Know what you’re spending.
The most important money principle for everyone — freelancer and full-timer — is to spend less than you earn . So knowing where your money goes is key to proper budgeting.
If you don’t already, track your spending. You can do this in whatever way you are most likely to stick with — a spreadsheet, a notebook, an automated program like Mint, or one of the numerous other financial apps that aim to help you manage your money.
Create a baseline budget using a conservative number.
Track your income for a few months and see what you’re averaging. Or, if you have records from the last several months or year, determine your average from that. Let’s say in the last three months, you earned $2,000, then $4,000 and then $3,000. Create a budget using $2,500 as your limit, remembering that 30% of that money will go to taxes. If this figure won’t cover what you’re spending monthly, we’ll go over how to fix that in a moment.
Come up with your dream budget.
The methods outlined above are good for helping you live within your means. But if you’re not making enough money or are new to freelancing or just lost a client, then you may be looking at that math and feeling like things are a little too close for comfort, or even realizing that you’re in the red.
If your dream budget number is vastly higher than your first, cut costs.
You may be in danger of getting into debt because your income may not cover your costs. If so, go back and see how you can cut your costs, starting with recurring ones. Are you really using all the offerings of your mobile phone plan or do you always have a surfeit of minutes and texts? Do you go to the gym often enough to justify the monthly cost? What if you took up running, played tennis with a friend or used exercise DVDs instead? How about your groceries? Could you stick to a set figure each week for your meals and not indulge in fancy cheeses? Are there habits you can adopt to cut down on the amount of food that goes bad? Is your cable subscription worth it or can you find a cheaper option? Scrutinize every single expense, especially the recurring ones. Even go over all your insurance again. Maybe you can get a better deal on car, disability or health insurance. Look into signing up for group policies where you can. If you can free up an extra $200 a month this way, that’s, $2,400 more in your pocket a year.
Try the 50/20/30 method of budgeting.
You may be wondering how much you should spend on different expenses. Some people like the 50/20/30 guideline : Take your income and subtract whatever you are paying to taxes. From there, divide your expenses into three categories — 1. Necessities like housing, transportation, groceries and utilities, 2. “Paying yourself” in savings, retirement contributions and paying down debt, and 3. Discretionary spending on items like going out, shopping, travel, entertainment, fitness, etc. — and allocate no more than 50% of your income to necessities, no less than 20% to paying yourself andno more than 30% on discretionary spending. Notice that the emphasis is on saving more or putting more toward debt when you can.
Give yourself a weekly allowance.
Once you’ve determined your monthly discretionary spending limit (the “30” if you’re following 50/20/30), break it down into a weekly allowance. “This works really well for a lot of my clients, because they say, ‘I know my bills are paid, I know I’m putting aside money for taxes and savings each month, and I just need to keep track of this number,’” says Bera.
Give yourself a paycheck.
After you’ve gotten into a predictable rhythm with income, bills and your weekly spending, you can try creating a paycheck for yourself. Let’s say you decide you need $4,000 to live on every month and that $4,000 is your monthly average income after taxes.
Your Business Structure
Most freelancers start as a sole proprietorship. It’s the simplest business structure. It basically means you are the company. You control all the assets and profits and report all the profits and losses on your personal tax return (on Schedule C), but on the flip side, you are also completely responsible for all its debt and other liabilities. This means if you are sued, the amount you could pay is unlimited.
Insurance
Freelancers also should buy disability insurance, though it’s preferable to buy it while you are still full-time employed before you freelance. If you are already freelancing, see if you can get into a group policy, perhaps through a professional association. “It will be much more affordable than an individual policy,” says Bera. She also suggests talking with a financial planner who can help you compare the different options available to you. He or she can work with a disability insurance agent to see what option is best for the price. Make sure to buy “own-occupation” disability insurance, which means that you can receive benefits when you cannot perform your own occupation; other policies only pay out benefits if you are disabled from doing any type of work, even if it’s not your own profession.
