In November, I was let down by two clients. One of them I write for infrequently and the other has historically been a big chunk of my Quarter 4 income. But, this year, they’ve offered far less work than usual and are now paying up to a month late because they have cash flow issues. So now I have cash flow issues. Or I would do if I hadn’t built financial resilience.
The upshot is that I was short about 1400€ on work I’ve completed. I knew I was unlikely to get either payment before my next hit of Social Security and rent were due. So I should have been screwed, right?
Don’t get me wrong, I’m not happy about it. But because I’ve laid financial resilience into my money set up, I’ll be OK and that is a huge weight off my mind. Here’s how you too can build financial resilience.
What is financial resilience?
Resilience is about bouncing back and weathering storms whether those are personal, emotional, financial etc. For freelancers, like me, financial resilience is even more important because it’s hard to predict how much you’ll earn per month or quarter. Also a lot of clients can be unreliable in a way that’s not so common for a salaried job. My expenses, on the other hand, can’t be put off just because I didn’t get paid.
Financial resilence means being able to pay your expenses even if there are bumps in the road to getting paid. And that means having money set aside in accessible places. I’ve built multiple pots of money I can call on. And a lot of it is basically other people’s money.
How to build financial resilience
First know the dates your fixed expenses come out of your account. I know that the period between the last working day of the month and the 5th of the next month are when all my biggest expenses are due (social security, rent, pension contributions, school dinners and after school clubs).
The rest of the month, apart from the utility bills that come out around the 20th of the month, it doesn’t really matter if my current account balance is low. I let it hover around 150€ and have learned not to worry that it isn’t a lot. I check it every day or two just in case I’ve lost track of grocery shopping and top it from the interest-earning jar that my income goes into until it’s needed.
But, in November, that income jar hadn’t received enough cash so where did I top up from?
Build an emergency fund
Your emergency fund is to tide you over if there’s no work, if you’re ill, or can’t earn for some reason. Typically it wants to be 3-6 months of your essential expenses, in a separate account you don’t touch, and preferably earning interest. I’ve got a workshop on how to calculate, organise and earn money from your emergency fund which will help you just GET IT SORTED once and for all.
But my emergency fund, while it brings peace of mind, isn’t how I coped with my late-paying clients. I didn’t touch that money. Instead I borrowed it from somewhere else.
Set tax and other predictable future expenses aside
I borrowed the money from the tax man this time. Every time I get paid or make a sale, I work out how much tax I will owe and set that aside into an interest-generating account.
I use Wise jars for this as they earn either interest or cashback depending on what country you’re in and whether or not you opt to earn money from your balance or not. I always choose interest as it pays more than cashback. There’s very little risk of losing money, though it is technically a kind of investment so could go down as well as up.
That means that some of the money in that tax pot is due end of the quarter, so is payable mid January. And some of it will be due at annual tax declaration time next June. Not only is it earning money for me, it means no surprises at tax bill time. AND that money is available to me to borrow from as long as I know I can pay it back before those deadlines.
Another option for me would have been the pot I have set aside for paying my UK National Insurance contributions. I have to pay 4 years of backdated contributions by April 2025. No way am I handing that money over before I need to as I am earning interest on it!
In fact, I never pay anything until it’s due, whether that’s school expenses, rent, or anything else. I know it can feel safe to get things done and ticked off a list but there’s money to be made by holding onto it longer and it gives you the flex of financial resilience.
This time, I borrowed from the Spanish tax pot instead of the UK NI pot. Why? Because, in Wise, euros offer the lowest rate compared with my other income currencies, USD and £. So it makes sense to borrow from the lowest-earning stash.
But what if the client doesn’t pay at all?
When they pay, I’ll replace the money I’ve borrowed from the tax man. If it ends up that they don’t pay, then that is an emergency fund matter as that’s a lack of income. If my emergency fund was earning lower interest than the tax pot then I suppose I would have taken it from there in the first place.
But that’s the thing about robust resilience: the more options the less scary things are and the more resilence you have.
Some other things I do for financial resilience
I set aside money from windfalls ie cash I didn’t earn and wasn’t expecting. If I know a low-income month is coming, I might use it to put into a Wise jar labelled “next month’s rent”. Otherwise, that money actually goes into investments if I don’t need it for something.
Want to build a savings pot without even trying?
Set yourself a year-long savings challenge and use this tracker to keep a running total of your windfalls and give you more ideas of what counts as a windfall in the first place.
Hint: it’s not just lottery wins and inheritance. You’ll find surprising and overlooked windfalls once you start tracking them with these extra ideas.
Another thing I do, which I suppose you could call budgeting, is to think ahead about predictable expenses. These can be at fixed points in the year (like the house contents insurance or the tax for rubbish collection) or things that seem unpredictable like new kids’ shoes.
A lot of “unpredicatable things” are kind of knowable in advance. Although I’m annoyed every single time, it’s not actually surprising anymore that my boys wear out every pair of shoes in 2 months. So, if I have a good month and I’m not sure the following month will be, I often set aside bits of money into the “next month’s rent” jar too.
Don’t dip into your investments!
I do anything and everything to NOT take money from my investments. Even though the money earned in the investments is free money, I don’t look at it as the best place to dip into.
It’s really tempting when an investment is doing really well to want to dip into the profits. And a lot of people think of their investments like little lottery wins. But I would only do that if I had exhausted my emergency fund. Why? Because the whole point of investing is to take advantage of compounding – interest growing on interest. If I take out the interest before it can grow more, I’m taking money out of Future Me’s pocket.
On the flip side, if an investment is going badly, it can also be tempting to cash it in and spend it. After all, what’s one more loss? But when you’re talking about long-term investments, periods of time where markets are down and you’re losing money “on paper” aren’t the right time to take money out. You’ll miss out on the growth when that investment recovers AND you’re making those “on paper” losses concrete.
I never used to think about any of this stuff before I really sat down and looked at what to do with my savings. I discovered investing and sorted my pension out but, along the way, I became more intentional about money.
Knowing I could grow it made me want to be tidier and spend smarter and not allow little leaks. It’s very motivating when you can literally see your balance growing by magic. It makes you want to plant more seeds and grow even more money trees to one day bask in the shade of.
Resilience is also pretty relaxing.
Want to learn how to put money to work so you can grow it for the future and be able to retire one day instead of working until you die?
Grab a place on my No-Stress Money Plan course.
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