With the decision to give up summer sales, I became a full time freelancer. Rather, a part time freelancer because the goal is to limit how much time I spend working until I begin MBA school in the Fall.

Although I don’t have much time under my belt being completely self-employed, I have discovered a couple of financial challenges.

Health Insurance

One of the top concerns that I have is health insurance. We lost our health insurance when I quit full time employment in April. If any of you have ever looked at COBRA, it’s cost prohibitive for most people because your employer paid most of the cost for you.

I investigated health insurance alternatives through a broker as well as some price comparison I did myself online. I could easily find insurance that was half the price of COBRA but even then, it was too expensive for us.

We are fortunate in that we’ll have health insurance when I begin school in the Fall.

Expect your health insurance costs to at least double when you become self-employed – especially if your family has a history of medical issues.

Budgeting

I’m a lists guy. I like constancy. I like stability. I like predictability.

You lose all of that when you first become a freelancer. Before, my budget worked on a set, fixed amount coming in every month. So determining how much I could spend was very straightforward.

Now that my income is variable (and frankly less), I’m struggling with how to best budget. We have some expenses that are set and happen at the same time every month – cell phone bill, car payment, etc.

But our other budget accounts, such as food, are now also variable depending on how much money is in the bank.

Honestly, it’s a disconcerting feeling.

I’ve found that I have to budget for a minimum. What’s the minimum that I expect to earn each month? What’s the minimum that I can spend on pretty much everything?

Consequently, I’m learning that our budget has to be very fluid. I can’t always use in this month’s budget what worked in last month’s budget. I have to be flexible. I have to readily change our allocations based on my expectations for the next several weeks.

Credit Cards

I’ve made some strong arguments against credit cards and a few arguments for credit cards.

I’ve spent the last few years transitioning all recurring bills to auto-withdrawal from our checking account. But since I don’t know, like I did before, that I’ll always have the right amount of money in my checking account at the right times during the month, I find myself moving everything to a credit card so that I can make one convenient monthly payment.

Let me be clear. I’m not suggesting that you live off of credit cards. But they can be helpful if you pay them off every month and don’t incur interest charges.

Your Own Space

I half jokingly told my wife this morning, “You don’t seem to understand the working part of working from home.” To which she just grinned.

With three kids and a wife who want my attention, it’s very easy to be distracted.

There are several options on where to work:

• Working out of a coffee shop – There is just something romantic about this thought. Sitting at some cafe with a laptop in front of you where the people know your name (think Cheers but without Ted Danson’s hair or ego). Of course, drinking premium coffee, or hot chocolate in my case, can be an expensive habit.
• Coworking or renting space – I also love the idea of coworking. Basically, you pay daily, weekly or monthly for access to a shared work environment. The idea is that by working around others like yourself, you can bounce ideas off of each other. Cheaper than renting an office, but far from free and only in select cities.
• Home office – Probably the most economical, but you may face interruptions…lots of tiny little interruptions like, “Daddy, can I do your hair?” or “Here’s the baby.” Time away from work can be just as costly as either of the two options above because you aren’t bringing in money. Also, you may have some outlay if you need to setup an office in your home.

Marketing

This goes without saying but I’m going to say it anyways – you have to spend time every week or day acquiring new customers.

Depending on your craft, the best methods can vary.

For example, I have a friend who is breaking into the real estate market. More specifically, he has opened a Title business to close on homes. He spends a lot of time at networking events. Most of which have a cost to join.

I recommend looking at sites like Meetup.com and LinkedIn to see if there are groups in your area that you can attend for free.

Some other marketing costs you should consider:

• Business cards
• Website
• Flyers
• Referral incentives
• Branded give-aways
• Yellow pages
• Facebook ads
• Google PPC ads

What financial challenges have you found as a freelancer?

My wife and I have been teaching a Family Relations class at church that includes a section on money management. Writing all of these posts on finances has come in handy as I have a lot of material on the topic of money.

I want to share some of the principles and take-aways from our last lesson which focused on the basics or foundation to good money management.

Live on less than you earn

If you aren’t familiar with it already, that video clip is a duplication of an old Saturday Night Live sketch with Steve Martin.

Hopefully, you already know that you should live on less than you earn. But actually doing it can be pretty hard sometimes.

“I have discovered that there is no way that you can ever earn more than you can spend. I am convinced that it is not the amount of money an individual earns that brings peace of mind as much as it is having control of his money.”

– N. Eldon Tanner

Read the first line of that quote again if you need to – I did. The message is simple – there are always things to buy and ways to spend money regardless of how much money you make.

