Budgeting for Freelancers with Variable Incomes

For anyone who gets paid a different amount of money every month, it can be challenging to come up with a budget.

The usual method is to look to the past for guidance on what the future might bring, and set up the budget that way. This works for employees who know exactly how much they’ll be making every month.

But the problem with this method for anyone who makes a variable income is that you never really know what the next month will bring. Even if you’re billing about the same amount from month to month, your accounts receivable might be very random.  So using the past to estimate the future can be a very rocky road.

WEEK BY WEEK BUDGETING

I found a method that works quite well (assuming you have an income).  Instead of guessing what the following month will bring by looking at the past, I look at exactly how much money actually cleared my bank account in the last week, and disburse my expenses based on that amount for the following week.  Using the last week’s cleared income as a basis, I allot various percentages of it:

  • 20% for taxes
  • 15% for credit card payments
  • 10% for emergency fund savings
  • 10% for retirement
  • 30% for rent/bills
  • 15% for spending money

But I apply this only to the first $500.  For anything over $500, I change the percentages slightly:

  • 25% for taxes
  • 15% for credit card payments
  • 10% for emergency fund savings
  • 20% for retirement
  • 25% for spending money

Notice that for anything over $500, I no longer have a rent/bills percentage. I calculated that 30% of the first $500 over four weeks would cover my rent, so I no longer need a “rent” percentage for any amount over $500.  Using an Excel spreadsheet, you could pretty easily come up with a sheet that performs your disbursement calculations automatically.  You could even set up multiple rates for: up to $500, from $501 to $1000, from $1001 to $1500, $1501+, or whatever.  (I personally use a php script I wrote myself [click here], you’re welcome to use it if you know what to do with it and how to tweak it — DON’T ASK ME FOR HELP UNLESS YOU’RE WILLING TO PAY ME $75/hr!!)

Then there are some rules (these are my rules, you’ll probably need to come up with slightly different ones):

  1. I deduct business expenses from the weekly income before applying percentages.
  2. Withdraw spending money only once a week. If it runs out, don’t withdraw more. This will encourage you to be conscious of what you’re spending.
  3. If you have spending $ left over after a week, you can do whatever you like with it, including adding it to the next week’s spending money.
  4. Don’t carry ATM or credit cards around. You might even consider cutting up ATM cards or freezing them in a block of ice.
  5. Emergency fund can be used for medical/dental anytime, or at year’s end to pay down credit card, or as a spending money buffer if the previous month’s income dips below whatever you consider a too-low amount, or perhaps if you think you’ve been good and you deserve it, a new computer!

Of course, you’d need to modify the percentages to work for your situation, and also tweak the rules.

Written December 10, 2010 on 5:14 pm in category(s):
eCommerce, Helpful Hints | Comments Off

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