Heidi is a reader of this blog and personal finance enthusiast. As I’ve really come to love personal finance over the last few years, I asked Heidi to offer some advice for broke English majors and grad students who want to create a budget. This post offers some practical advice about how to create a budget when your income is irregular. You can get more finance tips from Heidi at the excellent blog www.thriftytricks.com.
I used to imagine freelancing as the perfect lifestyle; working anytime and anywhere you want, having no boss, and receiving as much money as you want, or rather, can.
As I started freelancing, all these expectations turned out to be very close to the truth, except for the money part. I found out that managing clients and projects takes a lot of time – time that would otherwise be spent on productive things like, well, making money. I believed that I can’t make a budget because of my irregular income and so I easily burned away all my monthly income.
I later ditched freelancing to get a 9-5 job and it was refreshing to see a paycheck come in every month. It allowed me to set some rules regarding spending and saving and I suddenly felt like I can afford much more. In this article, I’ll try to explain how to put ‘regular’ into the ‘irregular income’.
If you ever had a regular income, then you probably already realize its benefits. The goal with ‘freelance income budgeting’ is to mimic the regular income as much as possible. Basically, you need to become two persons; the employee and the, uh, payee – and simply pay yourself a certain monthly/weekly sum of money, regardless of how much you earned that month.
While researching various tips on budgeting for freelancers I found that many articles recommend creating projections of yearly income and then splitting it into 12 parts to get this monthly amount – but there are multiple problems with this approach:
- It assumes you’ve been freelancing for a while and you can make projections.
- It only covers one part of budgeting, and disregards how much money you actually need.
- Consequently, you might not see the big picture of your finances, and therefore be unable to adjust your earnings according to spendings.
This is why I’m suggesting you start from the other side – finding out first how much you need. Do that by adding together all your essential monthly expenses, like rent, bills, groceries (be careful here, it’s easy to underestimate the amount), ‘spending money’, mortgage payments, etc. The goal is to find out what is the absolute minimum of all your expenses while still covering everything.
Ideally, you should make this amount your ‘paycheck’. You should either withdraw this amount in cash or (the preferred option) deposit it from your business account to the personal one. If you don’t already own multiple accounts, this might seem like a big step, but it makes a lot of sense. It’s a bit like having multiple e-mail accounts.
In fact, I would suggest opening a couple more accounts and put automatic transfer service in use by setting it up to deposit money to personal and savings accounts without you ever having to do anything. Either way, you should leave the leftover money in the business account as an emergency or taxes fund.
The problem of freelance budgeting
There is only one thing that can go wrong with this method – you can find out that you don’t make enough money to pay yourself. This is bad, but at least you know now. As a freelancer, you must always aim to make more money than you spend, because you never know how much you’ll earn next month. If this method reveals that you’re unable to keep up with your actual expenses, at least you can do something about it before getting yourself into debt.
In other words, a budget doesn’t always fix financial problems. Sometimes, it reveals the reality of your situation. For most of us, budgets show us the gaps between what we are spending and earning and the changes that need to take place in order to stay ahead instead of falling behind.
Get more personal finance advice at www.thriftytricks.com.