The key to happiness is to avoid the bondage that comes with debt. Money and interest can be a very cruel taskmaster when used improperly.

Owe no man anything

A hundred years ago, having a mortgage would have been considered filthy or immoral. If you wanted to own land or a home, then you worked and saved for it.

Most families built their own home.

And yet, debt financing a home today is the standard. Saving enough money to buy a home seems unfathomable to so many.

Banks and lenders have done a great job teaching us that we need their money. It’s a lie. A complete and total lie.

That lie created the collapse in the housing market over the last several years. Consumers believed that we had to won a home – it’s the American dream. Banks believed that we’d never foreclose on the American dream and that home prices would always go up.

Unfortunately, inflated home prices caught up with too many and the bottom fell out.

So how do you avoid having a mortgage?

Dave Ramsey tells a story that I love. He describes a young couple that make a combined $80k a year. They rented a small place and lived on $30k and saved $50k every year. After four years, they had $200k in the bank. They found a modest home for $150k and then spent the other $50k furnishing it however they wanted to.

Awesome!

I’m sure you are thinking, “Yeah, well, I don’t make $80k a year,” or, “I have more expenses and kids and blah blah blah.”

If you are thinking anything like that then you need to change your paradigm. You need to change how you think about money.

It might take you longer than four years but you can do it. You can own a home without a mortgage. You can own a car without a car payment. You can have what you want..in time.

Learn to be patient.

If decide that you just have to get a mortgage, then at least save enough to secure a 15 year mortgage. You will pay substantially less.

Tips for spending less than you make

Saving that much money takes a lot of discipline and time. Let me give you some pointers.

• Setup auto-savings – Determine how much you are going to save each paycheck – let’s say 20%. Use direct deposit or automatic transfers to put that money into a separate account that is not easily accessed or spent. Basically, make the money disappear and forget it’s even there. Don’t rely on yourself to make the decision every paycheck to save the money.
• Develop and live within a budget – One of the most crucial factors in your success will be how well you live by a budget. Just to be clear, budgeting is not tracking how much you spend. Budgeting is setting limits to how much you spend and then living by those budgets. Some more bugeting tips.
• Cut up your credit cards – Just be done with them. If you have an issue with overspending, then take away your ability to overspend. I don’t care about the rewards – they are just gimmicks designed to take your money. Studies have shown that people who use credit cards spend more than those without. Fact.
• Use cash only – If you find that even with just a debit card you find yourself racking up overage charges or going onto an overdraft credit line, then move to a cash only system. Only use cash. If the cash is gone, then you are done spending. That simple.

 I may not have said too much in this post that you haven’t already heard or read. However, I do hope that you’ll walk away better motivated to make needed changes.

Take a look at your life today, target some specific areas for improvement and then go for it. But go all out and make it happen!

First some business…

As some of you may have noticed, I’m a delinquent (which I explained in my last post Why do I have to wait until I’m in trouble to clean up my finances?) And as a delinquent, I have neglected to tell you about some awesome finance blog round-ups that I have been featured in recently. So to atone for my sins, I have a list of great round-ups below.

(For those of you unaware of what a Blog Carnival or Round-up is, it’s when a bunch of bloggers submit posts to one blogger who then picks the  best and features them in one post)

• Carnival Of Personal Finance #324: The Universe Edition hosted by Christopher at StumbleForward.com
• Carnival Of Personal Finance #315 : Bring On The Long Weekends hosted by Canadian Personal Finance Blog

Now to the good stuff…Airline Miles Infographic

The team at Deals.com put together a pretty cool and highly informative infographic about Airline frequent flyer programs and their branded credit cards. If you are considering joining a mileage program or getting a branded credit card, then check out the image below.

Infographic from Deals.com

Recently, my wife and I had what I call a “Come to Jesus” moment. Basically, we had to face reality. We had let a number of areas in our finances slip. Mostly, we just got lazy. So we are currently putting everything back in order. But this experience has left me asking myself, “Why do I have to let things get bad before I shape up?”

Maybe you’ve found yourself in the same boat.

You are sticking to your budget and saving money. But then one expenditure comes up and you decide to dip into your emergency fund (even though it wasn’t an emergency). Then another thing comes up, and then another, and so on. Next thing you know, you are pulling our credit cards again.

Hopefully I’m not alone in this boat (let me know in the comments).

Long before making big, bad decisions, we started by just being lazy about little things. And rather than making changes when it was easy, we waited until things were hard. I’ve repeated this pattern a couple of times in my life.

