I would not consider that I am more of a freelancer or part of the gig economy.

For a long while, I held a job that many said was rather stable. The difference is that I have a gig at night that pays as well.

Generally, I do not face any cash flow problems throughout that time because I don’t do crazy things like spending more than what I earned.

The gig part pays, but it does not cover all the expenses, so its role to me is good to have and it keeps me motivated. But I have been doing this since Uber, Grab, Deliveroo, Food Panda is a thing.

But before all this, there were a lot of professionals that manage their time, their own sales, their own earnings. Photographers, videographers, swimming coaches come to mind.

I always wonder what is a fundamental sound framework to think about managing money if your income is not very stable. It bothers me because I seemed to have an idea that as freelancing and doing gigs get more popular, there will be more people struggling to save and manage their money well.

So here is what this post is going to explore.

Why Income can be Volatile

The main characteristics that was often mentioned was the volatility in income. A lot depends on the frequency of projects. The payment schedule is also another thing.

Some of the jobs get bunch up… then there is a period with very little job. It can be rather seasonal.

In some of my gigs in the past, I nearly forgot about the payment because the company took a long time to pay.

Some of us have to chase to see what is holding up.

In some gigs, it is not whether the jobs are volatile, it is the income depended on whether you work, and whether you worked hard.

When your income is volatile, I felt that there is this uncertainty at the back of your mind whether you would make enough to be OK. This could overtime be rather stressful.

You enjoy the good part of being in control of who you wish to work with, the hours to work, and not having to have to follow some corporate structure that does not make much sense for your case. But the stress is translated into something else.

The solution to everything seemed to be:

1. Get better. When you are better, more recognized, you have the potential to be paid better
2. Get enough buffer. Instead of living in fear whether what you earn is enough, have enough jobs, projects on a more recurring basis so that this uncertainty gets reduced

I do find that whether it is working a salaried job or working on your own business, on a high level, some rules of thumb are the same.

Managing money when income is Volatile may not be so different from managing Retirement Income Needs

The future of retirement may not be a day where you stopped working entirely.

I do foresee many not having the adequate wealth to fully retire.

Thus, it is a mixture of

1. Working and getting a work income
2. Living off CPF Life
3. Living off an endowment policy with income
4. Living off dividend income from unit trust
5. Living off selling units from accumulating unit trusts
6. Living off rental income

The only consistent income may be your CPF Life. You would need to create a sustainable spending plan to deal with how 1 to 4 comes together.

Freelancing and working on gigs look very similar in that you have multiple partners you worked with, multiple projects, work for multiple gig companies. Each of these have different durations, frequencies pays a different amount.

Thus, the freelancer may need to manage their money using a framework similar to how a retiree manages their income.

The main difference though… is that the freelancer has to put greater emphasis on saving than the retiree.

The freelancer has a long time to go. There are many future liability/goals that they would have to fund and would need money to do so.

So here is how I would think about the money side of things.

How you should Frame the Money Game

I will view your money management in 2 phases. The difference between these 2 phases is how certain you feel about the business:

1. Phase 1: Business Building Stage. You are not so sure if things will work out and are putting in efforts to bring the business to a stable state
2. Phase 2: Stabilised Business Stage. After being in phase 1 for some time, you have a very good sensing that you have reached a stable state where you have
   1. brought in enough projects
   2. have adequate recurring projects
   3. enough large clients
   4. by not working yourself dead, you can have income that covers the essential expenses and more on a consistent basis

The way you would manage your money in these 2 phases should be rather different. Let us go through them.

Phase 1: Business Building Stage

In this stage, you are likely filled with a mixture of

1. uncertainty whether things will work out
2. things you have to figure out that you do not know about having a business on your own
3. transitioning from a paid employee, a student to a sole proprietor

Because you do not know whether things will work out, when it comes to money, this is the stage where you go into “siege mode” or “living like a student mode”.

This means that you have to first be aware of your finances and be in total control over it. This is because you might not have much income coming in, or the income can be rather low and volatile. The income needs some time to ramp up and transition to Phase 2.

Here are some things to think about.

Look at Your Expenses on 2 Levels: Essential and Less Essentials

Living the life of a student can ensure your money last for a longer time and give your freelancing or gig business a greater chance of surviving.

In order to do that, you need to know where the money goes out to.

I would tell a retiree to look at their expenses as 2 levels:

1. Essentials: What you need to survive and stay sane
2. Less Essentials: Expenses that are optional. They make life richer but without them, you should not suffer much

You will have different definitions for both and it is up to you. But you will have to exercise some critical thinking.

