A major concern of beginning freelancers is how to budget fluctuating income. Things are wonderful when you have a $5,000 month but when you only bring in $1,500 the next month, you start to panic. This post is a step-by-step tutorial to help you get out of the freelance feast or famine cycle.
7 Steps out of the Freelance Feast or Famine Cycle
Step 1–Open bank accounts
Open three checking accounts and one savings account.
You could have more accounts, and likely will down the road. But for the purpose of this post, we’re going to stick with four.
Name one checking account Operations, another Taxes, and the third, Personal. The savings account is for, of course, Savings.
Step 2–Set your salary
Decide how much money you need to make, personally, each month. This is your money, not for the business or taxes, but for you. If you want to make a living, you’ll calculate all your living expenses like housing, utilities, groceries, gas in the car, etc.
Once you have a figure, deposit three times that much into your Operations account. If you don’t have that much to deposit, you can do one of two things: 1. take it out of your personal savings or 2. wait until you’re paid for a large job and do it then. I waited until I had a huge income month and started this plan then.
This large deposit provides the funds to cover your salary when you have a lean month. I learned this trick from Kim Baker of Simply Sufficient Life.
Step 3–Business expenses
Determine how much you need to make each month to keep your business afloat. Thankfully, being a freelance writer doesn’t require a lot of overhead but it’s not exactly free. However, when first starting a freelance business, I caution all newbies to be thrifty. You really don’t need new office furniture to write copy. Nor do you need to take every class that comes your way. Be conservative until your business grows. Business expenses could include:
- Website hosting
- P.O. Box
- Co-working space
- Memberships to coaching groups
- Continuing education classes
- Professional memberships like Chamber of Commerce
Step 4–The rest of the money
Determine how much you need for other areas like taxes, savings, or charitable contributions. My husband and I believe in the principle of
“Give and it will be given to you. A good measure, pressed down, shaken together and running over, will be poured into your lap.”
So, I have a checking account where I deposit 10 percent of my income for various ministries or charitable causes.
Step 5–Assigning everything a percentage
Based on what you need to keep your business afloat, put in your pocket, save, etc., assign percentages to each category. Currently, mine comes out like this:
A few notes here:
Please remember this is only an example. Every person’s circumstances and needs are different. Also, as your business grows, you’ll want to re-evaluate and adjust.
Also, this Savings account is for unexpected business expenses like your Mac dies. Once you accumulate a certain amount in that account to handle emergencies, you can make adjustments. But that’s a topic for another post.
Step 6–The Day to Day
Now, down to the day-to-day operations of your business. Deposit all payments into your business/operations account. On the 15th and the 30th of each month transfer the percentages of those payments into the other accounts. For example, let’s say that between September 1 and 15 you receive the following payments:
- Client A–$500
- Client B–$2000
- Client C–$1500
for a total of $3000. On September 15, you deposit that $3000 into your Operations account if it wasn’t direct deposited. Then, using the example above, you transfer:
- 30%–$900 into Tax account
- 35%–$1050 into Personal account
- 10%–$300 into Giving account
- 10%–$300 into Savings and
leave 15%–$450 in the Operations account.
However, let’s say your budget is based on 35% of your income is $4000/month. That means you are short this pay period. So, since you began with a three-month buffer, you can transfer an extra $950 to make up that difference without having to tighten your belt. You can’t do that too many times, though, or your buffer money will be gone. That’s where Step 7 comes in.
On the other hand, let’s say your 35% was more than $2000. You only transfer the $2000 to your Personal account and add the extra to what you transfer into Savings.
Now, on to the part that kicks the famine to the curb.
Step 7–Helps you foresee a coming famine
I have to give credit to Mridu Khullar Relph, The International Freelancer, for this trick. She shared it in a Facebook video once and it has been a game-changer for me.
I like to keep track of these details in my paper planner. You can use a Word doc, spreadsheet, or whatever works for you. The point is to keep track of the following values:
- Work Assigned
- Payments Expected and
- Monies Paid
So, at the bottom of my monthly calendar pages, in the empty squares, I write these three words as column headers: Assigned, Expected, and Paid. Then, when I’m given an assignment that pays $800, I write that under the Assigned column. I then page forward to the month that I expect to be paid for that assignment and write $800 in the Expected column. When I’m actually paid that $800, I write $800 in the Paid column for that month.
When I have a monthly contract, like my regular columns, I go ahead and write what I’m paid for those columns in the Expected column for each month. If you’re writing content for businesses, do the same thing for your retainer clients. When writing for magazines, Expected is not the issue month. A lot of magazines pay 30 days after publication. Some pay when the story is turned in.
Here is a shot of what my month might look like.
Now, it’s the middle of April and I look at my Expected column for July and see that I’m not going to be bringing in what I need to pay my bills. That means I need to get my hustle on to bring in more work. Ideally, you’ll look a few months ahead and always be marketing.
And that’s it. Of course, after you see consistent growth in your business you’ll want to re-evaluate your figures. The idea is to have more money to invest in your business and put more money into your pocket.
What are your tips for riding the freelance feast or famine cycle and coming out on top? I’d love you to share in the comments.