Nearly 70% of Americans don’t have $1,000 in the bank according to a CNN article. That’s a little scary. That means most people don’t know where their money is going and whether there’s going to be anything left at the end of the month. One emergency away from financial ruin. I’ve been there myself. I figured I knew “about” how much I spent each month and so everything was okay. When I sat down and went through my expenses, it was such an eye opener. Those “little” daily spends (a snack for the kids, a night out to eat, etc.) really added up. I’m an accountant by trade and so the fact that I had been lax on my own budget was more than just a little ironic and downright embarrassing.
When you’re self-employed, you have the added wrinkle of not having a fixed income each month. Some months could greatly exceed your needs while others may leave you wondering if you’re actually still in business.
While creating a budget on a variable income will take some work, it is so worth the financial peace of mind. Here are some steps you can take to get a game plan for setting up a freelance budget.
KNOW WHERE YOUR MONEY GOES
Before you can set up your budget, you have to know exactly where your money goes each month. So grab those bank and credit card statements, grab a glass of wine, and get busy.
You will track EVERYTHING. If you grab a cup of coffee, that counts. The dress you saw that you had to have? Yep, that too. Getting a complete picture will help you to identify any leaks in your budget.
PLAN FOR THE SHORT MONTHS
We all know that business has its ups and downs. Some months will make you feel like you’ll be retired before the end of the year, while others will have you wanting to polish up your resume and give up entrepreneurship altogether.
In the great months, set some of those earnings aside to help cover times when things are slower. If you have been in business long enough where you can estimate the timing and amount of the shortfall that makes things easy. If not, try to save enough to cover one month’s expenses in a shortage fund. This money will be separate from any savings or an emergency fund as it’s a planned fund that you know you are likely to use in the short term.
SAVINGS SHOULD BE A PART OF THE BUDGET
I’m a huge believer in paying yourself first. Savings should not simply be whatever might be left over at the end of the month. It should be a line item in your budget. A minimum of 10% would be awesome. If that is not possible, make sure that the amount is consistent each and every month. As your business grows, make sure you adjust your savings accordingly.
Don’t forget the kids! If you’re saving for college they should definitely have a 529 plan.
DON’T FORGET THE TAXES
When you’re working for yourself, you are responsible for making sure Uncle Same gets his portion each quarter. It’s much different than when you are working for someone else and your employer withholds taxes on your behalf.
This can potentially be one of the largest expenses that you have. Not only can it bust your budget if you don’t plan properly, but you can also be subject to interest and penalties if the right amount is not paid.
If you are unsure of the amount you should be paying each quarter, your best bet would be to reach out to an accountant or CPA, who can help you to create an action plan.
LEAVE ONLY THE BUDGETED AMOUNT IN CHECKING
Once my budget is set. I leave only the amount that I have budgeted in my checking account. Once you have created your budget, every dollar should be accounted for. If your expenses for the previous month were less than what was budgeted, that money should have been transferred to savings. This helps me to stay disciplined and on top of where my money is going. I won’t spend it if I know it’s already marked for something.
If you are not able to fund your budget a month ahead, try to keep only the amount necessary for the upcoming expenses in the account.
BE NICE TO YOURSELF
Once you’ve got your budget in order, it will not be set in stone. It will be a working document that you will update as your circumstances change (increase/decrease in income, change in expenses, family, etc.). You might make some mistakes.
I had to make an update to my budget because I had forgotten about my car insurance payment I made every six months. However, since I had my budget, I could make some adjustments with only a minimal amount of hair pulling.
Give yourself a break. The more you practice working with your budget, the easier it will be over time.
Consider your budget the foundation of your financial plan. Without a budget, it becomes difficult to plan for the fun things like savings and investing, or even the not so fun things like a fund for unexpected expenses.
If you have any questions about setting up a budget, please feel free to leave them in the comments below or via the comment form.