As a rule of thumb, the following are essential:

1. 3 Meals x 30 days that keeps you satiated (Meals that you go out with friends, socializing is less essential, or business expenses)
2. Transport
3. Rent and mortgage
4. Meals for children, school fees, allowances
5. Home utilities such as Mobile phone subscription, electricity, water, property tax, conservancy, sinking fund for home breakdowns
6. Hospital and surgical insurance (the rest are less essential)
7. Business expenses
8. Some entertainment expenses

Work out the number and know the number. If you have the chance, while you are an employee, try to simulate and see whether your essential expenses are reasonable.

Build up 3 Months of Essential Expenses before You Start

Some folks will tell you that you must have 3 months of emergency funds before you start.

I would say… let’s not term it as emergency fund.

The way to look at it is that all your money, every dollar is going to be queued up in a straight line.

Your job is to create the furthest gulf between the dollar you spend today versus the next dollar that you come in.

It would be better if you can save up 3 months of essential expenses before you embarked on this.

If you have a day job, save up the equivalent of 3 months of your essential expenses. If you are conservative, go up to 6 months or 12 months. This will give you enough runway.

Here is how it looks like:

You will have a 3-month runway. Whatever you earn in the projects get queued up behind pay 3.

The size of each blue box is the size of your essential expenses.

In this stage, there is no messing around. You do not know whether it will work out, so you will only spend the essentials. If you make more, the money gets queued up for future essential expenses spending.

Live on Last Month’s Income

This is a budgeting concept that comes from You Need a Budget (YNAB), a very popular envelope budgeting system.

On this note, if you wish to budget well, you can try to get one of the envelope budgeting systems such as YNAB, EveryDollar, Quicken so as to control the money well.

Living on last month’s income means this month you are spending what you earned last year. When your income is not consistent, it is better not to spend what just came in.

If the customer does not pay on time, then you have no money for food.

Whether in Phase 1 or 2, the idea is to build a dollar queue such that the age of the money you spend today is very old (this means that your money queue is very long)

Phase 2: Stabilized Business Stage

At some point, you will conservatively feel that you have figured things out to a certain extent.

The money management would change.

The difference between a freelancer versus a retiree is that there is much future goal/liability to think about:

1. Financial independence
2. Children’s education
3. Capital expenditure for business
4. Home

For some, their income have grown so much and so consistent that it seems to be like when they were employed. In this case, the way you manage money may not be any different from how a sensible employee would manager her money.

However, if the income is never consistent, you might need a different way of managing it.

I would suggest breaking up your income into 4 chunks:

1. Essential Expenses
2. Less Essential Expenses
3. Constant Savings. These are savings that you have conservatively estimate that you could put away
4. Good-to-have Savings. These are savings that supplements #3 when you do better

We break up #3 and #4 the same way as your expenses because to a certain extent, you need to save up for your future goal/liabilities.

But you don’t want to over save and not live for the moment. There has to be a certain balance.

However, if your business does really well, a portion of the savings can go into fulfilling those future goals/liabilities.

With that, you can build in some rules.

Firstly, ensure before you start this phase, you could have 8 to 12 months of essential expenses queued up. That will give you a good runway.

Your order of priority when your income comes in:

1. Essential Expenses
2. Constant Savings (pay yourself first!)
3. Good-to-have savings and Less essential expenses

A stabilized business should deliver in excess of a total of essential expenses and constant savings. But by your estimation, it should be well in excess of that.

You should have adequate for essential expenses and paying yourself first.

For each month, anything in excess, split in 2. One part you save, one part you spend.

Every year, increase the essential expenses and constant savings by a particular percentage. This may be the inflation rate.

In this way, you can try to build some stability in spending and saving.

Be Sensible with Your Less Essential Expenses

The idea is not to blow your less essential expenses for that month.

There are less essential expenses that are lumpy such as vacations, annual subscriptions, annual premiums.

You have to know the amount, and if you have excess that month, fill it up. If you wish to go to Europe and need $5000, the moment you have $1200 in excess for the month, spend part of it on trips with the family locally but put $700 towards this $5,000 target.

What should you put your savings into?

The savings is meant for longer-term liabilities such as children’s education and financial independence.

In order for your money to grow, you need to put into risky assets. This would depend on your ability to take risks as well.

I would not advise putting in a highly risky portfolio but you cannot live with it. A good investment plan is one that you could stick to.

