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Managing fluctuating cash flows can be a stressful task for freelancers and business owners. The instability that comes with variable income can lead to significant stress and financial challenges. From relying on credit to pay bills one month to scrambling to pay off debt the next, it can feel like a never-ending cycle. The “Freelancer’s Superhero Account,” aka the buffer fund, can help with all of this.
What You’ll Learn
→ What is a buffer fund?
→ Why the buffer fund is so important for freelancers.
→ How to get started with your buffer fund.
→ The difference between an emergency fund and a buffer fund.
Why is the Buffer Fund that Important?
A buffer fund is a separate account whose sole purpose is to cover the gap between a person’s month-to-month expenses and their fluctuating income. The buffer fund is important in minimizing stress and decreasing the need for credit. According to FreelanceMap.com, 38% of freelancers cite fluctuating cash flows as their top concern. With nearly half of freelancers reporting not being paid on time, according to bill.com. These struggles can lead to potential debt and financial instability.
This financial stress impacts not only your finances but also your well-being and quality of work. A buffer fund can help combat this by ensuring you have money available each month to cover your essential bills.
A Case Study
Consider a situation where expenses are, on average, $5,000 per month and income is roughly $7,000. This would be a great scenario, but these are only averages. One month, this person might earn only $3,000, while the next month they may earn $10,000. If there is a string of low-earning months, how is that person expected to pay the necessary expenses in one of those months? Well, this is where the buffer fund comes into play. If a person needs to cover $2,000 worth of expenses one month they can dip into this account to cover that. Having a buffer fund is like performing a financial balancing act
Steps to Set Up Your Buffer Fund
1. Calculate Essential Expenses:
Start by listing out your necessary monthly expenses like rent, utilities, and groceries. Aim to save enough to cover one to three months’ worth of these expenses.
2. Start Small:
If the thought of saving a few months’ worth of expenses seems overwhelming, remember to start small. Save a few hundred dollars at a time and gradually build up to your target amount.
3. Prioritize High Earning Months:
During months when your earnings are higher than usual, focus on saving additional funds for your buffer account. Not only will this help you reach your goal faster, but it will also replenish your fund in times when you’ve needed to dip into it.
Buffer Fund vs. Emergency Fund
A common misunderstanding is confusing a buffer fund with an emergency fund. While both serve as financial safeguards, they have their own unique purposes. An emergency fund is kept for large emergencies like a broken down car, loss of a job, or a large medical bill. A buffer fund on the other hand helps fill the gap between what you earn and what you spend.
Conclusion:
Life as a business owner or freelancer is already so stressful. The burden of unpredictable cash flows can lead to lots of unnecessary stress. Take control of this aspect of your life by setting up a buffer fund today. Doing so will ensure more predictable finances, reduce stress, and provide more focus for doing what you love.
Louis Guajardo is the founder of Moonshot Planning, a financial planning firm helping women entrepreneurs and women-led businesses plan and achieve their moonshot through comprehensive financial planning.