve spent the past year and a half studying it pretty much every day, non-stop, absorbing everything I possibly can, and I’ve learned a ton, and I feel totally qualified to give advice at this point. But even so, the amount of knowledge required, and the special limitations, income limits, different types of retirement accounts, it’s just endless. And for a normal person who has a busy life and a job and family and friends, it’s impossible to navigate. That really sticks out—it’s so hard to be successful with your money. I think that’s part of the reason for a lot of society’s problems, and why it’s not so easy anymore to just get a job and try to save money that way. You have to really educate yourself and know the moves you’re making are the right ones.

It seems very set up to be inaccessible to most people. One of the best things I’ve learned from the podcast so far is that money just stowed away under your mattress is not gonna help you in the long run because of things like inflation.

What’s really crazy about that is, I’m 30, and I graduated college in 2010 when interest rates were basically 0%. A savings account? Who cares. When I started making and saving money, my money wasn’t earning anything. That was a very unique situation. Interest rates on savings accounts have been as high as 10% in the ‘70s, '80s, and '90s. So far our generation, it’s kind of shocking, now that interest rates are rising back up again and we can get that 2%, I’m running around shaking all my friends, being like, 'Get your money out of Chase and put it in a high-yield account!’ The moments in which we happen to be born and start making money affects our perception of how our cash earns interest. This time last year, interest rates were 1%. It’s doubled in a year, and it was 0% from 2009 to 2016, pretty much.

So now’s the time!

Now’s the time to put that money in a high-yield savings account. One thing I think is kind of mind-blowing, that I learned very early on in this journey—it’s shocking how many people don’t know this—is the way that tax brackets actually work. There’s been a lot of hoopla in the news recently about a 70% top income tax rate, and all these tweets flying around, like, ‘70%! You can’t tax our income like that!’ In the US, we have a progressive tax system, which everyone should Google. But basically, it means your income is taxed in segments. So, the first $10,000 is pretty much not taxed at all. The next $2000 is taxed at this rate. Those top tax rates only apply to the dollar amounts over a certain amount. So right now, in the US, with the new tax law, most people are paying around 30% after they make $150,000. There’s a lot of misunderstandings about the way tax brackets work, and it’s really important to understand that if someone says, ‘I’m in the 35% tax bracket,’ your entire income is not being taxed at 35%. It’s just the amount in the last bracket that’s being taxed at that amount.

What’s the best advice you could give someone in a creative industry who wants to fix their finances or start off on the right foot?

Go talk to someone. Because you can do it yourself, but you’re going to be busy, and creating or doing whatever it is you like to spend your time doing and is generating income for you, and it’s not easy. I think you can add so much value by going to a financial planner or a CPA. Check your local library. There are so many different free programs. You don’t have to pay someone. I think it’s important to have another person who doesn’t know you look at your financial situation and be able to talk to you about it and make recommendations.

How do you think financial planning resources, up to this point, have failed?

I think they’ve failed because the industry, for good reason, is so regulated. It’s really hard to give financial advice. I’m actually not allowed to give financial advice independently right now, because I don’t have my Certification in Financial Planning (CFP) yet, which I’ll get this July. So when you ask someone who might seem qualified for a simple financial question, like, ‘I have a 401(k) at work, what fund should I put it in?’ you might get this response of, ‘Oh, sorry, I can’t really advise on that.’ It’s because the industry is so regulated. It’s a catch-22: the regulation is set up to protect consumers and weed out the bad apples, but at the same time, it’s really hard to get simple advice from people who know the answer. In that way, I think getting good financial advice or just someone to talk to you about it has been impossible. I think my generation is kinda sick of that, and websites like NerdWallet, She Spends, and Ladies Get Paid are tearing down the wall and talking about it, and saying the best way to get financial advice is admitting you have a question about something.

Have you found that people coming at financial planning from creative positions have any sort of advantage?

One thing is that, when you are self-employed, you do have to pay self-employment taxes. You’re in control, so you have to provide your own healthcare, but you do have access to some really nice tax-deferred retirement accounts. So there’s a 401(k) that your company can provide if you’re employed, but if you’re self-employed, you can actually set up your own 401(k). It’s called a Solo or Individual 401(k), and the contribution limits are actually a lot higher. So if you make a lot of money and you’re very successful at the business you own, you can put away a lot of money for retirement, more so that a person working at a company.

What advice would you give someone who wants to get rid of their day job and make the leap to full-time employment with their creative work?

Tread lightly. I think a lot of people do it too soon and aren’t necessarily prepared for the changes that happen. And the start-up costs, too. A lot of people think they’re working at their day job and then they get one or two really exciting freelance leads, but it’s not just collecting money. You have to pay taxes, you have to set up your place of business, you have to pay an accountant to help you organize your business, you have to pay for your own healthcare costs. There are so many hidden costs. So my advice would be to start saving for at least six months of living expenses, and then whatever you think your start-up costs are gonna be, double it. Because we see so many freelancers make the leap from a job that pays well, that they don’t necessarily love, to freelancing, and run out of money in month three. You have to be able to survive through those times where there isn’t work for a few weeks. That’s what freelancing is, it’s ups and downs and inconsistent income streams, which takes a lot of planning, and having that cushion is so important to success.

I did it. It’s really exciting—your business starts to take off, and you realize, “Oh, I can’t keep juggling my full-time job and this side hustle that’s now providing income.” But that little interim time, when you’re thinking of making the switch, it might be worth slowing down the freelance work for a month or two and keeping things consistent while you build up those savings. So then you can intelligently, and with a solid plan, make the switch.

Want more advice for freelancing?
How To Kill It At Your Side Hustle
Pain-Free Email Management Strategies For Creatives
8 Time Management Skills Every Freelancer Must Master

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