If you look at your life portfolio as a business, almost 80-90% of your net wealth is concentrated in your business. It is something you know very well about.

Your business may be volatile or less volatile.

The financial assets that you should use to build wealth upon should be:

1. Less correlated with your business. If your business is in the media industry, don’t have all your money in other media investments
2. Opposite to the volatility of your business. If your business income is uncertain, then the assets you put into should be less risky

It is no wonder that for many business owners individual bonds, property, insurance endowments have become the favorite.

They have a few things in common:

1. low volatility in value
2. provides an income
3. not very liquid

I do wonder if it is a good idea for property agents to have their net wealth in properties as well.

In any case, I think a low cost, diversified portfolio of stock ETF/Unit Trust and bond ETF/Unit Trust could also do the trick.

The allocation will depend on your ability to take risk and your need to take risk (most often you will need to)

A diversified portfolio offers a few advantages:

1. Liquid
2. Can be invested in small amounts
3. If you wish to liquidate, you can choose to liquidate partially
4. Diversified away from your freelance business
5. Ability to cash flow if you require

It is a misnomer that you could not cash flow a portfolio of funds that does not provide an income by default. The fund puts the decision & responsibility to cash flow in your hands.

Otherwise, why would the majority of the United States Financial Independence community be able to get cash flow if they have primarily used low-cost funds?

Your Portfolio As a Buffer

One advantage of that liquidity and cash flowability is that in the event you need to tap on your portfolio in the short term, you could do it:

1. Your mortgage would have sapped cash flow instead of giving you cash flow
2. Insurance endowment that do not distribute cash flow are illiquid
3. Your income from your bonds is fixed

In a diversified portfolio of funds, you could spend a conservative amount and the portfolio could still grow. For example, you could conservatively spend 3% to 3.5% of the value of the portfolio if it has grown to a sizable amount.

If not, when you really need it, you could spend 10% of it. If you keep up at this rate, your money will not last long, but the idea is, weather the short term storm and in the future replenish it.

Get Some Help if You Need To

Help can be in the form of some software as a service to help you manage your money.

I have mentioned YNAB and possibly a lot of mobile money app will help you keep track of what you spend on.

Summary

I am not sure if most readers agree. There should be a fair bit of you who are in this group I am talking about. You could correct me if I am wrong.

In actual fact, I would probably not be the right person to write about this.

But I don’t see some property agent, or insurance agent, or Grab food driver write a piece on this side of things.

There are probably some areas I missed out. I would add them in when I think of it.

Meantime do let me know if there are areas I failed to consider.

What May Be Helpful:

• Bully The Bear – Freelance Tutoring as a Business Part One, Two, Three

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

My washing machine is making a lot of loud noises recently. Looks like the dependable trusty machine could not last long.

I intended to try to see if I can fix it. But I do also intend to buy another one. Washing machine is not something that I am an expert in. I did not keep up with the technology of washing machine. In all honesty, the impact of selecting a wrong one can be a considerable inconvenience.

I spend some time researching the latest technology. And then look at what is offered out there. There are too many choices. When are too many choices… my brain short circuits and not sure which to choose.

This is when if a product gets more reviews somewhere, I could read the reviews and evaluate better. What I watch out for are the really useful ones that explain certain nuances that we will not notice within the first few days.

There are some glitches that we will only see after some weeks of usage. This is where you see the problem with reviews. They try to solicit the users to review and most of the users’ review only after the initial use.

The truly useful reviews are the ones:

1. deliver by someone in the know of the subject area
2. have extensive experience using the product for a period of time where you could safely judge

The search is still on. If you have a recent washing machine purchase that is a top loader (I know… research shows front load is more efficient but my dad wants a top loader) do let me know!

Reviews can be quite a Monster

Reviews are a marketing tool whether you like it or not.

Tripadvisor’s review of accommodation and tourist attraction have changed the game. These service providers have sought to improve their offering to ensure reviews are good. These are some areas they might not focus on in the past.

This is because most people see a lot of reviews, as long as overall it is favorable, they will go for it.

When you do not know much, you go with the safe, crowdsource.

But what if a product cannot be evaluated within a certain time frame?

There is this popular site that wishes to do good and help those who are less sophisticated with money stuff to be able to select the right things.

I feel that for some things, such as washing machines, reviews can be really good.

But for some things like investments, it can be a big problem.

