You may ask: “Surely budgeting is the same whether you are a freelancer, employed or a contractor?”
Yes, the basics of budgeting are the same. However, budgeting as a freelancer is not necessarily done in the same way as employed people.
The basics of budgeting
You need to know how much is coming in and from where, you also need to know how much is going out and where it is going. The aim is to reduce what is going out and to save, invest or pay off any debt with what is coming in.
I realise that being employed isn’t always stable, however you usually know how much you will get each month or at least know the minimum you will get. This gives a financial confidence that isn’t always possible with freelancing.
Employed people start budgeting using their income figure and work out where to distribute the cash to pay bills and cover expenses. Self-employed people need to start with their expenses to find out what the target income they need to bring in each month.
As a full-time, self-employed freelancer I am more careful with my money as my income is irregular. I normally know my income for the next 3 months but as things can change I can’t assume it will carry on for any longer than 3 months.
At the time of writing we are in the midst of a worldwide health scare that brings with it social and economic turmoil. If we are to look at it from a purely financial perspective; jobs are being lost, businesses closing and people are scared of what the future holds.
As both me and my husband are self-employed this brings with it financial uncertainty as our clients are closing their businesses for the short term.
Over the years we have learnt to be more cautious with our finances and have an emergency fund for any months where we find we can’t work. Nothing prepared us for the current situation, but we are better off than others.
I have put together a list of 10 steps that will help fellow freelancers and new freelancers alike to budget and plan their finances.
Step 1 – Know your numbers
Keeping track of your cashflow is key when trying to budget. You need to know how much income you are getting each month and how much is leaving your bank account.
Look at your bank statements and work out how much it costs you to live each month. Review this list and eliminate any non-essential spend and work out what the minimum you would need to earn to cover your basic needs.
As a freelancer it is a good idea to have some money put aside for any leaner months.
Work out how much you would need to live for 3 months without any income. This should be your goal to set aside as an emergency, you could even work out how much for 6 months of no income.
Keep a record of your income and expenses in a simple spreadsheet. This will make it easier to check and review in the future.
This may be a time consuming task but it is worth it in the long run.
Step 2 – Keep an eye on your finances
Budgeting isn’t a one and done task, it is something that needs to be monitored regularly.
I remember as a student going to the ATM and crossing my fingers as to whether I could get any money from it “will I be able to afford my wedges and garlic mayo tonight?”. This was before internet banking and there no such things as banking apps, so I can almost be excused.
I now check my bank account regularly and am very aware of my spending habits, both good and bad. It is so much easier now with mobile banking and internet banking. I urge you to set up your banking on your mobile or at least take it online if you haven’t already. Some banks offer financial planners and budgeting apps, if you find you overspend on certain areas maybe this will help.
Every now and then run through a financial cleanse of your recurring payments. It’s amazing how quickly the monthly app’s or subscriptions mount up. Where possible sign up for the annual subscription if you really need the software/services as this usually has a discount and means less coming out of your account on a monthly basis.
Step 3 – Set Financial Goals – Have you ever heard of the 50/30/20 rule for budgeting?
- 50% of your pay cheque goes towards your basic needs such as rent/mortgage, bills, food.
- 30% is for you to spend on your wants such as clothes, dinners out, days out, home improvement.
- The final 20% is to save, invest or pay off any debt, like credit cards.
As a freelancer this rule can be adapted to suit your financial planning to maybe 50/20/15/15.
- 50% for your basic needs as above, but then
- 25% for your tax bill,
- 10% for your wants and
- 10% towards your savings and paying off debt. When starting out as a freelancer you may want to put more than into savings.
Have a goal that you want to reach for your emergency savings fund, a good buffer would be enough to cover 3 months living expenses.
Step 4 – Know your clients
Keep a record of when they pay your invoice, so you know when to expect payments.
This will make it easier to budget your money through the month as you know when to expect payment. You can use this information to decide what date a direct debit should come out of your account.
I have some clients that pay on receipt of the invoice – whoop! And others that pay 30 to 45 days after the invoice is sent. This may seem too long but larger companies pay invoices once or twice a month and if you miss their payment run you will have to wait until the next. This actually works in my favour in the current circumstances as I know that at the end of next month I am getting an invoice paid.
Step 5 – Have separate business and personal banks accounts. You wouldn’t put deliverables to 2 different clients in the same email, so why would you keep your personal and business money in the same account.
This makes tracking your finances much easier, especially when filing your tax bills.
Step 6 – Consider giving yourself a salary.
Your salary could be based on a percentage of the profits, especially if you are a new freelancer or you could take a set salary each month.
Initially you will need as much as possible in your business bank account to cover any eventualities, so only take what you need.
I remember when I started giving myself a salary, it was once I had some recurring clients, it made me feel safe and secure and like I had a real business.
If you don’t want to give yourself a salary, then at least put a cap on your monthly spending and keep an eye on your bank account.
Step 7 – Set up an emergency fund.
Some call this a backbone account or a cash cushion, but the principle is the same. Have a separate bank account to use as a buffer, with enough money to cover 3 months (if possible more) of your monthly bills.
If work slows down or you have clients that are paying late, this means you don’t need to panic straight away.
Step 8 – Automate your finances where possible.
With the use of internet and mobile banking it is much easier to have a standing orders or direct debits set up to automate your tax fund, savings, credit card payments etc.
Step 9 – Have you thought about retirement?
Finding more money to put into a retirement fund may be the furthest from your thoughts when you first set up a freelance business. Thinking about your short term savings is important in the beginning, but once you are more established, it is wise to set up payments into some form of retirement or long term savings fund.
Step 10 – Track your time
By tracking your time you will be able to notice if you are undercharging for work.
I used an app called harvest to track my daily activities for 30 days and was surprised on a few tasks. Some took me longer than I though and some much quicker.
As a result of tracking my time I realised I could take on 2 more clients a month and I had an accurate hourly rate. Not an hourly rate I charged my client, my actual hourly rate which was much lower than I’d have liked.
I managed to set up focused work hours and even set aside admin hours each week.
Bonus tip – Give some thought to creating packages for clients. If you are working using a project based model it can feel a little insecure at times. e.g. When you have a large client that is coming to the end and haven’t found another client to work with afterwards. This is when you need to be good at budgeting.
If you can find a way to offer a monthly package it will mean a recurring payment which will help your monthly bank balance. Ask yourself, once you finished the project is there any retainer or monthly service you can offer them?