In my experience life is more enjoyable without debt and the anxiety that it brings. The eight budgeting tips for freelancers outlined in this post can help you bring order to the chaos and take control of your finance.
But before we go through the plan, let’s talk about budgeting at the macro-level. Budgeting is hard, especially when your income fluctuates from month to month. If budgeting were easy, then the average U.S. household wouldn’t have $15,675 in credit card debt and $132,158 in total debt.
What Is Really Going On?
Let’s start with a brief lesson from Economics 101.
Debt is more than just a by-product of overspending. Because this is true, managing debt effectively requires more than a tongue lashing about laziness or a lack of discipline. Though I encourage you to exercise self-restraint and to commit to living within your means, I caution you against thinking that mental fortitude is enough to solve your financial problems.
Economics is more complex than irresponsible spending. Since 2003, median household income in the United States has grown 26%. That sounds pretty good until you learn that the cost of living has grown faster. Over the past twelve years, medical costs have increased by 51% while food and beverage prices have gone up by 37%. (source)
In short, the average median household income in the U.S. cannot keep pace with the rising costs of living. A drought in Mexico or California affects the price of fresh produce. Legislation on Capitol Hill affects the price of health insurance premiums. Even without indulgent overspending, budgeting poses a challenge.
Photo Credit: Holly Golabek via Flickr
Why Do Freelancers Have Such a Hard Time With Budgeting?
Trying to stick to your budget is like trying to shoot a pronghorn antelope while riding a slow horse. And budgeting is more difficult still for freelancers because variable income adds another layer of complexity to the earning/cost of living conundrum.
You’re still on a slow horse, but you don’t know whether or not you’ll be able to feed it next week—let alone next month.
Instead of validating our excuses, I’d prefer to equip freelancers and consultants with a practicable plan for taking control of their business and personal finances.
Every dollar spent now has an opportunity cost later.
Freelancers tolerate the stress, risks, and demands of self-employment for a variety of reasons, including the autonomy and the upside. If you go to the trouble of drumming up more business, then you stand to make more money.
This upside has a downside. It fuels a fatal optimism: “I’ll put the conference on a credit card. It will pay for itself one way or another with new contacts or clients.” And maybe it does. I love conferences for that very reason. The thing we often fail to see when running our businesses and lives on credit is that every dollar spent now closes the door on an opportunity down the road.
By spending money we don’t have, we say, in effect, “The current opportunity is more valuable than the future opportunity I don’t know about.” And if we’re really being honest, swiping the plastic usually has less to do the three smart reasons to spend money and more to do with “I want a $6 coffee now.”
The future becomes a vague purple cloud charged with anxiety. “How will I ever pay down this debt?” We treat debt like telemarketers and ex-lovers: Maybe if I ignore it, it will go away.
Yes, budgeting seems harder for freelancers because our income is variable, less predictable. You may value your freedom and independence more than a steady paycheck, but that freedom doesn’t feel so free when money gets tight. A budget can feel tedious and limiting, but worrying constantly about money is worse. So pick your prison: anxiety about overspending, debt, never getting ahead despite making good money; or careful, consistent, disciplined management of your resources.
A Quick Disclaimer
I do not have this all figured out. I like money, and according to my parents, I always have.
My Economics teacher in high school showed me how to balance a checkbook. My consulting business has grown consistently year over year. I even sold my mobile app portfolio.
But I still make stupid spending decisions. For example, earlier this year, I “invested” in a lapel mic and an audio recorder that I have only used once. Why? I could have just borrowed BETTER equipment from any number of friends.
Fatal optimism tells me to just put it on a credit card. I can always pay it off later when Wunderbar’s cashflow and my investments dramatically exceed business and personal expenses. Yeah, that’s a nice thought. Pigs will fly, and Richard Branson will acquire my startup Closeup.fm.
I don’t stand before you as some kind of guru. I’m the student next to you repeating important lessons aloud because they are easy to forget and critical to remember.
How Do Freelancers Get Ahead?
So how do smart freelancers do it? How do you break out of that vicious feast-or-famine cycle and stop living paycheck to paycheck with variable income?
Use a simple plan. Complex plans take more time to manage, which also means they break more easily.
If managing your finances becomes really time-consuming and tedious, will you keep doing it? Probably not. You’ll go back to shooting from the hip.
Choose a simple plan, and stick to it. Vanguard founderonce had this to say about building wealth, “The secret is there are no secrets.”
We freelancers and consultants have got to stop making excuses for ourselves. We must start looking for answers. We must seek out and learn from the real financial experts like Todd Tresidder, the founder of FinancialMentor.com:
“How do postal workers and teachers achieve financial security while certain doctors and lawyers get stuck in financial mediocrity? Why do some people work hard and end up broke while others exert far less effort and make millions? Answer: the winners have a plan based on proven principles and take persistent action to realize their goals.”
Try to not outsmart yourself.
Start With These 8 Budgeting Tips for Freelancers.
1. Write down your expenses.
The goal here is to figure out your real survival number.
Most freelancers I talk to who seem perpetually stuck have never taken a systematic approach to organizing their personal finances—let alone to tracking their business-related spending.
Consequently, they cannot assign a concrete number to “the cost of doing business,” and they have never defined their true cost of living.
No wonder anxiety trickles in! It’s hard to hit a target when you don’t know where it is.
Certain expenses can sneak up on you: renewing your vehicle’s license and registration once a year, ordering business cards (finally) for that upcoming conference, buying a decent suit (finally) for that awards ceremony, replacing that Macbook after its cantankerous motherboard (finally) gives up the ghost.