You cannot evaluate the performance of funds based only on recent history. In some of Dimensional’s research, the time frame that you need to show whether an active fund has a statistical edge to outperform is more than 20 years.

There will be managers that execute some complex strategies that in a particular year, they do really great.

So if they

1. manage to market heavily
2. then the next year the fund performance was really good
3. the reviews will flow in as highly favorable
4. the less sophisticated, seeing there are many review (whether it is good or bad), with the first few as generally good, they will choose this

What you get is a snowball effect.

What I mention has got less to do with technology. In our asset-gathering world, this is true as well.

If we have a period where the market is going up, our Providend clients have a good experience, they feel good. They go and tell their friends how good we are, and it makes it easier for business.

But what if the Year was Bad after the Launch?

Then it will be rather difficult to sell the narrative.

Clients will pull out their money and perhaps tell their friends about the so-so returns (they don’t want to say that it is very poor since ultimately, they were the ones who made the decision to go with X company)

In a review site, it might be different. The number of reviews is still there. Fewer people are leaving reviews. So the average maybe still high.

If we have 3 underperforming years, an active manager may not be poor. They could be just unlucky.

The timing between launching, marketing and performance just happened to be bad.

Thus, asset gathering depends a lot on luck as well.

Going by that research, I wonder if 10 years of good record is a good judge.

The Less Sophisticated Leading More Less sophisticated

You got to know “enough” to be able to tell whether a certain investing platform or product is “good”.

If you do not know enough, a lot of the focus is on frivolous things that impact what you are looking for less.

I was at an Endowus event and a participant was asking Samuel (CIO of Endowus) whether the mobile application is on the cards. I have people giving me feedback that MoneyOwl’s interface is “concerning”.

And I was thinking… these folks should see what I have to live with at Standard Chartered Online banking.

In this realm, it will be long term risk-adjusted returns that suit your risk profile.

In our course of work, we came across some funds that double their client’s money fast. The volatility is crazy. There are also well-performing funds which are low volatility.

You know what… their interface sucks. They practically have no interface.

For one of the well-performing funds, they did close to -30% last year. This year they are up big time.

If you cannot judge this within 1 year, then is the review helping folks make meaningful decisions?

If the crowd does not focus on this, then isn’t the crowd leading people to make the wrong conclusions?

Investing is something finance bloggers like myself spend so much time educating and we know the difficulty in understanding this stuff.

I have to influence more than 3 people to stick the top reviewed Roboadviser after they had less than 1 year of experience.

I do not know whether they will deliver the track record, but man… some of these things… it is not a one year review!

Conclusions… of some sort

I am not sure whether those who know more leave reviews. I find it difficult to do so because you are sticking your guns out and saying this investment is good.

There is this industry speak that what the manager put out in the factsheet… might not be what the manager do ON your actual unit trusts. What is inside is usually a black box to you. For passive unit trusts you can at least see if they are tracking the indexes.

The active funds… you need a level of trust in the manager, unfortunately. I met up with a long lost friend not too long ago.

He told me he puts his money with a certain unit trust fund manager that does things actively (this fund is available to us most likely). The reason is that he knows the people behind, their processes, and they trusted them.

And this is how things are most of the time.

My friend certainly knows what he is doing since he has been trading for years. Now he prefers to let managers manage his money. Active funds.

At the end of the day, the interface may not be the most important, but it has to be serviceable. When you want to see something about your investments, you should be able to review them.

Reviews or not, a lot of people burn in their investments. This is not the only monster out there. That is just the way it is.

We all need to pay our school fees. We just think we can pay less.

I will leave you with this article from Ben Carlson:

The Mainstay Marketfield Fund (MFLDX) saw strong returns, delivering a return of more than 100% from 2009 through the first quarter of 2014. The S&P 500 was up more than 130% in this time, but the fact that an alternative fund that switches between a number of asset classes and has the ability to short securities was able to keep up attracted huge inflows from investors.

Assets in MFLDX exploded from just $34 million at the outset of 2009 to more than $21 billion by early-2014. So while fund performance merely doubled, assets were up 60,000%. Warren Buffett once said, “Size is the enemy of outperformance,” and the Marketfield Fund was no different.

Since the first quarter of 2014, MFLDX has gone nowhere, losing a total of more than 11% up to now. U.S. stocks are up nearly 80% in this time. The fast money that poured into this fund fled just as fast as it came in. Assets are now under $200 million, down 99% from the highs in 2014.

This is the nature of things. Reviews or not… we all are bound to lose money due to our behaviors.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works