Dickens’ Mr Micawber, as drawn by Joseph Clayton Clarke, was famous for the maxim: ‘Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.’
Budgeting: it’s easy. There are a ton of websites that will tell you how to do it. Just take your projected income for the month. Then categorize your expenses. Fit that income into those expenses. Hey presto… a budget.
But – like most people working in the arts sector – I have no idea how much I’m going to make this month, or next month. And it’s the same for expenses. They’re crazy… all over the place. Some months I’m spending a ton, and some months, nothing.
Being a freelancer does not mean you don’t need to budget but you have understand how to budget on a variable income and you have to play by the rules.
Rule #1: It’s not income until it’s in the bank
There is a school of thought that, even for people on a variable income, you can still project your average income for the year. Just take the last 12 months, figure out the average… or the lowest possible amount you made… and budget to that.
That may work if you income is irregular but not if it is erratic. In my case my income in the last year has been zero some months, and many, many thousands other months.
A budget is about facts. I do not count something as income until the money is in my hand.
I can have a gig at the end of the month, but things happen. Jobs get cancelled, people get sick.
Don’t build a plan on wishes and honeysuckle. Build it on facts. Income is money that you actually have.
Rule #2. Every dollar has to ‘have a job’
Ensuring every dollar has a job means that it everything that comes in or goes out is accounted for. That means that all your money goes through the budget.
I get into trouble with this all the time. I’ll get an unexpected 20 bucks (a good night playing poker, for example) and I’ll keep it out of my budget. Before I know it I’ve used that 20 bucks as an excuse to order pizza, take a cab and buy fancy cheese…and I have spent much more than my extra $20. The vague feeling that I have ‘extra’ money has made me spend like a fool.
Money that doesn’t have a job makes your budget start to feel lazy and everything begins to lose focus.
Making sure your money is employed also helps with saving. It means that you don’t have a big pool of ‘general’ savings. Instead you’re saving for specific projects.
Is this money for acting or singing lessons? Is this money for travel? Is this money for retirement? When a little ‘extra’ comes your way, it is directed to something you really want not lost on kneejerk spending.
It also means when you are spending you can feel confident you are doing the right thing, not feel like you’re robbing your retirement funds in order to pay your teacher.
Knowing what each dollar is for, and each dollar will end up giving you all the value it can muster.
Rule #3: Don’t expect to get it right first time
Many people put off budgeting until they feel they can do it ‘properly’.
‘I don’t really need a budget yet.’ ‘I’ll do it when I get more money.’ ‘I’ll start budgeting at the beginning of next month so it’s cleaner in my records.’
No. Budgeting is going to be a hot mess for a while. I think it must be for most people but when you’re trying to balance all the aspects of a freelancer life, it’s bound to be a straight up disaster when you start
You can’t skip this step. Let it be messy.
I threw out my first couple of budgets. But by doing them I learned a ton about what worked and what didn’t.
It’s personal finance. There’s no fast tracking or easy answers. Let it be messy. It’s the only way to figure things out.
Don’t give up on budgeting because you failed this time. If you went over budget this week/month/year, don’t worry about it. Everyone goes over budget. Just adjust and try again.
Rule #4: Base your budget in reality
Don’t build the budget that you think you’re ‘supposed to have’: a budget that looks like someone else’s template or the one in your head that you figure ‘grown ups’ must have.
This is your budget and no one else has to ever see it. So make it true.
That means that if you’re spending 1400 bucks on clothes a month, don’t leave those costs off (or disguise them) because you know that you shouldn’t. You’re spending the money. It is part of your financial truth and you need to account for it.
You will not rebuild all of your spending habits in one month. When you’re just starting out make sure that your budget is showing you where your money is actually going. Then, over time, you can start changing habits and moving money to different areas.
A budget has to be based in reality for it to be worth anything. That’s a budget that you might actually stick to, instead of one that’s just telling you to basically be a new, different, more boring person.
So get weird. Make categories for all the crazy stuff that your money goes toward: donuts, beer, toy boats, anything.
Just because adults have budgets, doesn’t mean that yours has to be boring. It’s yours, it can be just as boring as you are.
Rule #5: Have a second budget
What? I don’t even have one. Why do I need two?
You need to separate your business spending and your personal costs.
While it is possible to work with a combined budget, it’s not the best way. Keeping them separate keeps most of the variable costs over on the business side, and keeps the personal side much more stable. It’s more comfortable and you won’t feel like the basics like paying your rent or putting food on the table are always at risk.
The more you can separate your business from your personal finances the clearer your records will be at tax time or when you need to identify the real costs of a project.
I also think that fundamentally your business and your personal budgets serve different purposes. At least they do for me. On my personal side, my goal is to remain as frugal as possible. I want to make sure I’m living in a decent place and eating decent food… but I’m constantly looking for ways to live more simply.
However on the business side I’m not looking to cut back, I’m trying to make sure money is there so that I can react to opportunities whenever they come up.
