Ep 5: Intro to Financial Planning for Freelancers

One very important thing that we learned as freelancers is how to manage our finances. Since we don’t always a fixed monthly salary, it’s vital that we have our finances in order so that we are able to keep up with our expenses, while having a cash runway so that we are never in a desperate position. How should we plan? In this episode, we talk to Abel Goon, who is a CFA charterholder, fund manager and associate in a financial planning firm.

Show Notes

If you’re looking for ways to start investing, check out fundsupermart.com and Stashaway. If you’d like to get a consultation from Abel Goon, let us know via email at hello [at] solosync [dot] xyz or slide into our DMs on Instagram.

Transcript

[Prologue]

Sarah   00:01

I only started having savings when I became a freelancer. And I think it’s because when I came out on my own, it made me more conscious of the way I manage my money.

Jeannette Goon  00:09

Sometimes I think I have quite a good handle on things, mainly because I’ve gotten a lot of advice over the years from people who do understand the finance side of things. But there’s still a lot that I don’t know. So I guess that’s why we turn to experts.

Abel  00:21

I mean, if you think about it, every dollar you have is actually your employee so how will you want your employee to perform every day or every year? What would you want them to do for you?

[Start] 

Jeannette Goon  00:39

Hello, there! It’s Jeannette and Sarah again. This is Solo Sync, a podcast for the curious solopreneur where we discover simple solutions to keep enjoying what we do together. One of the things I find myself thinking a lot about ever since I quit my job is finance. Back in the day full time employment was always seen as something more secure. As long as you have a job, you don’t have to worry about how you’re going to pay your mortgage or credit card bills. You know, a salary comes in every month, your company provides health insurance and you get maybe like a car or phone allowance. And maybe the situation is a bit different now. Since the pandemic, full time employment doesn’t always seem so secure anymore. But when I was starting out as a freelancer, full time employment was definitely something that was a lot more secure. And now that I’ve been freelancing for quite a while I’ve learned the importance of planning my finances. And to be honest, I learned it the hard way. What was your experience with finance, like when you first started out?

Sarah   01:32

Sometimes the hard way is the best way to learn, unfortunately. Experience with finance. Honestly, when I first started becoming a full-time freelancer, I didn’t expect it to happen so soon, I always had a side gig when I was a full time employee. But when I had to go into full-time freelancing, it happened all of a sudden. I didn’t have any savings. I didn’t have a plan. In fact, I just knew I needed to leave my current job and I was applying for other jobs, but I couldn’t get any. So it all kind of you know happened at the same time. I would say that for the first few months, I was quite desperate. I was put in a situation where okay, I’ll just take any job that comes my way if it helps me pay the bills. But thankfully, through my social network, people started to find out that I was free and they started to send jobs my way. I’m really grateful for that. One thing I do want to say is the irony of it all is that I never really had savings even when I was employed full-time. I’m not sure if it’s because as someone who was employed full-time, I took it for granted, I knew that I would always get my next paycheck. I only started having savings when I became a freelancer. And I think it’s because when I came out on my own, it made me more conscious of the way I manage my money. And for me, that was a big milestone, it helped me to realise that I am 100% responsible for myself and that I can start saving. And I did. That was my breakthrough.

Jeannette Goon  02:56

Yeah, I guess that was the same for me as well. When I first quit my job, I had no plan. I didn’t have any real savings or any idea about like investing or where to put my money and things like that. It’s been quite a number of years now. And sometimes I think I have quite a good handle on things, mainly because I’ve gotten a lot of advice over the years from people who do understand the finance side of things. But there’s still a lot that I don’t know. So I guess that’s why we turn to experts.

Sarah   03:24

Yeah. And I think I’m at a stage where I need to know what to do next with my money.

Jeannette Goon  03:29

So today we have with us Abel Goon. Full disclosure, he’s my brother, but he’s also a CFA charter holder and a fund manager in a boutique fund management company. At the same time, he’s also an associate in a financial planning firm that assists investors in getting their finances on track and growing their wealth. As an avid investor himself, he believes everyone should invest as it is the easiest way to grow wealth. So Abel, since you say everyone should invest, and it’s one of the easiest ways to grow. Well, is that something that freelancers can do as well? And you know, for someone who’s just starting out, what should they think about when they plan their finances? Like how can they get on track to even begin investing?

