Budgeting for Freelancers

in Working Guides

Working as an independent professional can be quite challenging and demanding, especially when it comes to managing finances. Most self-employed professionals often freelance and, as a result, they tend to have unpredictable incomes. With inconsistent income, it is often too hard for freelancers to budget for the different cycles of their jobs.
Admittedly, budgeting for the valley seasons and saving for long term needs, such as kid’s school fees and retirement can be quite daunting for freelancers. Although it’s not easy, it is achievable
While successful budgeting requires a steady income and careful planning, freelancers lack a steady income. But, even with the erratic income, they can use the following tips to budget for both short-term and long-term needs.
To begin, a budget is simply a way of ascertaining how much money you require to meet your daily needs and prioritising things to ensure that you don’t exceed the amount. Irrespective of your situation, a budget is an essential part of ensuring that your finances are sustainable.
If you are a freelancer, a consultant, a commissioned salesperson, a temp worker, or any other worker with fluctuating incomes, a budget is of utmost importance.

Know Your Baseline

Whether you are a full-time employee or freelancer, the underlying money principle is that you should never spend more than you earn. Consequently, you need to know how you spend your money for you to budget efficiently.
For those who have a steady income, budgeting will generally entail allocating spending categories to your limit of income. Some freelancers have enough consistent gigs that they can use them to create their budgets and leave out any one-offs for their debts and savings account. 
However, for most freelancers and other independent professionals, the process entails working backwards. You have to start with the money you spend to determine how much you need. Simply stated, for freelancers, their expenditures must be stable because their incomes are unstable.
So, if you don’t have an existing budget, start by tracking your spending. What do you spend your money on mostly?  List these items on a notebook or spreadsheet. How much do you spend on these items? You can start by focusing on your monthly recurring expenses, such as housing, groceries, transportation, utilities etc. You can then use your old credit and debit card statements to ascertain your average monthly discretionary spending on thing such as eating out, shopping, travel, etc.

According to the 50/20/30 rule, expenditures fall into three categories: essentials, priorities and lifestyle. From the rule, financial experts advise that freelancers should strive to live on 50 per cent of their income with the other half shared between flexible expenses and savings -30 per cent and 20 per cent respectively. Staying within this guideline will enable you to meet your long term financial objectives, regardless of your income amount.
Using the guideline, your baseline expenditures are those that fall under the essentials category-the ones that you can’t do without and are incurred every month. So, focus on estimating the costs of the following:

1. Groceries
Plan your baseline expenditure by focusing on the lowest food cost that suits your circumstances. Your grocery expenditures shouldn’t include a lot of extras, such as coffee shops, wine, fast food hope, etc. 
If you intend to minimise on your food cost, take that into account when drawing up your budget, but try to be realistic with your cost estimates. You can decide to track your spending for a few weeks to assist you in getting the best estimates for your monthly expenditure.
Preferably, you can learn to only shop once a week, based on the meals you’ve already planned. Moreover, you can team up with fellow freelancers and friends to buy in bulk from large retail outlets.

2. Housing and Utilities
For most people, mortgage or rent form part of the essential expenses in the home. If you are fortunate to be staying in a house that you don’t pay rent, include your minimum monthly housing cost in your baseline. Ensure that your property tax bills and homeowners insurance are accurately captured in your total.
If you are staying in a region which requires air-conditioning and heating as necessities, include the monthly bills for the same costs in your baseline. However, if you come from areas with moderate regions, utility bills are categorised under the lifestyle expenditures which don’t constitute the baseline expenditures.
If you work from home, account for your phone and internet costs because they are a necessity and constitute part of the baseline expenditures.

3. Medical Costs
A key reason why most people file for bankruptcy is because of medical bills, so it is crucial for freelancers to have a medical cover. Include the cost of medical insurance in your baseline estimates and any other outstanding medical expenditure. 
When looking for a medical insurance plan, learn the habit of negotiating and comparison shopping, whenever possible. Shop around and get advice from other freelancers before choosing a particular insurance cover to give you the best payout options that will suit our lifestyle.

4. Transportation
Determine whether you need to use transportation to work and consider the lowest cost of transport available for your job. If you have your car, factor in the auto insurance, car loan repayments, gas expenses, garaging costs and maintenance costs. If you use Uber or some taxi services regularly, factor in the cost estimates and include them in your budget. Try to be realistic with your cost estimates and sum up the costs you’ll incur on transportation per month to include it in your baseline estimates.
If you can manage to bring down the essential expense to less than 50 per cent of your income, you’ll have more money to allocate to your savings and discretionary spending. So, in the end, you may find yourself tweaking the rule to 45/25/30 or whatever it may be.
However, it is noteworthy that the rule doesn’t work for everyone. If you are a parent with young children, you will incur a lot of money on necessities, and you may be operating at 60/20/20. However, once you are done with childcare, you may revert to 50/20/30 or anything close. Nonetheless, the 50/20/30 is only a guideline.

Determine Your Income Target
Once you’ve determined your monthly baseline expenditure, you can now figure out the pay you will write to yourself every month. Using an online tax calculator, determine how much tax you will pay the government and add the numbers to your baseline budget. 
Alternatively, you can hire a tax expert who specialises in freelancers and independent contractors to help you get your tax obligations right. Once you’ve added the tax to your baseline budget, the figure you arrive at is your bare minimum monthly income requirement.
Anything you get above the bare income requirement should go to your financial priorities first, and then cater for your emergency savings, and any remainder will be for your lifestyle expenditures.

Set Up Different Bank Accounts
Because you have essentials, priorities and lifestyle expenditures, and you need to spend in all the categories, you will, therefore, need to set up separate bank accounts.

1. Business account
Here, you will have all your cheques auto-deposited and all invoice payments from clients deposited on time. For your daily cash, you may have to rely on tips, if you get any. From the business account, you should only make three transfers per month to the below-listed accounts.

2. Personal Account
This account caters for all your bills- lifestyle, priorities and essentials. The rule of thumb is that you should not spend more than you’ve allocated yourself for the month. If you have performed very well and your income has exceeded your target, and you have money that you can spend on your savings, this account receives any bonus that you may wish to allocate yourself.

3. Emergency Savings
Each month, after paying yourself for your baseline needs and transferred money for your priority needed, you should deposit money into an emergency fund.
Freelancers should always aim to channel at least six months of net income to their emergency savings account to insulate them from the following situations: 
•    Loss of job and you have bills such as rent and living expenses
•    A medical emergency
•    A car breakdown, specifically if it is your primary means of transport to work
•    Emergency home expenses, such as a leaking roof, AVC breakdown, etc.
•    Bereavement-related expenses

4. Priority Savings
The priority savings account holds money for your semiannual and annual payments, such as home insurance, property taxes and income taxes. Additionally, the account is the repository for money intended for specific vital goals, such as college savings for a child, mortgage downpayment, and student loans repayments.

Keeping your finances healthy takes self-control, commitment, and consistency. If you use the strategies above, you have a much better chance of meeting your budget goals.

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