Freelancers wear many hats — budgeting and tracking expenses is one of their countless roles. Financial planning is complicated as is, and as a freelancer, budgeting business and personal expenses can cause the lines to blur between the two.
Sudden expenses appear for everyone, and things can get out of control fast, especially if you don't have a steady paycheck from payroll to rely on. Don’t worry — let's help you figure out your finances and regain control. In this article, you will read the budgeting tips that will help you save more money and become more financially independent. Let’s see what you can do.
Set Your Expense Limits
Investing in coaching, mentoring, and productivity tools can be critical to growing your business. However, it is easy to get carried away with spending on new tools or conferences and rationalize the expense as investing in business growth. Let's discuss how you can deal with it.
Set your limits — think about how much you can spend on a specific category of activities or tools. Next time you are tempted to order new software or a book, ensure you haven’t exceeded your set limit.
Perhaps, some books you order often pile for months on your shelf. So what’s the point of ordering new books if you haven’t read the ones you bought last month? If you spend your budget way too quickly, ask yourself: Do you prioritize your expenses well?
Create a Savings Account
Imagine you have already spent all the money this month and suddenly find out you have to pay a dentist's bill. So how can you stop worrying about another money emergency? Unexpected expenses can be unavoidable and complicate life, nonetheless, you can be prepared.
Whether you earn $10000 or $50000, you should set some money aside every month. Having some savings helps instill a feeling of security and helps you become prepared for unexpected expenses in the future.
How much should you save? Make sure you accumulate the money necessary to cover three months of your basic expenses (such as mortgage, electricity, water bills, life insurance, etc.) Save the amount you are comfortable setting aside — 10% of your monthly income can be a good starting point.
Sleep on It Before Making a Big Expense
Shopping online is easy nowadays, especially if you save your credit card details on your favorite store accounts. The ease of spending money online often leads to overspending. But do you really need the things you buy, or do they pile up on your shelves? The ease of spending money online often leads to overspending.
We don’t need a lot of things to live a happy life — embrace minimalism. But it’s not easy to break the habit of spending money online way too often. Good news —there is one simple trick to deal with compulsive shopping effectively.
Before you buy another pair of jeans or food processor, leave it in your shopping cart for a few days. When some time has passed, think if you still find the purchase necessary for business or personal purposes. If your answer is “no” or “maybe”, leave it — more money will stay in your bank account.
Learn How to Spend Less
In a world dominated by consumer culture, it’s easy to fall into the trap of buying new things all the time. People buy a bigger or more beautiful house, a new phone model every year, or designer clothes. However, doing so means you stretch your budget and constantly earn more money to satisfy your growing needs.
Increasing your debt will most likely hurt your feeling of security and your future financial choices. Even worse — spending too much can later lead to taking loans and mortgages. What should you do?
Learning to spend less money is a sure-proof way to prevent financial collapse. You have much more flexibility when you feel comfortable living on a small budget. For example, imagine you have a client you don’t like working with — he is always rude and demanding. If you don’t need that $500 extra, you can quickly put his project on hold and stop reading his emails abundant in exclamation or question marks.
You can also pass on some other projects if they don’t contribute to your professional growth. Finally, you can start working only on the projects you like that develop you.
Let’s face it — cutting your expenses and keeping only the most essential ones is difficult. You have to do it in small steps — going for it all at once can be discouraging. Also, remember that living on a shoestring budget is a habit to be developed, not an overnight success.
Track Your Spending
You can’t balance your budget better if you don’t know where your money goes every month. Tracking expenses can help you regain control over your income.
Try to write down all expenses you have or collect receipts and put them down as expenses by the end of the month. No matter what option you choose, by the end of the month, you will end up with a summary of your expenses. Later, you can segment it into smaller categories such as utility bills, mortgages, insurance, or entertainment. You can also find some free expense-tracking tool that makes the whole process easier.
Next — analyze where you spend the most. Ask yourself the question — should your expenses stay as they are? Because you might be spending too much in some areas and would benefit from cutting the budget for that particular category. For example, you can eat out way too often during the week, which is your most significant expense. Solution? Perhaps, you could prepare food at home from time to time to free up more money for more meaningful categories.
The 50/30/20 Budgeting Rule
The 50/30/20 rule can help establish the right balance between essential and less essential expenses. So what is it all about?
According to the rule, 50% of your budget should go to baseline expenses, 30% — to entertainment, and 20% — savings (or pension fund).
Your baseline expenses are the most necessary expenses that meet your basic needs. Baseline expenses can be your mortgage, water, and electricity bills. The second group — 30% expenses — are not so crucial for your existence and can be cut. They can be your Hulu subscription, gym membership, training program, foreign language course, or cinema tickets. Your savings category is the money you set aside for retirement or some emergency fund.
Keep the Personal and Business Separate
Freelancers often mix the two accounts — personal and business. Accountants like to emphasize that personal expenses don’t qualify as business expenses that can reduce your tax. Keeping personal and business accounts separate can help keep your business receipts more organized — a helpful thing to do in case of some discal controls.
The easiest way to become consistent with keeping personal and business accounts separate is to pay yourself a salary every month. Make it a habit to transfer a specific amount of money to your account from your business account. Just choose the day of the month and set up a recurring reminder — this way, you ensure this task won’t go through the cracks.
Save Money for Taxes
Nothing is certain except death and taxes. While everyone knows the former, freelancers often forget to account for the latter. Finding out you have some tax to pay, but no money on your business account can be frustrating. In the worst-case scenario, passing the deadline can lead to a hefty fine.
So what should you do to be safe with taxes? Consider setting aside around 30% of everything you earn, so you can safely pay your taxes when the tax time comes. Paying taxes on time also depends if your clients paying you on time. Introduce account receivable management for easier billing, invoicing, and communication with clients — this way, you can collect money easier.
Effective budgeting is all about establishing proper habits. You won’t change much with mere determination. Instead, you have to become consistent in your approach to finances. As you know, establishing habits takes time. It’s better to start working on them earlier than later. So what are you waiting for? Get started!