Abel  04:11

The first thing you have to think about when you talk about your finances is: What’s your goal. Is it for retirement? Is it just to cover your expenses, or maybe people are looking to save money to carry out house renovation or to buy a car. So you have to figure out what is your end goal, how long time period you have to invest, and that’s how you start. Besides that you have to also keep track of your budget. So I know a lot of people who spend every month but they don’t know what they’re spending on. They don’t know how much they’re spending on food. They don’t know how much they’re spending on their phone bills. There’s a lot of places you can actually cut down and then you will be able to save more from that but something unique to freelancers is the fact that their income is not consistent. So a good idea for them to think of their money is in a annual sense rather than a monthly sense, which most salarymen do. So if you go online and you read advice on saving, most of the articles will talk about saving 15 to 20% of your monthly salary. For a freelancer, I think this may not be so ideal because your income is quite volatile, meaning some months, it can be really good. Some months, it can be not so good. So I think a better idea would be to set an earnings and savings goal. So for example, you may want to consider saving, say 10,000 for this year, and then when you hit 10,000, then you start spending a certain way or saving a certain way. Because I’ve seen some freelancers that they land a very lucrative contract, maybe an RM30,000 contract and they’re very happy. They go around, you know, I can buy big ticket items like designer handbag, or maybe I can spend on a really good meal. But at the end of the day, they are not able to cover their expenses for the full year. So that’s one of the things that’s quite unique to freelancers. I would advise freelancers, before they actually start investing, they should keep a rainy day fund. This is important for everyone but even more so for freelancers, because if you have a rainy day fund, you won’t be desperate to give discounts, you can be more picky about clients, you can work with only those people that bring value to your business. You won’t have to work with toxic people. You’re only able to do this if you have an emergency fund. So I think that’s a few key points for how freelancers should think and start planning their finances.

Sarah   06:30

That’s really good advice, Abel. I do have a few questions, though. So firstly, earlier, you said we have to think about our end goal, right? And then you gave us a few examples. What if your end goal was pretty much all of those things? I mean, what you mentioned is what an average person may want to secure in their lifetime – buy a house or even preparing to grow a family? Like what would your advice be? If our end goal was made of a few of those things?

Abel  06:57

Yes, as a financial planner, or even as an individual, you can actually set out the target. So like, for example, buy a car in two years, so you put how much you actually require to buy a car in two years. And then let’s say you want to save up for a down payment for a house in five years. So you put how much you want to save. You have to build the cash flow, like after two years, I need 50,000. After three years, I need 75,000. And from there, you can actually track how much you actually need to save and how much you would actually need to invest for you to reach that target. But yeah, that’s a bit more technical. I mean, there are guides online on how to do it. So basically, you can come up with that sort of cash flow and budgeting on how to end up with that end goal.

Sarah   07:41

So what you’re saying is prioritise and then space it out and target each goal one by one…

Abel  07:48

If everything combined, you need 100,000, then at least you have that target of hundred thousand. So basically targetting it one by one, but at the same time as a whole.

Sarah   08:00

I was just thinking that it could be very overwhelming. Of course, our desires are all there. But then to actually make it happen. Sometimes people feel like, oh, why should I even bother to start? I have nothing not. And I have to save 100,000 just to hit like three of these goals. So it could seem very overwhelming. So I think when you say to space it out and target it one by one, and then achieve maybe one at a time. Would that make more sense?

Abel  08:22

Yeah, if you target one by one, that would be a lot easier to do. So you save up for your house, then you space it out after that you have a down payment…

Jeannette Goon  08:31

I want to go back a little bit. Earlier you were talking about how freelancers should be planning their finances on a yearly basis rather than monthly compared to like other salaryman because freelancers’ income or even solopreneurs’ incomes may not be as consistent. So what do you think they should think about? What kind of factors should they take into consideration when they start planning their finances? Like let’s say it’s someone who is just about quitting their job or wants to quit their job? What should they do to you know, even start the planning process? Like should they have a rainy day fund, like how much of a rainy day fund should they have and things like that?

Abel  09:11

Yeah, so if they’re thinking about quitting their job, I would advise having six months to a year rainy day fund. So you basically have six to a year worth of expenses. So how much you spend a month, you have to track down how much you spend every month, you multiply that by six and 12. And then you will actually have some sort of runway for you to be able to get new contracts or to  slowly build your freelancing business so that you are able to carry it out in not a desperate way. Because I’ve seen some people they don’t have a runway and then they start getting desperate. They start giving very hefty discounts. And normally when you give discounts to people, it’s a bit difficult to reduce your discount, whereas if you start at a high price, normally it’s a bit easier to maintain at that high price.

Sarah   09:59

Good advice.

Jeannette Goon  10:01

The other thing I wanted to ask about as well is, one thing people who are not in full time employment don’t have is insurance. Like, you know, when you’re working for a company, you have company health care, maybe you have other benefits and things like that. Should freelancers, or solopreneurs set aside a certain amount every month for this sort of expenses?

Abel  10:20

So basically, I view insurance as a product that you purchase. It’s not an investment, a lot of people view insurance as, “Oh it’s a necessity, it’s an investment.” For me, I believe that insurance is a product, like any other consumer product that you actually purchase. So when you purchase this insurance, you should buy what you need. So for example, most people will need a medical insurance, which is your medical card in case you get sick, or have to do any major operations or maybe your personal accident where you go, wall climbing and you fall down. This medical card, we’ll be able to cover this sort of unexpected expenses. If you look at things like life insurance, or a savings plan, life insurance is only necessary if you have dependents that if anything happens to you, you will have some money to cover them. Whereas a savings plan, which a lot of people like keeping like to think of an investment. A savings plan is actually a product. Normally, I feel like it’s rather unnecessary as most of the time these insurance companies actually have a lot of hidden costs or for example, the insurance agent commission, for example, the sales charge, yeah, basically, there are a lot of better options out there. So the main point is probably just medical would be the most necessary for freelancers and life insurance, if you have dependents.

