You need to have everything under control but in order to really be able to do that, there are a few lessons for you to learn in order to avoid getting into big financial problems.
#1. Keep Track of Your Spending
Whether you’ll use a notebook or a spreadsheet, or even a cool app, it’s important to know where your money goes every month.
The point is to get at least an estimation of your monthly spending that include housing, utilities, transportation, food, debts etc.
Don’t forget to include eating out, travel, shopping and similar things – they are visible through your credit card statements. At the end of the month, you’ll get a pretty precise idea of how much you spend.
#2. Have a Baseline Budget
After you have been keeping track of your income for a couple of months, you’ll be able to determine your average. Always have in mind that some 30% of that money will be used for paying taxes.
Next, compare that figure with how much you spend every month to see if you earn enough to pay for everything you have to. The point is to have enough money left at the end of the month for saving or retirement.
#3. Determine How Much You Want to Earn
The first two steps are there to help you live within your means, but what if you want to earn more? What if you lose one of the clients? What if your goal is to put away more for your retirement or spend more on travel?
If you want some 20% of your income to go on savings, while 30% will be spent on taxes, then it’s clear you are expected to live on a daily basis on the other 50% of the income.
Maybe that is the moment you will realize you want to earn more. As a freelancer, you probably spend some part of your time researching, pitching new ideas or running your business, which tends to be unpaid. You will need to charge rates that take that time into account.
You may also need to wait some amount of time, usually a year, in order to attract more clients or to have a bigger demand for your services. That’s when you’ll be able to charge higher rates.
#4. Set Up Different Accounts
To have your budget neatly organized, you could try setting up 5 different accounts used for different purposes. Maybe it seems a bit too much but it will help you keep track of different aspects of your life and to have every aspect taken care of.
The first account should be for taxes (20-30% of your total income), meaning it will be used for paying taxes at the end of the year.
The next is your living account, which includes your everyday expenses like food, utilities, entertainment etc.
The third one is your emergency account – it’s the one many people forget about. You need to have some money on the side for emergency like a broken car or a house appliance, or even medical emergencies. Still, if you can’t put aside money for this account, you can always opt for unsecured personal loans online in case an emergency or even an opportunity occurs.
The retirement account may not seem important to you if you’re 25, but you will live to regret it when you are 70. Start putting money on this account as soon as possible.
The last one is the save-and-spend account. This is the one where you will put aside money for your future goal, like a luxury holiday, a new car or a camera or even a smaller investment to grow your business further.
#5. Cut Some Expenses to Reach the Dream Budget
If you notice after a couple of months that your dream budget is too far away from your current budget, then maybe you need to take a different step.
Take a look at your expenses and think hard about each expense item. It’s possible you have some unnecessary expenses you are not aware of.
- For example, do you really need all that TV channels you don’t actually watch?
- Do you go to the gym three times a week like you are paying for?
- Are there any cheaper options in any aspect of your life that won’t make a big difference but will help your budget?
Try to identify your weaknesses and your bad habits and make an effort to break them.
Final Comment on Personal Finance Lessons
As a freelancer, you always have to think ahead. And the best way to do it is to have a clear sense of how much you earn and spend but also to save for your future.
That’s how you’ll manage to run a freelancing business without too much stress and unexpected surprises.