The first step toward a real survival number is figuring out how much you spend in an average month.
Sneaky expenses can blow up your budget, but most of them really aren’t all that sneaky. They’re just irregular so we forget to plan for them.
2. Prioritize bills from most to least important and pay them in order.
You may not be able to ramp up your earnings right away, but you can get a few quick emotional wins by saving a little each month. For example, I started by putting only $50 a month in savings and contributing $150 per month to my ROTH IRA.
At this rate, I won’t retire by the age of 40, but neither do I feel like I’m dead in the water.
3. Build your budget around your lowest-earning month.
The goal is stability in the midst of unpredictability. Therefore, the most logical place to start is with your worst month from the last twelve months.
Email your accountant and ask for that number. If you don’t have an accountant, then run a Profit and Loss report in QuickBooks.
If you don’t use QuickBooks, don’t keep tabs on monthly earnings, or can’t come up with historical numbers, then build your budget around your real survival number instead.
The best way to not overspend during drier months is to live off the money you made the month before. In order to do that, you need a business checking account, a personal checking account, and a business savings account.
Your business savings account is the same as an emergency fund or rainy day fund for your personal finances. This business savings account will eventually contain 90 days worth of operating expenses, including your monthly salary.
Don’t have a monthly salary? Divide last year’s pre-tax take-home pay by 12. That monthly average is a good starting point for a salary and personal budgeting.
You may not be able to live on last month’s income right away. In fact, you may need to ramp up your sales and production in order to have profits beyond what you need to cover your personal survival number.
Now you know the importance of setting accurate sales goals: Sell enough work each month in order to have cash left over after you pay yourself in order to save up an entire month’s worth of salary and operating expenses in order to start living on last month’s income in order to not always be living from paycheck to paycheck.
(Phew. Hopefully, that’s the worst sentence I’ll write today.)
Word to the wise: Once you have socked away enough in your business savings account to live on last month’s income, you may be tempted to dip into extra net profits.
Don’t. According to J.D. Graffam at Pulse, you should wait until the quarter ends to pull surplus cash out of the business. Better yet, keep ALL of the cash in your business until you have 90 days worth of operating expenses, including your salary.
5. Use the Balanced Money Formula (50/30/20).
I first learned about the Balanced Money Formula in J.D. Roth’s book Get Rich Slowly. He borrowed it from Elizabeth
Warren and Amelia Tyagi’s book All Your Worth where they outline three broad categories: needs, savings, and wants.
The Balanced Money Formula is based on your net (after-tax) income, and the authors recommend that you spend no more than 50% of your take-home pay on needs. You then spend 30% on wants, and the final 20% you save.
Go back to your lowest-earning month (or your survival number) and tweak all of the categories. If you can’t get them closed to the Balanced Money Formula, then you have just identified a new goal.
Photo Credit: Andrew Czap via Flickr
6. Open business bank accounts.
I already alluded to this one. Budgeting is easier if you keep business and personal accounts separate. I use four accounts on a monthly basis: business checking, business savings, personal checking, personal savings.
Pro Tip: Look for business bank accounts with no monthly maintenance or minimum balance fees.
7a. Optimize and automate your system as much as possible.
Complex systems break more easily than simple ones, and systems that require lots of data entry, maintenance, and brain space do too. Set aside time to brainstorm ways to simplify your system.
Here are some practical steps I have taken:
- Create a Budgeting board in Trello with cards for regular expenses and bills. (This way, remembering them is easy.)
- Move cards from Unpaid droplane to Paid as the month progresses.
- Have a separate droplane with cards for pre-determined jobs for any surplus—e.g., $150 – New MacBook Fund.
- Manage spending and budget week-to-week with You Need A Budget (YNAB).
- Track all new client and project leads in Trello.
- Set monthly sales goals.
- Project cash flow with the Pulse app .
- Automate my invoicing with Harvest app. (Also, use these invoicing tips.)
- Be smart about deposits for freelancers.
- Outsource bookkeeping.
- Have a go-to CPA for questions and tax work.
- Have a go-to financial advisor.
7b. Hire a bookkeeper and CPA.
Hire an expert to get your books in order and prepare your taxes. It’s that simple.
You’re more likely to make more money if you have a plan both for making it and for spending it.
Your plan needs to be bigger than what you currently earn. That’s the whole point of business, right? To grow? Not just to survive but to thrive? (Read this post to figure out your Thrival Number.)
Don’t use a windfall to buy anything shiny. Use it to fertilize future growth. Create a job for every dollar–both real dollars and imaginary ones.
Let’s say that you currently aren’t able to live on last month’s income because every check is already spent before it event clears in your account. In order to set aside a full month in your business savings account, you need to 1) make more than you spend, and 2) save the surplus.
Obviously, this ideal scenario exists in a vacuum where no boneheaded friend wrecks your truck. Regardless, keep your eyes on the prize. Move every extra $7, $50, $750, over to your business savings account until the balance exceeds the sum of your monthly salary and monthly business operating expenses.
As soon as you hit that number, you’re no longer living month to month!
Budgeting isn’t deprivation.
“[Budgeting] is not about doing without at all. It’s about you getting what you that’s most important with the resources you have available.” (Todd Tresidder)
Budgeting is about freedom, and according to David Campbell, Founder of Saks Fifth Avenue, “Discipline is remembering what you want.” Set priorities. Use these budgeting tips for freelancers to make a plan. And take control of your finances. Despite what my mom says, I’m not that special. If I can, you can too.
“Seek freedom and become captive of your desires. Seek discipline and find your liberty.” – Frank Herbert
That’s it for now, folks.
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