Let me spoil the whole article for you in the first sentence: if you spend less money than you make, you'll be profitable.
Seems simple, right? Boring, but simple. Wealth (which is what you earn, minus what you spend) is easier to build up when your spending column is very small.
When you work for yourself, it's much more fun to do super awesome creative client work instead of managing money and expenses. Heck, you're doing what you love AND getting paid for it! You make good money, so you assume budgeting is only for "financially challenged" folks.
But that's some flawed logic.
Because if you aren't keeping track of what you're spending your money on, both personally and for your business, you'll end up having to make more of it to turn a profit. Or, you could be spending more than you're making. Or, you could not know how much to even spend on useful things like housing and transportation.
According to StatsCan, families in Canada that make over $100,000 account for 37% of the nation's debt. In 1982 we stockpiled about 20% of our income as savings or investments. But by 2014, we're saving less than 4% of our income. Yikes!
You'd never tell a client, "Hey boss, the budget is whatever, you'll just spend some money and I'll do the work" -- so why would you not want to keep track of what you're spending your own money on? Keeping track is important, so you will know what you can afford (and what you can't).
The secrets to budgeting as a freelancer
- Cheque yourself. Yes, you're the business, but that doesn't mean you can't take a regular pay cheque that's the same amount every month. Don't know how much to pay yourself? Take the average amount you made over the last year, and pay yourself 70%. Keep 30% in the company for taxes (if taxes are less -- invest the rest). That way you know how much money you've got to play with, since it's the same every month now.
- Keep track of everything. You could use fancy accounting or budgeting software that costs money, or you could use a spreadsheet every month (free). In it, write down your income (money in) and your expenses (money out). Every month, start a new spreadsheet. From here you can see if you're spending too much and where.
- Know your bare necessities. Figure out what you need to make to pay for housing and food. You'll need to make approximately double that each month for your budget to work. If you can't, maybe it's time to spend less on housing, that car, etc. Be practical about housing and cars -- since both always cost more than their ticket price (maintenance, repairs, upkeep).
- Build a buffer. I like to save 10% of what I pay myself, for "just in case." Just in case I can't work for a few months, just in case work is slow, just in case there's a massive global economic downturn. Once that 10% savings each month works out to a year's salary, you can sleep well at night knowing that even if things go to shit, you've got enough money to live for a year.
- Prioritize expenses. If there's a lot of things (personal or in your business) you need to spend money on, make a list of all the things you need to buy and put them in order of priority. What has to be bought now versus what can wait a month or two? Most things don't need to be bought immediately (unless, say, it's plumbing fixes). You don't need the latest and greatest hardware, software, subscription service, etc.
- Find easy wins to save money. Regardless how much or little you make, find ways to make your money stretch further. Cut cable (youtube is free), cut your landline (use Skype), cut eating out (cooking is fun, especially if it's for other people), cut buying new clothes (your clothes aren't rags), cut buying lattes at the store (homemade coffee can be good), unplug everything that's on "standby power." The less you spend on items you can live without, the less you have to make and the more you can spend that time enjoying life. If you're keeping track of your spending and look back over a few months, see what you're spending on non-survival things. They add up!
- Diversify your income. As a freelancer, you're in charge of how and where you make money. There's nothing stopping you from looking for multiple sources of income. I currently make money in a number of ways: doing design work for clients, consulting, podcasting, running a course and writing books. That way if one income stream isn't going well or making money, I can lean on other sources. I like to have a mix of products and services, so the products can make some money even when I'm not working (if they're set up well and I continually work at them). Just like your investment portfolio, diversity is key to growth.
What I've learned in 18 years as a freelancer
Money's taboo, I know, but tough shit. It's a conversation that should be had, especially with folks who work for themselves.
In my years working for myself, I've become ok with being cheap. I don't need a fancy car or a place to live in an expensive city. I make every dollar I earn stretch, so I don't have to spend as much time making them (instead I can spend time enjoying my life).
Treating a budget more like a game you can win each month instead of "oh no, I really have to do without ALL THE THINGS?!" makes it much more fun. I even give myself mini-games like: see if you can skip groceries and just eat what's already in the pantry/fridge or see how long you can go without buying coffee at a coffeeshop or even only spend money on rent, food and gas for six months. Make your own money-saving game!
I also find I enjoy free things more, if I give them a chance. Experiences like walks, working in the garden, swimming in lakes/rivers/the ocean, picnics, board games, and having people over for dinner (instead of eating out) are fun. My wife and I don't even do presents for birthdays or holidays for each other -- instead, for each event, we plan an EPIC meal and cook it together. We don't need stuff, but there's no limit to needing enjoyable experiences.
If you spend less money than you make, you'll be profitable.
The take aways
True to my promise in the first line, you've got to spend less to gain wealth. The nuts and bolts of it?
- Pay yourself a regular salary even if your business' income isn't the same each month and even if you're the only employee.
- Know your income and expenses each month by keeping track of them.
- Plan for taxes and buffer for emergencies/life shitting on your face.
- Remember why you're making money (because life is about more than work, money and spreadsheets).
Now go forth and manage your money. It's not as fun as super awesome creative work, but it's just as important.