Backwards Budgeting:Priority Budgeting for Freelancers and Self-Employed
Budgeting by definition is a way to basically tell your money what to do and where to go. I love budgets as one of those silly math geeks, but when I got into freelancing several years back, everything changed. The main budget forms are not the same because I don’t know how much money I will have to budget. While in a perfect world, you will always have enough, if you want to make a budget when you don’t really know what next month brings, you need to do it differently.
So after aggravating myself doing a regular budget, I started doing what I called a priority budget each month.
First you have to put down what you do know. You have to figure out what you spend and how much each month you will need to live the style of life you want.
Common Budgeting Items
With that in mind, all your expenses laid out and accounted for on a monthly basis, then go to your annual budgeted items. For me these are car insurance and maintenance, birthdays, Christmas gifts and a vacation. That number will be divided into 12 for the year and that is how much you will have to put in fund each month to have the money when the expenses come due. Anything that is going to come up that can be foreseen, put it in the budget so there will not be expenses popping up that you have to dip into your emergency fund for. Even worse, if you don’t have the money and are left juggling what gets paid that month.
Annual Expense Budget
$500-Car Insurance and Maintenance
$50-TTL & Registration (car)
$50-Other Holidays (Halloween and Easter)
Then when you have your Budget for the monthly bills and expenses, as well as your monthly allotment for your annual expenses, you have your number. Whatever that it, that is your goal for the month. While it may not go as planned each month, I like to put my budget in reverse and write it down in a way that as the money comes in, I know which priority is next on my list. Everyone’s priorities will be different and I will leave my own budget as an example.
$125-Internet/TV (While I need it to work, this may not be a top priority for many.)
$200-Food (As a freelancer, always keep a month or so of can goods, non-perishables or frozen food around. This number could be cut down tremendously if needed.)
$50-Gasoline (Once again, probably a higher priority if you commute to work, but as I am home-based it is not that big of a priority in my household.)
$50-Household (Same with household items, keeping a spare around of things you use most often, as it can help make this a zero item if needed. We all have bad months from time to time.)
$200-Annual Budget (2000/12 rounded up)
$500-Emergency Fund Savings
Leftovers- 50% to Emergency Fund and 50% to purchase list
Once you have you priority budget lined up, you will then need to think about where any extra money is going to go. If you have a good month and you make an extra five hundred or so passed the budget, where do you want your money to go? I do mine as percentages, halved between extra emergency fund and a purchase list of items that I want to get.
So in this way, you know where you stand and what is paid first when that first check rolls in for the month. It also helps to have a budget in place and for a freelancer, the unknown can only be mitigated by planning ahead for a rainy month.