How I Budget as a Freelancer (Tutorial)
Updated: Jul 1, 2022
Since the last post got a good reaction, I thought I’d do a deeper dive into the nuts-and-bolts of how exactly to budget as a freelancer.
I’m offering this in the spirit of teaching and service; I’ve worked and refined this system for the past seven years living and working on an irregular income in LA, which isn't exactly cheap.
Before I show you how, I’m going to introduce you to an alter ego of sorts: Nikki Needsabudget (see photo - she’s pretty dope).
This photo is of her from a few years ago (but it kind of doesn't matter because she never ages or gains weight. Ugh. Hate her for it).
Here are a few facts about her:
She’s single and dating
She works as a freelance editor in LA, and she’s in her early 30s
She loves what she does, and she’s building a career (but the work is not steady)
She has $150 in an emergency fund
She has about $2500 of CC debt that she’d like to get rid of
She also has $30K of school loans that she’d one day like to pay off.
She’d love to budget (and live on cash), but she doesn’t know how when her income is so irregular
And a few more:
She’s organized enough to know what bills are going to hit her bank account and when.
She keeps her business and personal checking accounts separate.
Once she’s been paid for a gig (she’s a 1099), that money goes into her business account. After she sets aside taxes and amounts for reinvestment in her business, she withdraws the net amount and puts that into her personal checking to spend (the net income - this is what we’re going to look at for the rest of this example)
She'd rather not use her credit card
She knows what she generally spends per month on what items.
She has several net income/paychecks coming in per month from several gigs.
If this sounds like you, great! If not, that’s okay, too. Let’s keep going.
Nikki just got paid
Hooray! Nikki just got paid for a non-union editing gig that she did some work on. After taking out expenses and taxes, her net income/paycheck is $1,200.
How does she create her budget?
Step One: Define What The Spending Period Is.
If “pay period” is defined as the time spent to make the money, a “spending period” is the period when you actually spend it. (And this is my definition entirely).
Since Nikki got paid on 6/15, and she picked up another gig that will pay her on July 1st, her spending period is 6/15/2022 - 6/30/2022.
Step Two: Define What’s to Happen During the Spending Period
Coming from a screenwriting background, I find this part of the process to be oddly fun.
I'm essentially writing a script with money about where I'm going to go and what I'm going to do.
Because, like a screenplay, a budget is just a plan.
You're writing it so you know exactly where your character is going to go, what they’re going to do, and what they’re going to spend. (This is all very rough. Of course you can't know precisely how much you're going to spend. A best guess is fine. But stick to it!).
So let’s figure out the plot for Nikki these next two weeks by doing two things:
What special events will Nikki be attending?
What bills (fixed or variable) are due?
Nikki will mainly be working for the next two weeks, but she does have a dinner out on 6/25 to celebrate her best friend, Hedda Hasabudget,’s birthday.
In addition to her regular expenses, she also has her car insurance monthly premium due on $117.80 on 6/22; her Spectrum bill of $89.00 is due on 6/24; her credit card minimum of $42 is due on 6/25.
Plus, her rent is coming up on 7/1 (of the $1K that’s due, we’re going to pretend she already has $750 in her personal checking account).
Step Three: Save Yourself and the Six to Survive
Nikki is going to save 10% to put towards her starter emergency fund. She knows that she always needs to pay herself first, and a good rule of thumb is 10%. (Remember: she has $150 in her emergency fund. A good rule of thumb is to have $1000-$2000 as a starter fund, so she’s getting closer to completing that goal).
So Nikki is dedicating 10% of her $1200 ($120) to her emergency fund.
You don’t always have to save; you can also use this part of the budget to allocate money to retirement, save for a dedicated purchase, or do something else.
The point is that you’re not just a conduit for money to go through to pay other people. You need to keep some for yourself.
Second, Nikki goes through her Six to Survive. As mentioned here, the Six to Survive are food, clothing, shelter, transportation, utilities, and medication. (One thing I really hate about the whole "needs versus wants" language in personal finance is that people will justify almost anything to make it a need. My clarification that these six essentials are what any person needs in a given moment to survive and be functioning).
In other words, you need food in your stomach, clothes on your back, shelter to sleep in, transportation to get around in, utilities to live comfortably and communicate with the outside world, and (prescription) medication.
I say this with a caveat: you may not be spending in all six categories per spending period (sometimes neither transportation nor medication will be needed). Still you need to doublecheck with them first; these categories take priority over anything else.
So, Nikki allocates the following for the below categories
Food: $120 for food for groceries and eating out (including going out to her best friend’s birthday party; this amount isn’t based on any particular percentage; it’s based on data Nikki already had about how much she spends per month).
Clothing: for Clothing - Nikki decided she’s not going to be buying anything for the next two weeks. Besides, it’s hot here! The fewer clothes, the better.
Rent: $250 this is the amount Nikki needs to make her July 1st payment (remember: she already has $750 in her personal checking account allocated towards rent).
Transportation: $197.80 for transportation - this includes the $117.80 car insurance payment and $80 for gas (hello, inflation)
Utilities: $89.99 for Spectrum internet
Medication: $15.00
Now that we’ve taken care of $672.79 for savings and the Six to Survive, what comes next?
Step Four: Dedicate the Remaining Funds
Having taken care of the essentials, let's go back to the movie metaphor and take care of the rest: Nikki's going to check her calendar to see what bills are due and what special events are going to happen.
In an allocated spending plan (which this is), you’re paying for things in order of priority. And you get to decide what those priorities are.
Nikki remembers that her credit card minimum of $42.00 is due. She sets aside money for that (and even pays it ahead of schedule).
On 6/25, she’s going out to celebrate her best friend, Hedda Hasabudget,’s birthday. Nikki's already set aside $120 for food, so that also incorporates $40 for a birthday dinner to take her friend out. Nikki also knows Hedda wouldn’t mind receiving a $35 gift card from Amazon, so she sets aside money for that.
Nikki looks ahead to her future, and doesn't see anything else she's planning on doing, but that could change. She sets aside $50 for a "Fun Fund." A "fun fund" represents any fun events that may come up. Allocating money ahead of time gives Nikki flexibility in her planning in case she and Hedda decide to go to a super fancy restaurant, or if Nikki decides to get a facial.
If anything that arises that goes beyond the $50, Nikki won't do it. Why? It's not in the budget.
Step Five: Balance the Budget
As Nikki’s using a zero-based budget, balancing the budget merely means that every dollar that comes in is accounted for so that the balance is zero. Nothing is left over.
Now, we've allocated $919.79 out of the $1,200. She still has $280.21 left over. So what does
does she do with it?
She decides that she’s going to allocate it to her hills-and-valleys fund.
She knows that she’ll get paid for her next gig on 7/1 and she’s fully booked through July, so she can cashflow her next round of expenses.
But August is wide open. So, she’s going to allocate it in a different account from her emergency fund so she won’t spend it and she can cashflow the next round of expenses without going into debt.
She decides she's going to allocate that money there.
THE BUDGET IS BALANCED!! THE BUDGET IS BALANCED!!!
So, now all Nikki has to do is walk it out and make her plan a reality.
Stay tuned next week as we see what happens!
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