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Eleven years ago I stepped out into the world a fresh-faced college graduate, holding a degree in vocal performance from a well-regarded music conservatory. I believed that in the previous four years my education had given me all the tools I needed to take the next step toward my dream career as an opera singer.
Then the real world intervened. In college I had learned the rigors of preparing repertoire, mastering foreign languages, and achieving vocal freedom through sound technique, but in the professional world I was completely unprepared for the realities of preparing tax returns, deciphering the language of credit card applications, and achieving financial freedom through sound behaviors.
As graduation season approaches, I've been thinking about some of the things I wish I had known that day as I walked across the stage in my cap, gown, and stylish pink tassel. These are all drawn from my own experience, but I'm certain that other graduates have encountered the same surprises as they’ve begun their own careers.
With that in mind, here are some lessons from the past eleven years that I never heard in a college class–but that undoubtedly would have made for a smoother transition into freelance life.
Time is your friend
People don't tend to think about savings right after college. It’s hard enough to make ends meet in those first months and years. After you've fed yourself and paid your bills and student loans, you’re lucky if there’s enough left over for a couple of happy hours a month. You’re not thinking about how you might want to buy a house someday or travel the world or start a business; even if you are, you tell yourself that you’ll start saving in a little while once you’re making more money. You’re still young and there’s plenty of time.
It’s precisely because you’re so young that now is the time to start saving–even if you don’t know yet exactly what you're saving for. Twenty dollars a month, $5 a month; any little amount matters because of two simple concepts:
- Basic math: Compounding–the way that money earns interest on itself over time–means that a little money saved early (and invested with discipline) can earn more than a greater amount of money saved even just a few years later.
- Psychology: Habits you form early on are far easier to maintain and build upon–and far harder to change once they’re ingrained. If your brain is telling you today that you'll start saving someday when you’re making a little more money, it’s going to say the same thing later on no matter what you’re earning.
Our lifestyles (that is, our expenses) have a way of expanding to fill up our capacity to pay for them. Make saving a priority today, and you’ll have passed the significant mental hurdle of perceived scarcity that keeps many people from starting until it's too late to catch up.
Don't take your health for granted
I actually did learn this one in college, but it took so long to sink in that it warrants including here. Halfway into my sophomore year, I hurt my knee playing (of course) ultimate frisbee. Rather than getting it fixed right away, I decided just to live with the bum knee for the next two years. Almost any kind of exercise aggravated the injury, so by senior year I had put on weight and the low-but-persistent pain had begun to interfere with my performing onstage–the main reason I was at college to begin with. Finally, with my health insurance coverage set to be cut off at graduation, I acceded to knee surgery and spent the final spring break of my college career convalescing at home.
The injury had loomed over me those two years, not causing pain every day but seriously affecting my ability to do things I enjoyed and ultimately to do what I needed to begin my career. I found out how a chronic ailment can drag down the quality of life for an otherwise healthy person. Health problems can compound too, and as further issues arise any one step toward improvement can feel increasingly futile. The longer you wait, the harder it is to start getting better.
There are enough things to worry about in the formative years of your career without adding health problems to the list. Thankfully, because of the Affordable Care Act, younger people have much better options for health insurance than we did when I graduated. Many young people feel they don’t need healthcare and may indeed go years without seeing a doctor. But all it takes is one injury or illness to appreciate the importance of getting (and staying) healthy when, like any self-employed person, your income depends on your physical ability to work.
Taxes don’t go away
Having worked various menial jobs in high school and college, I wasn't a total stranger to income taxes upon graduation. I even did my own tax filing each spring, which was fairly straightforward because of the minuscule income I was earning. Still, I had no idea what paying taxes would be like as a professional singer, so I was thankful that my school required me to take a course on basic accounting and tax planning for performers to prepare me for the realities of working in my field.
