Financial management is, by far, the most difficult thing I do as a freelancer. Some freelancers won’t broach this subject, but we talk about everything on Realistic Freelancers.
Every soloprenuer or independent contractor should be prepared to take a hands-on approach to budget, credit, and financing. In this article, I’m going to walk you through the basic expenses you should anticipate as an individual with a work-from-home budget.
Some Things You Should Know
First, this prospective budget assumes that you have no pets and no children. You’ll need to carefully adjust for other living creatures. My husband and I learned that the hard way when we adopted four guinea pigs and a puppy.
Second, this budget is based on a single-bedroom apartment in the Midwest. Your rent payment could vary based on your location. Unfortunately, freelancing rates aren’t based geographically. This means, while I can survive comfortably as a freelancer with reasonable rates in the state of Michigan, I probably wouldn’t be able to do the same thing in California. Unlike other industries, my rate isn’t going to change based on where I live. Keep this in mind, because it makes a big difference.
Third, and last, it’s absolutely essential that you understand the stakes. If you drop your current job and embark on a journey as a freelancer, you need to be prepared to do the financial footwork. I highly suggest getting approved for a credit card before leaving your current job. This credit card will serve as a foothold for your spending money. It will also be able to save you in emergency situations. In addition to this card, you should have enough money in your savings account to carry you through at least one month – preferably two or three.
If you don’t have this kind of money, and you have no freelance experience, I do not recommend quitting your current job. It’s bad financial management. Instead, start dipping into your freelance career, make a budget, and save up. The best way to stay self-employed is to make smart financial decisions. Otherwise, you’ll be back at your hourly job in less than a year. This transition needs to be done right the first time.
I just want to emphasize that, as a soloprenuer, you should be a month ahead on your payments. That means, during your first month as a full-time freelancer, you’ll use money from your savings account to cover expenses. Any money you earn during that first month will be used to cover your second month. During your second month, you’ll earn money to cover your third month. And so on, and so forth.
With all of that being said, let’s start digging through your prospective budget. This budget is based on a single-person household. Some aspects will increase with a roommate.
Your Prospective Monthly Budget
Rent – $650
Utilities – $200
Phone Bill – $50
Groceries – $250
Internet – $60
Car Payment – $150
Car Insurance – $150
Spending Money – $100
Laundry – $40
Gas – $50
Other Financial Management Notes
You’ll notice there are a few things I didn’t include in my budget. For example, most smartphone payments are more than $50. I highly suggest switching to StraightTalk if your bill is more than $80 per month. My bill is just over $45 and I get all the same coverage as Verizon Wireless customers.
I also didn’t include cable. My fiance and I use Hulu and Netflix for all of our cable-viewing needs. For just $20 a month, this is a far cheaper (and more convenient) option. I’ve yet to run into a show I can’t watch.
The car payment is based on a lightly-used sedan. If you plan on leasing or buying a vehicle, I suggest getting approved before you switch careers (the same is true for your apartment). Insurance is based on full coverage for a new driver. Your payments may be less significant if you’ve been driving for a number of years – or if already own a paid-off car.
This budget is the bare minimum for living comfortably as a freelancer. You may want to add money for pets, a gym membership, another bedroom, or something else. Just remember, when you make the decision to freelance, you need to be willing to cut back. It’s all about living within your means.
Earning Your Money
Now that we know what our budget should look like, let’s talk about how we can earn that money.
You can earn $1700 as a freelancer in a number of ways. I’m going to use writing rates in this example, but you can use other rates, as well.
Let’s say you have five clients. Each client wants 5000 words each week. Your going rate is $.03 per word. That’s 25,000 words per week at $.03 per word. That’s $750 per week. Subtract 20 percent for taxes and you have $600 left. That’s $2400 a month.
That leaves some money for savings and unexpected expenses. And trust me, there will always be unexpected expenses.
That much writing per week is certainly possible for most freelance writers. It should take somewhere between thirty and forty hours a week. And your rates will, eventually, improve. You should also keep in mind that some months will be better than others.
Other Things to Remember
1. Financial management can be frustrating and scary. Don’t let it overwhelm you. Go through your finances at least once a week and make sure you’re on track for the month. If you ever feel anxious, going through this motion will help.
2. Avoid unnecessary spending. It might be fun to see movies, play expensive video games, and eat fancy food in your free time, but save your cash. If it helps, set aside weekly spending money for yourself and limit yourself to that fund only.
3. Make a point to put aside money each month. Even if you only put $50 into your savings account, you’re starting to build. Every little bit helps.
4. There will, inevitably, be months when you can’t put aside tax money. That’s okay! But make sure you put any excess money into your tax account during the following months. You don’t want to be empty-handed come tax season, no matter how tempting it is.
5. Last, but not least, take it day by day. Set realistic short term and long term financial management goals. As you hit them, praise yourself. You’ve worked hard for it.