Sarah   11:43

I see. You mentioned savings plan. I’ve heard that before. So are there other areas you would recommend for freelancers to start a savings plan with if it’s not with a insurance company?

Abel  11:54

Yes, so the insurance companies have quite a lot of hidden costs for these things. And so what they can invest in now, with the digital age, there are plenty of investments online, which have almost no hidden cost. For example, Stashaway, which is basically a robo-advisory service. You have things like fundsupermart, which is basically an online marketplace for mutual funds, which have very low upfront costs. It’s quite intuitive to actually set up an account. And if you actually Google search online, there are plenty of these sort of services in Malaysia.

Sarah   12:28

I see. So what I’m hearing from you is when you talk about having a place for savings, you’re actually talking about a place for investments. And does that mean that people should just avoid stashing up their money in a stagnant way somewhere, like if you’re going to put money away, put it into an investment?

Abel  12:45

Yeah, basically, if you are thinking about, you know, previously we were talking about the emergency fund. That emergency fund should be in some sort of investment as well, like maybe a money market fund or even a fixed deposit is considered an investment. So basically all extra money that you have, I believe, should be working for you and giving you some sort of return and not just lying there doing nothing. Okay,

Sarah   13:11

Okay, I have a lot of work to do.

Abel  13:13

I mean, if you think about it, every dollar you have is actually a worker, is actually an employee. It’s actually your employee. So how would you want your employees to perform every day or every year? What would you want them to do for you? I like to think about it that way.

Sarah   13:29

That’s a really good analogy.

Jeannette Goon  13:30

And very capitalistic too.

Sarah   13:33

All this applies except for your cash flow, right? I know use it to a certain extent, say, you have a one-year rainy day fund, you put in fixed deposit. But I mean, you still need to have a certain amount that you can access anytime. You don’t need to invest that right? Dumb question, but I thought I’d just ask.

Abel  13:48

Yeah, so maybe you have one month of your expenses, in your typical bank account savings account, and then that 12 months emergency fund, probably not a fixed deposit because a fixed deposit is quite illiquid. So maybe you can go for something like a cash management account. So for example, like on fundsupermart, they have this fund called the RHB Cash Management account. It gives you around 3% per annum, and you can take out basically whenever you want, and you can put in whenever you want. So I mean, that’s one of the examples that I would throw out there but there are many other examples besides this.

Sarah   14:25

I see. And I’ve heard advice saying that you shouldn’t be looking into doing any kind of investment until you have a good cash flow. And in this case, we were saying six to 12 months. What’s your take on that?

Jeannette Goon  14:36

Yeah, that makes a lot of sense.

Abel  14:36

I’m a bit different in the sense that when I think about investment, I don’t just think about you know, stock market  or bonds or investing in a house or private equity. I even consider fixed deposit an investment. For example, even Stashaway, all these, are considered investments and you can easily do direct debits and they can be taken out at any time as well. So for me, yes. An emergency fund where the amount wouldn’t fluctuate is important. But I believe that investing as soon as possible is even more important. Of course, how you save and how you invest depends on each individual. if let’s say you are just starting out, and your income comes once every six months in a small amount, of course, I would advise you to keep that money in a very safe investment but if let’s say, you’re a bit more established. Every month, you secure at least one project or you know, every two months, you secure at least these one project, then you can start playing planning more. Because your income starts getting more consistent so your emergency fund starts getting less useful. So I mean, if you compare it to a salaryman that gets a monthly income, I would say, probably three months expense saved up is more than good enough for an emergency fund.

Sarah   15:57

Hmm, that’s really helpful.

Jeannette Goon  15:58

Thanks so much, Abel. This was like a great introduction into thinking about finances as a freelancer or solopreneur. Thanks so much for being with us today. And we’ll probably get you on a little bit more since I think we have a lot of questions for you, and probably would want to hear more of your advice too. But thanks for spending your time with us today.

Abel  16:20

Thank you.

Jeannette Goon  16:23

So that was Abel. We’ll probably have him on the show again, if he’s willing. There’s so much more we have to ask him. But thank you guys so much for tuning in. Show notes for this episode, as usual on our website, http://www.solosync.xyz. If you’d like to get in touch with us to suggest a topic for an upcoming episode, or if you have a question that you want us to answer, email us at hello@solosync.xyz.

Sarah   16:51

You can also follow us on Instagram for more updates too. Our handle is @solosyncpodcast. See ya!

Jeannette Goon  16:57

Bye!

[End]