Last week I wrote about the difficulties of money management when dealing with irregular income as a freelancer. I listed five areas of focus through which we can gain a handle on our finances. Today I want to focus on the first of those five, budgeting. Getting this right is the key to the rest of the system. It is a foundational element of a healthy financial life and deserves spending a fair bit of time on.
Now before I go any further it should be noted that the following system is not for everyone. There are many variations out there that may work as well or better for you . What I will be outlining is a system that I have developed through much trial and error that works for me. Your mileage may vary. I went through at least 5 different budgeting systems before I developed this one and even now I make small tweaks along the way.
The most important aspect of working out a budget is to include EVERYTHING. This can be hard for a lot of people as one often does not want to admit to certain purchases, but if you spend $150 a month on comic books, you should include that in your budget or else there will be constant wonderment as to why you are always over budget. Find a place for everything.
Some items will be combined together, while others will be discrete categories. The key is to break down your budget categories as much as makes sense for you . Some may have a general dining out budget while others will separate that into dining-food, coffee, drinks, snacks etc. No one category structure is right or wrong, the point is to make it as accurate as possible and as reflective of your true habits as it can be. I drink a lot of coffee, so I have to include coffee as distinct from other food and dining options. This will not be the case for others.
The spreadsheet I have is broken down into four categories: Personal Expenses, Business Expenses, Savings and Income. Note that there are multiple sub-categories for each of these. This is because as a freelancer I not only have many different kinds of expenses that are treated differently with taxes, but I have different incomes as well. While it does not really matter from a tax perspective whether that $1000 came from a small design or some consulting work, it is useful for me to know where my money comes from when planning where to put my focus.
I will get to how to handle the Savings and Income later, but since we are dealing with budgeting let’s begin with expenses. Download the spreadsheet here. It is an OpenOffice Document. If your spreadsheet program does not support .ODS files, you can download OpenOffice here or use Google Docs.
As a freelancer you are bound to have some categories that overlap from personal and business. Big ones for me are rent and cell phone. I have two equally valid ways of dealing with this. One is to simply divide the number manually and enter it into two categories, one for personal and one for business. This requires a little more work with each entry but is a bit cleaner when we get to the spreadsheet. The other is to enter the total amount into the column and then have your spreadsheet run a simply calculation to divide the number between the percentage that is personal and the percentage that is for business.
Once you have determined how you want to deal with these overlaps you are ready to begin working with your spreadsheet. Some people prefer quicken or other database software. I like using spreadsheets as it allows me to see a clearer overview in a format that works well for me. I can easily adjust it to do any calculation I might need, but all my basic calculations are set up from the get go. I have one tab for each month. There are then 31 rows per month, corresponding with each day, wherein I enter my daily spending. At the bottom of each column are three fields. One is my budgeted amount for that category, next is the amount I have actually spent and finally the difference between the two. I also have fields for gross and net income, total expenses, total deductible expenses, etc.
I color coded all the auto calculating fields in shades of gray to indicate that the user(me) does not input anything there. These are all designed to take other information and perform calculations so that I know what my money is doing.
To begin the budgeting process, go to the "BUDGET" tab. There you will see a sheet where most of the fields are gray. This is because, with the exception of setting your budget numbers and category names, everything else is a calculation based on actual spending and earnings. Start by changing "Personal 1" with whatever the actual expense is, let’s say "Rent." This will populate all the monthly pages with "Rent" in that field. Continue with "Personal 2" and so on until all your fields are populated. You might have some empty fields, that is fine, nothing will be affected by an empty column or two. If you need more you have to do a tiny bit of work, but it is little more that adding a column and cutting and pasting the field data. Be sure to do that for EVERY MONTH or you will get some strange and frustrating results.
Once you have all your fields named it is time to enter your budget numbers. I spent the better part of a year tracking all my expenses before I made my first budget. This way the budgeting decisions were based on actual habits and not ideals. It would also be possible to rough in a budget using this system and then adjust every few months to reflect actual habits.
It is critical to not only include all spending, but also all savings. I will get into targeted savings accounts in a later article, but for now be sure that you include all your savings accounts on the budget. The ‘INCOME" fields work the same way except we do not enter a budget number. After income I have a totals field that gives me an easy reference for income and expense totals by month, quarterly, monthly average and YTD.
The last calculation at the bottom on the far left hand side of the spreadsheet is a little box called "Monthly Budget." This is your total budget including Personal and Business Expenses as well as Savings. This is your target number that you must earn every month. If the number is too high or too low, you can adjust your individual fields until you land on a number that works for you.
On the Monthly calculations you will see a field for "Total Intake" and "Earned Income." For the purposes of the template they contain the same range of fields. However, you will change these to suit your needs as some income fields will be earned income and others might be loans repayed or financial gifts. It is useful to know the total of all moneys incoming, but necessary to separate earned income from non-earned sources.
After the Income fields I have a little are I use to calculate tech and travel days. While the "tech days" are just for my own interest, the travel days are useful for tax time when calculating my away from home meal deductions. Entering an "x" in one day populates both the "tech" and "travel" columns, while a "y" is just a tech column. Obviously if you do not travel for work this is unnecessary and can simply be ignored, but I find it a lot easier than sifting through my calendar and counting out every day I am away from home or traveling.
There is a lot more that one could write on budgeting and I may well do so in future articles. For now, this is my introduction to how I approach budgeting as a freelance lighting designer.
I hope you find this useful. Please leave feedback as I am always interested in how this lands for you.