• Step 1: Get everything in order.
• Step 2: Start slipping in small ways (usually dining out).
• Step 3: Start making bigger, badder decisions (and yes badder is a word).
• Step 4: Realize what I’ve done and work for months to fix it.
• Rinse and repeat.

The problem is that each cycle is costly. It sets us back and puts our goals that much further out of reach.

What’s scary is that our entire nation acts the same way.

We’ve been on a spending spree since the Obama Administration took office nearly three years ago. Although many people and groups warned of the dangers, Congress charged forward. Then, we were hit smack in the face with warnings of credit rating decreases, actual credit rating decreases, and the risk of default. We hit our credit limit. It was only at that point that Congress decided to make some effort to reduce spending.

The scary thing though is that fixing my financial mistakes is not that hard, it just takes a little time. Fixing the financial mistakes on such a large scale – the United States of America – will take decades and a lot of money out of everyone’s pocket. And don’t tell me that it won’t affect your because businesses and the rich should pay more. Businesses and rich people are what drive the economy. They put the money into the economy that gives all of us jobs. So if they have less to spend, then our economy slows and jobs go away.

So why do we as individuals and even huge governments let things get so far out of control before we wake up and have a “Come to Jesus” moment? Why don’t we guard ourselves against deviating from our course?

The government has no excuse.

Elected representatives should represent their constituents and the system of checks and balances should weed out stupidity. But it seems to have failed of late (for a lot of reasons).

But as individuals

We don’t have checks and balances unless we create them. Let me give you a few ideas on how to create self-monitoring mechanisms.

1. Budgets – A budget is a guide and benchmark against which you can weigh yourself.
2. Weekly or Monthly Financial Reviews – Set aside a time each week or month to review your finances with you spouse so that you both know what’s going on and can talk through any issues.
3. Cut up credit cards – Just remove the temptation.
4. Tell your mom about your goals – Okay, so maybe you don’t have to tell your mother per se. But tell someone that will check-up on you about your financial goals. Create accountability for yourself.
5. Automate as much as you can – Make your savings automatic. Make bill pay automatic. Make donations automatic. Get your money going to the right places as soon as you are paid. Then, only spend what’s left.

I’m happy to say that we are headed in the right direction again. But it’s still been costly. Hopefully, I won’t have to wait until it’s out of control again before making course corrections.

Can you empathize? If so, let me know in the comments or on Twitter.

Let me start by saying, I like Dave Ramsey. I am a Dave Ramsey fan. I’ve completed his Financial Peace University. I am prepared to “Live like no one else, so I can LIVE like no one else.” But I have to disagree with him on at least one account – no credit cards at all.

I advocate that you don’t use credit cards. My wife and I switched from putting everything on a credit card and paying the balance off each month to using a debit card. We closed 14 different credit and department store cards. It was one of the best financial decisions we’ve ever made. However, I still have one open credit card and one open department store card.

I have been asked if and when using credit cards makes sense. As a general rule, I tell people to never use a credit card. Mainly because many people don’t have sufficient self-control to manage credit cards. So don’t even put yourself in the situation to be tempted. However, if you can exhibit self-control, then there are three reasons I use a credit card.

My three reasons for using a credit card

1. Avoid multiple withdraws or overdraws from bank errors
   I don’t like someone having direct access and authorization to withdraw funds from my checking account. For example, I only put my electric, cell phone, and gas bills on my credit card. That’s it. I don’t use it for anything else. My reason is that I have known a number of individuals who had a bank or merchant, in error, make a withdraw several times or withdraw the wrong amount from their checking account. In 99.9% of the cases, you will get your money back. However, that mistake can be costly until it’s resolved. Maybe you won’t be able to buy food or you end up with overdraft fees.
2. True emergencies
   I really hesitate to even mention this reason since it can be too easy to call something an “emergency”. The purpose of an emergency fund is so you can cover emergencies and not have to rely on credit. However, you can’t always get to the funds in time. Let me give you a recent experience. A little over a month ago, I received a call at 1AM with news of a death in the family. Just 24 hours later, my family was on an airplane. We were gone for more than a week. Since we needed to book plane tickets, a rental car, hotel rooms, etc. in such a short timeframe, I relied on my credit card. Having said that, I paid off the total amount of the trip from our emergency fund within one week of returning home. But again, make sure it’s an actual emergency. As an aid, here’s a list of 49 non-emergencies.
3. Discounts or money back
   So I’ve explained why we have one credit card. I want to now briefly explain why we have one department store card – Kohl’s. We love shopping at Kohl’s. I actually interned a few years back at the corporate office and gained a real appreciate for the organization as a whole. As a result, we do a lot of shopping at Kohl’s and receive coupons each month for great discounts. The only requirement to get the discount – use your Kohl’s card. Since we’d be shopping there either way, we might as well get the 20-30% discount. Just make sure that coupons don’t end up costing you more money because you spent more than you would have normally.

