Finessing Freelancer Finances: Learning How To Budget
As a freelancer, you run completely on your own schedule. You are now your own boss, HR department, and accountant which means you have to learn how to budget your finances. The YNAB method (this is a referral link btw), is crucial for freelancers. It’s pretty much the envelope method but better. I use this method personally and have found money I didn’t think I had, stopped leaking money, and started being able to afford items on my wishlist. The YNAB method can be broken up into 4 simple rules. (Corona update below)
Rule One: Give Every Dollar A Job
This rule is especially important for those of you who like to spend money that you don’t physically have or like to splurge because “you just got paid”. Rule one makes sure you reserve your money for what’s most important to you and it makes sure you budget with money you actually have. I’ll give an example later on in this post. This lets you spend your money with confidence because you actually budgeted for it and if you weren’t able to make the purchase you can set aside money for it later. It basically works by putting whatever you receive into the “envelope” that needs it the most. An example for prioritizing which envelopes get the first dollars can be having an envelope for rent, for phone and internet, for your expensive software subscription, then for savings towards bigger purchases later. The only “extra” you have is what is leftover after you fill up those envelopes.
Rule Two: Embrace Your True Expenses
Do you feel like you’re constantly going through a financial crisis? This rule can help you prepare for financial emergencies and tackle large expenses. Using this rule you’ll break your larger less frequent expenses to small manageable monthly amounts. This rule helped me save up for my last upgrade to a new laptop. It also helped me budget for the visa expenses I have to pay every 6 months. With this rule, hefty medical bills, repairs, slow months (more on this later) become manageable because you’ve already allocated money for it. An example would be me saving up for my postgrad deposit. I put away a minimum of $50 to a maximum of $200 (depending on if i filled the more important envelopes first) every month and was able to pay in February.
Rule Three: Roll With The Punches
Life happens, things change. It may seem hard to stick with a consistent budget when your life changes drastically and it is hard. The truth is your budget should be adaptable. If you’re going through something life-changing and your finances look completely different now, you should change your budget accordingly. A great example would be the current WFH situation brought on by this pandemic. See what cable subscriptions you can cut to make up for the lack of clients. Check your beer money envelope to see if you can instead move that money to emergency groceries in case of a lockdown extension. Keep in mind, you should still be budgeting money you actually have in hand.
Corona update: because my spending habits have changed since quarantine, I had to adjust my budgeting. Dining out, entertainment, as well as outdoor activities have been moved to savings for my postgrad as well as any living expenses for the next year. The money has been reallocated to cover up to 3 more months of my basic expenses as well as down time from work— something I wouldn’t have realized I could do and something that I will be greatly thankful for in case I am unable to find steady work.
Rule Four: Age Your Money
If you feel like you’re desperately in need of your next paycheck then this rule will change things for you. With Rule Four you take the money you’re earning right now and use that to budget for future expenses. Obviously, you’ll have to start slow. Start by budgeting for next week’s expenses but with the help of the other rules, you may even start budgeting for next month’s expenses!
Aging your money simply means increasing the time it takes for you to spend the money that you earn; if your money is 0 days old, that means you’re spending whatever you are earning on the same day, hence the paycheck to paycheck cycle. The higher that number goes, the further you are from spending what you earned on the same day you earned it. Every month when my budget cycle ends, I see that I have extra money in some envelopes and nothing in others. I decide if I want to keep that money there or reallocate it.
Upon receiving my next paycheck, I divide that again into the same envelopes I did last month. That means for this month, some envelopes get a little bit extra, and at the end of this month whatever extra I have goes into the next month’s budget, and so forth.
For me, that number that you see on the upper right corner is the number that indicates that the money I’m spending is money from 84 days ago. The older your money gets, the less you are living from paycheck to paycheck because you’ve already planned that money out and prepared responsibly.
When it comes to budgeting for your own life, make sure that you cover your equipment and software, and then of course for self-improvement, then later for your quality of life. For example, my priority list kind of looks like this:
- True expenses: rent, groceries, transportation, phone and internet, regularly occurring medical needs, taxes, debt payments
- Travel and lifestyle obligations: where i save up for tickets and visas and payments, my visa agent, etc.
- Work equipment: includes saving for a new set of equipment in case something breaks down. Budgeting $100 a month has helped set my mind at ease when I had to upgrade my laptop
- Just for Fun: classes, hobbies, video games, etc.
Outside of the YNAB method here are a few more helpful tips that will help you budget for the things you need. Over time equipment degrades, and some companies (certain fruitarian companies that I won’t name) plan for obsolescence. These are also the Big Time purchases that many people forget to set money aside for. You never know when someone accidentally sits on your laptop or if there’s a power surge that fries your motherboard. It’s best to start saving as early as possible.
Recurring expenses are just as important. Prioritizing which software is important for your specific goals and which you can do without are crucial steps we often forget. I’ll cover alternatives to popular software services in a later post. If it’s free and gets the job done I’d highly consider using them.
Something that’s a little less exciting to budget for is your accounting and tax responsibilities. As a self-employed earner, you don’t have anything withheld from the income you earn. So you must learn how to manage your money throughout the year and budget for tax expenses.
Lastly, keep it simple. Budgeting may seem like a daunting task but if you break it up into small manageable tasks it can become quite easy. Understand where you are financially and budget accordingly.
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Originally published at https://www.asianoble.co.
