How to Create a Realistic Budget for Freelancers
While there are many advantages to the freelance lifestyle such as the freedom to create your own schedule and work with the people you want, there are also some drawbacks. One of them is income stability, or in some cases, lack thereof. Depending on the services that you offer and the clients to which you offer them, you may have periods of feast and famine. Due to this instability, freelancers must create a realistic budget for themselves. In this post, we’re going to look at how freelancers can budget for the best and worst of times.
Determine Your Minimum Income
After you have been a freelancer for at least a year, you can review your income reports to determine your minimum income. Your minimum income is just that—the absolute minimum of income that you made per month.
When you have a couple of years worth of income to analyze, you can begin to see which months are the most and least profitable in your business. This analysis can help you plan accordingly for potential slumps in the industries you work with.
Determine Your Basic Expenses
There are three types of expenses: set expenses, variable expenses, and debt expenses. There are set expenses that must be paid each month, such as your rent or mortgage, car payment, and utilities. There are variable expenses that you must also budget for, such as gas and groceries. And there are debt expenses, such as your minimum credit card payments.
In addition to your personal expenses, there are also your business expenses. These can include costs related to web hosting, advertising, marketing tools, professional memberships, and conference travel.
Just like you know your monthly income, you need to know your monthly expenses. Preferably, your expenses should not be more than your minimum monthly income. If they are, you might want to prioritize your expenses to see which ones are vital and which ones are not (like your top tier cable TV subscription).
<figcaption>Hiveage dashboard reports are a convenient way to keep an eye on your finances.</figcaption> </figure>
Save the Difference
The best piece of mind a freelancer can have is a savings account that contains at least three months worth of income. In the event that you could not work for a month due to illness, you lost a major client, or you had a major unexpected expense, you would have time to recover without being financially stressed.
While you might be tempted to spend extra income in your “feast” months, there are better ways to utilize your funds. These include the following.
- Create that savings account with three months worth of income.
- Pay down your credit cards and other loans to improve your credit score and stop throwing money into interest.
- Invest in a retirement plan.
The easiest way to make sure you are responsible with your finances is to have a plan. That plan can simply be to take a specific percentage of your extra income and to divvy it between the above three items while having a little left over for yourself to celebrate a good month.
Know Your Backup Plan
No matter how well you plan and budget, things happen. Having a backup plan beyond your savings account that you don’t need is better than not having a backup plan when you do need it.
Your backup plan should cover three areas.
First, you should always know where you can go for immediate, extra income. Depending on your service offerings, this can include creating gigs on Fiverr or applying for jobs on sites like oDesk and Elance.
Second, you should know what expenses can deferred to the next month or immediately reduced. For example, if you live in an apartment, you cannot go more than a few days late on your rent without getting into serious trouble. But you can forgo your weekly trip to Whole Foods and opt for less expensive grocery options. Or you can cancel your monthly subscription to that premium analytics tool that you haven’t looked at in a few months anyway.
Third, you should know some funding sources to tap into when you need to increase your business’s cash flow quickly. The latter should be used only when necessary, as most cash advances and loans come with hefty fees and interest.
With a proper budget with realistic financial goals, plus a savings account and backup plan, you will always be confident in your freelance business, despite income stability.
What other tips do you have for realistic budgeting as a freelancer? Please share in the comments!