Just kidding! There was no such class then, and as far as I can tell there still isn’t one today. When I graduated, the terms 1099-MISC, quarterly payments, and self-employment tax meant nothing to me. After I got through of my first year as a freelancer and prepared my taxes expecting the painless process I had known, it came as a very unpleasant shock to learn that I owed the government money. Lots of money, in fact; more than I even had in my bank account at the time. I panicked and decided to become an ostrich. Maybe they won’t notice, I thought; they’re too busy worrying about rich guys with elaborate tax shelters to bother with small fries like me.
What I didn’t know is that it’s very easy for the IRS to notice when people don’t report their income for the simple reason that all employers (freelance or not) report whom they paid and how much. And so I got a letter a few months later requesting that I please pay them their money, with interest and a penalty charges added on for good measure.
The good news is that the IRS, despite their ogrelike public image, has some very friendly people who will help you set up a payment plan. It’s not ideal to have to send money each month to pay the taxes you owe for a previous year while also setting aside money to pay for this year, but ignoring the problem will only make it worse. The key is to get ahead of the process and treat a portion of your paychecks–individual circumstances vary but it could be as much as 20% or 30%–as untouchable until your quarterly tax payment is due. Traditional employers do this automatically for their employees; as your own employer, you should treat your employee-self the same way.
Know the risks of relying on credit cards
If you’re starting as a freelancer straight out of college, you probably don't have enough cash sitting in your bank account to cover multiple months' worth of expenses at a time. Many young freelancers instead turn to credit cards as their de facto emergency funds, carrying a balance for a few months (or longer) and making the minimum payments until the paychecks start rolling in.
This strategy can and often does suffice for a few months or even years. But you're riding the tiger when you rely on credit cards for emergency liquidity: at some point you'll get thrown off, and when that happens it won't be pretty. For one thing, you have to know that your income will be enough to pay your future expenses while also paying down the debt you’ve incurred. It's a delicate balancing act, in which an unexpected expense or broken contract can easily cause everything to tumble.
The consequences can range from paying far more than the amount of the original debt (due to the cards’ high interest rates) to ruining your credit rating and impacting your ability to get an apartment, a mortgage, or a car for years down the line.
I highly recommend that freelancers start out by stashing away as much of their early paychecks as they can–whether it's from their freelance work, a side gig, or a day job–into a savings account to provide enough of a cushion to sustain them at least six months without any extra income. If you ever need to tap into those funds, it’s equally important to replenish them.
The upshot is that instead of paying upwards of 20% interest annually on a credit card balance, you’ll be “loaning” yourself the money at a far more reasonable 0%. Credit card debt is not fun to escape. Your mental state–and your credit score–will be better off if you can manage to avoid it.
We’re all making this up as we go along
American culture has made it taboo to discuss money in polite company. Speak up about your income and you risk seeming boastful or pitiable depending on the perspective of the listener. Ask a question about financial management and you might feel embarrassed for not having everything figured out already.
At the same time, very few formal educational settings, from high school on up, cover even the rudimentary basics of personal finance. Every individual, self-employed or not, is effectively on their own in preparing for their own financial future.
None of these facts about our society will be easy to change, but until our colleges and universities start doing more to prepare young people for financial reality, it’s best for all of us to start opening up with one another. If we all share with our peers and colleagues the skills we've learned and the challenges we've faced in this complicated world, it will make it easier for everyone to make the best choices for themselves without the doubt, noise, and selling that currently bombard us when we look for any sort of guidance.
None of these lessons is exclusive to people in their early twenties. Good financial habits are most effective when they're ingrained early, but no matter your age, today is a better time to start than tomorrow. The sooner you can take these facts into account, whether you're in the Class of 2018 or the Class of I'd-Prefer-Not-To-Say, the easier it will be to transition to a life doing what you love.
Ben Henry-Moreland is a financial planner who specializes in working with freelancers, entrepreneurs, and business owners. He also used to be a professional opera singer. You can find him at freelancefp.com.