If you use a credit card, do so sparingly and pay it off monthly

I really can’t stress this point enough. As I mentioned before, I usually just make the blanket statement that you should never own or use a credit card. But I’m a realist and recognize that there are situations when credit cards can make sense.

What other sound reasons might cause you to keep a credit card just in case?

For those unfamiliar with the Prisoner’s Dilemma, it’s essentially a hypothetical scenario where a prisoner has to choose between two alternatives – rat out his accomplice or say nothing. The prisoner selects which action to take based on the potential payoff or outcome from either alternative.

The Prisoner’s Dilemma is a common way to explain a branch of economics called Game Theory or Industrial Organization, popularized in the movie A Beautiful Mind. John Nash realized that to reach an optimal outcome, no participant can be made better off by choosing a different course of action. Essentially, everyone is in the best place that they can be.

So how does this apply to personal finance?

Let’s use credit card companies as an example. ACME Credit Cards has a large marketing department who has one simple responsibility – convince you that the optimal outcome is using a credit card.

So let’s use game theory to analyze the true payoffs of using and not using credit cards. I’ll then show you how ACME Credit Cards has distorted the truth hoping that you’ll choose a non-optimal solution (though certainly optimal for them).

Setting up the participants and outcomes

Step 1 is setting up the game with the possible choices that each participant has.

As shown above, Consumers have the option to either use credit cards or use cash for purchases. For the purpose of this illustration, I am narrowing the Credit Card Issuer’s options to make money from either interest charges or transaction fees charged to merchants (this assumes that the Consumer pays off the balance in full each month).

Step 2 is setting the payoffs that each participant can expect depending on the outcome of the choices made.

Here is a recap of the outcomes:

• If the Consumer chooses to use credit cards and not pay off the balance each month, then the Consumer pays interest charges and the Credit Card Issuer makes huge profits. Bad outcome.
• If the Consumer chooses to use credit cards and pay off the balance each month, then the Consumer still pays more since Consumers spend on average 18% more when using credit cards versus cash and the Credit Card Issuer still makes money. Bad outcome.
• If the Consumer chooses to use cash only, then he or she saves money and the Credit Card Issuer goes broke no matter what it chooses. Good outcome.
• Optimal Outcome: The Consumer should always choose to use cash instead of credit.

Step 3 is setting up the outcomes as Credit Card Issuers would have you believe them.

Here is a recap of the outcomes:

• If the Consumer chooses to use credit cards and not pay off the balance each month, then the Consumer  was able to get just what he or she needed when he or she needed it and the Credit Card Issuer is the good guy. Good outcome.
• If the Consumer chooses to use credit cards and pay off the balance each month, then the Consumer was still able to get just what he or she needed when he or she needed it and the Credit Card Issuer is the good guy. Good outcome.
• If the Consumer chooses to use cash only, then he or she misses out on all of the rewards and fun that everyone else is taking advantage of and the Credit Card Issuer goes broke no matter what it chooses. Bad outcome.
• Optimal Outcome: The Consumer should always choose to use a credit card instead of cash.

Avoiding the marketing traps

Do not be fooled by slick advertising. Although Credit Card Issuers paint a very pretty picture of instant gratification, reasonable fees and interest rates, and a mass of incentives (e.g. miles, points, cash back), the reality is that they are making a lot of money. Visa posted profits of $713mm just for the first three months of 2010!

Meaning, they are doing a great job of distorting the truth. As shown above, the actual outcomes are not fun and fancy free living. Rather, avoiding credit and debt is the sure path to financial stability and growth.

This same logic and process aptly works for other areas of personal finance as well. I just like picking on credit cards.

Also, listed below are several articles and ideas on how to avoid debt and save money:

• How To: Get out of debt using the Snowball Method
• 6 More ways to stop overspending
• The 30-Day “No Spend” Challenge
• 4 Changes to make in this new economy

What are some other examples where the optimal outcome is being distorted by clever marketing? Also, sign-up for our RSS Feed for timely updates on this and other financial topics.