One of the hardest things about freelancing is trying to live a normal life while earning an unpredictable income. Even if you have good clients, payments often come late, which means cash flow can be choppy.
It can be really stressful if it’s the end of the month, and you see bills looming without enough $ in your account to cover them. It’s one of the main reasons people who freelance decide to abandon it and try to get full time employment – the anxiety that not enough money can create.
Most of us don’t really know what amount we actually need to live on or how we spend our money. Sure, rent and monthly bills are predictable, but what we end up spending on food, clothes, haircuts, gifts, etc. often depends on what we have on hand at the time (or what we really want in the moment).
And why would we know how to manage money? No one really teaches this skill. Most school curriculum at the elementary and secondary level fails to teach kids how to plan their finances. Granted, some of it comes with experience but increasingly ,the high costs of living in most of the larger cities is making it harder to figure out how to live on what you earn, or earn what you need to live the way you want to.
For this reason we’ve broken down this process to help kickstart your entry into the world of financial planning.
Managing money can be as hard or easy as you make it. Sometimes even a couple of dedicated hours to figuring out a simple budget is enough to gain some control over your finances and your life. Once you know how much you need and how you spend within a given timeframe, you can make decisions that increase your overall security and reduce your stress. You can also make different choices – either in what you’re putting money towards or whether you need to find alternative ways to boost your income (or both).
There are many budget templates online. We’ve shared one that is straightforward and easy to figure out. Here’s how it works:
The first step is to create a financial model. Start by writing down your best guess of what you’re earning from all of the sources identified below.
If you don’t know the answers, look back over last 4-6 months and average it out (you can also check bank records, credit card bills, etc.). If you have money you’ve put aside for dry periods in a savings account, which you then draw upon, try to capture how much you pulled into active spending in the Transfer from Savings line.
The next step is to figure out what you spend each month. Some of this is easy (e.g., rent, utilities) but other items you may have to guess a total in advance.
Following step 1 and 2, try for at least one month to keep track of what you really spend. Even if you normally don’t keep receipts, try to change this behaviour so that you can begin to track your spending every couple of weeks in the budget sheet. Ideally you would do this for a few months at least in order to average out any abnormal spending in a particular month.
This part can be a bit tedious since it forces you to pay attention to everything you spend money on. It’s not unlike counting calories – kinda takes the pleasure out of eating.
Once you have written down what you earn, and what you spend, you will gain an initial picture of your estimated budget. We’ve plugged in some sample numbers in the Budget Tracker provided to show what the summary looks like:
At the simplest level, this tells us that this person earned close to what she projected but spent $347.65 more in that month than she’d estimated. The combination of a little less income and a little more spending results in an end balance that’s $347.65 less than the original plan.
The cell in yellow says she can carry-over $1,268 into the next month.
On the surface our example doesn’t look too bad since there’s actually $1,268 more income than spending. Great – a surplus! However, missing from this discussion so far is the money you need to put aside for taxes and savings.
In the full budget tracking sheet provided, there’s a section for you to plug in savings, debt and taxes:
If you want an estimate for your taxes, there are many good tax calculators online. The iCalculator app is a good tool for people in Canada.
According to the iCalculator, someone earning $3800 on average, per month, is making $45,600 per year. At this income, and without a lot of deductions for expenses, they would owe $7,105 per year in taxes ($592 per month). This gets plugged into the taxes line in the budget tracker.
The other expense you need to plan for is savings. When you’re freelancing for the long haul you really do need to keep some savings for those inevitable rainy days. Maybe you get sick and can’t work for a month, maybe you break a tooth or lose your phone … you get the idea.
General wisdom is to have at least 3 months of savings in your account. You may have to build up to this, but for planning purposes you could start by saving 10% of your earning (or more). Having a separate savings account is essential. That way you know what’s in your savings at all times, and it won’t be confused with any other funds that you may not be able to rely on.
In our example, she is saving 10% ($380/month) and $592/month for taxes.
Here’s the impact on the overall month.
The surplus of $1,268 at the end of the month has been reduced to $323.
Where does this get you?
You know how much your current expenses are.
You have money put aside for taxes and savings.
You know if you want to go on vacation (or buy a car, or…), you either have to pump up the earnings or spend less in other areas.
Some people may enjoy working on their budget; others might find a root canal preferable to working with a spreadsheet and numbers. Either way, some version of this activity is well worth doing at least once and certainly when your circumstances change.
There are several good budget tracking apps available which you can find in the Resources section of our website to make this all a lot simpler.
The good news is that it does get easier over time. More importantly, having some control of your finances helps reduce the stress that comes with not knowing if you have enough money to live the life that you want.