Freelancers have a unique financial situation. They do not have consistent incomes to count on every month. They can expect mountains, hills, and valleys in regard to income.
So, the question becomes, how to budget for those three events and how to save for the “valley” times and for long-term needs, such as kids’ college and retirement.
It’s not easy. But it can be done. Here are five tips for budgeting smart and ensuring that there is both an emergency fund and long-term savings.
1. Start tracking your expenses
You need a budget, but you cannot put one together until you know exactly how much you are spending each month. Track your expenses for about three months. You’re not really looking at your fixed expenses (rent, insurance, utilities, taxes, etc.); you’re looking at what are known as flexible expenses – those items that can vary and/or that you can cut if you need to.
At this point, you want to get an average of your monthly expenses, so that you can measure that figure against your average revenue. Once you do this, you can actually set a budget.
2. Shoot for the 50/30/20 proportions
Financial experts advise that entrepreneurs make it a goal to live on 50% of their income.
The other 50% should be divided between flexible expenses and savings – 30% and 20% respectively. If you can get close to these proportions and stay there, you will be able to meet long-term financial goals – savings for kids’ college and retirement, for example.
3. Pay attention to discretionary spending
When you were employed and had that fixed income every month, you knew how much you could spend on non-essentials and luxuries. You did not have to watch your money too carefully. You could even be a shopaholic, and it may not have impacted you too much – after all, your taxes, social security and retirement was already put aside before you got that paycheck.
Things are different now. Your former shopaholic ways could land you in deep trouble. When you’re working for yourself, it is so easy to go online and find all sorts of things to buy. Curb the temptation to do this, even if you do have extra discretionary money right now. Sock it away toward that great vacation you dream about instead.
4. Cut down the spending wisely
Everyone faces times when they have to cut expenses. Freelancers may face these times more often, and while it’s no fun and may require some extra time, here are a few ways you can save:
- Grocery shop only once a week, based upon meals that you plan in advance. Team up with friends or other freelancers and buy in bulk from large outlets
- Save money by cutting down on alcohol. And no, having several booze-free days a week might not be enough as research suggests there is no safe level of alcohol at all.
- Instead of funding an office for meetings with clients, get shared office space and coordinate with your office mates for meeting times.
- Get in the habit of comparison shopping and negotiating when you can. Shop around and seek advice from other freelancers you know before buying health insurance so you can get the best option for payout/premium/deductible. Phone and cable TV plans are usually negotiable. Better yet, dump the cable and get Netflix or Hulu – much cheaper
- Purge any assets you are not attached to – jewelry, antiques, etc. The money you make can go toward paying back any personal loans you took or a splurge you’ve been dreaming of, and you don’t have to touch savings.
5. Combine short and long-term savings
If you haven’t already, you need to have an emergency savings account for unexpected expenses. This should be about one-month’s income, according to financial planners. If you do this, you will not have to pull from your permanent savings for things like car repairs or an emergency trip to the dentist.
In addition to an emergency fund, financial experts also recommend that you have three to four months’ worth of income in reserve, to handle those “valleys” or catastrophes that can befall even the best of freelancers.
Your permanent savings should be such things as IRAs and college savings plans, if kids are in the picture. This is where the bulk of that 20% should go. If you get in the habit of paying yourself right after meeting those fixed expenses, then you can juggle the flexible spending costs as you need to.
If you are getting the idea that you may need two different savings accounts, along with your permanent savings, you are correct. Dividing things up helps you keep track of what you have and what you need to replenish if you use some of your funds.
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.
Image Credit: Shutterstock
Theresa Todman, Managing Partner/CEO of B&M Financial Management Services, LLC . Theresa works with small business owners and entrepreneurs to assist them with financial management and creating organized systems and procedures. She specializes in bookkeeping, accounting, QuickBooks solutions, small business tax issues and consulting.
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