Following the previous post concerning savings pools, I was asked to provide a more detailed look at leveraging short term savings to lower overall costs. This is a process that involves combining budgeting with savings and interest generation to reduce costs for freelancers. When major costs can be identified twelve months or more ahead of time, they can be planned for and saved for. As the savings builds, if the appropriate vehicle for the savings is chosen, interest can accumulate along the way, this interest can help to offset some of the cost incurred. Lets look at an example.

Jane Doe Budgets

As part of her freelancing consulting business, Jane Doe knows that she has many expenses, and budgets for them accordingly. Three expenses especially stick out for her: A software subscription for $ 1,200 which occurs in next April, Insurance for $ 1,950 which occurs in next February and a professional credential for $ 2,800 which will come up next August. As it is now May she has 12, 10 and 16 months respectively to prepare for each of these expenses. Dividing each of their costs by the respective months remaining, shows that saving $100 per month will cover Jane’s software subscription, while saving $195 per month covers her insurance and saving $175 per month will cover her professional credential. But what if we put those amounts into an interest bearing account?

Jane Doe Saves

Well as it turns out, Jane saved for these short term expenses by putting her money to work in an account bearing 4% interest. By saving the above outlined amounts, and then paying each of the expenses in full Jane would have approximately $225 left over in her short term savings. That is an extra $225 earned on money that was going to be spent within the next 10 to 16 months. Put another way, she has a $225 head start on next year’s expenses. Or this can be seen as a 3.78% rebate on current expenses. Regardless of how it is viewed the important take away is that Jane was able to leverage her budget to make her money work for her.

Complicating Factors

This is an extremely simplified example. It ignores a multitude of complicating factors such as payment timing, rate variability, transaction costs, tax consequences, among others. It is also important to note that Jane should choose an account type to match her goals, which in this case means short term liquidity and principle protection. Each individual should consult with an advisor, accountant, and/or tax professional to ensure they are getting advice specific to their situation.
We hope this example helped to show what can be done by a freelancer to leverage the resources available and mitigate known costs.