Many freelancers love their work, and some couldn’t even imagine getting back to the regular 9-5 job.
But things are always that sweet; there are massive wins as well as those moments when there is no work in sight.
It is, therefore, important for any freelancer to budget properly and be prepared for the gloomy days. Here, we share the 5-step process that could provide them with some guidance. Let’s get started…
Step 1: Know Where Your Money Goes
An important step before creating any budget is to determine where the money goes. Only by knowing what you’re spending money on will you be able to come up with a realistic budget.
The idea here is to identify patterns and realize what you’re paying for every single month. Also, you should be able to put all your costs into several categories, including:
- Housing – costs in this category include rent or mortgage, utilities, insurance, cable TV, internet & mobile services.
- Debt – credit cards, student and other loans.
- Transportation – public transit ticket costs, gas costs per month, other car-related costs like maintenance and insurance.
or car loan, petrol, parking and servicing costs, as well as any insurance you pay
- Savings – we do advise you to put something on the side every single month.
- Personal expenses – food, vacations, clothes, gifts, and healthcare costs (healthcare plan).
- Fun – entertainment costs.
- Miscellaneous costs – see if you can come up with how much you’re spending on everything else per year and then divide that number by 12 so you can get to the monthly cost of this category.
With all the costs lined up, you are ready to proceed to…
Step 2: Create a Baseline Budget
The other name for a baseline budget is a survival budget. It contains only the necessities you can’t live without and those important bills you must pay every single months.
Looking at the categories listed above, a baseline budget includes the following:
- Basic housing costs you must pay, no matter what.
- Basic personal expenses – food and healthcare costs.
- Basic transportation – typically there is a room for savings in this category.
The idea behind the baseline budget is to get you prepared for the worst case scenario. It should also help you determine how much you could save — as you are advised to have money to cover 3-6 months of baseline expenses in case the situation requires so.
After you have created a baseline budget, it’s time for…
Step 3: Optimization
You don’t want to live on a baseline budget; it is there as an exercise to help you prepare for the tough times, cause sooner or later — they will come. What you do want to achieve with this exercise is to come up with a realistic budget, which sits somewhere between baseline and over-the-top spending.
In order to optimize your spending, you will have to create some kind of a mini business plan, which on one side has your projected earnings for the year, and on the other – your costs. This should give you a better idea where you’re standing at; also, you will be able to find room for cuts all around the place.
The question we regularly ask in our articles is: do you really need a cable TV? Can’t you just buy internet and, say, Netflix separately?
And that’s just a start. Look at your mobile phone bill – can you change the carrier and save? How about transportation costs — can’t you get a more fuel-efficient car? Or use public transportation more regularly? What about dining out — can you cook more at home? And so on and on…
Step 4: Pay Yourself
It’s not all doom and gloom in this article — we want you to pay yourself regularly, that’s the whole point.
Best way to do this is to set yourself on a trial budget, factoring in both your expected income and your expenses. If it turns out right — i.e. you feel comfortable without all the extra expenses you have cut in the previous step — you’re onto something.
On the other hand, if you miss a thing or two, feel free to return them to your monthly cost list, just make sure these extra costs don’t break the bank.
At the end of the day, you should come up with a number you will be able to pay yourself regularly, so you may not want to cut too many corners. You will, however, want to leave something on the side every single month. Remember that!
Step 5: Make a Plan
You got this far — good for you. Now’s the time to look into the future, and imagine where you and your business could be in the next 3-5 years.
In order to get there, you will undoubtedly have to put some money on the side so you can fund your future growth. Also so you could pay yourself more and even indulge in some more-than-affordable vacation. At some point in everyone’s life, we all want to enjoy a bit.
The important thing though is to have both of feet on the ground; cause life will continue after that fancy vacation. And we want you to be ready for what comes next. Good luck. 😉