If you decide to become a freelancer, expect your earning potential to go on a roller coaster ride. Freelancers carry a unique financial standing as they do not have a consistent source of income to rely on.
Mid-day sleeping time, zero transport cost, and vacation plans without prior permission are the best benefits every freelancer can enjoy. But any freelancer will tell you that his biggest stressor revolves around money to pay for home rental, utility bills, personal loans, and food expenditure, among several others.
That’s because freelancing involves not having a fixed income or having your taxes automatically deducted from your salary. A freelance career will also give you a hard time where to get the extra money you need to pay for your government contributions including PAG-IBIG, SSS, and PhilHealth. In most cases, you are not eligible or even allowed to get a credit card or a life insurance policy unless your proof of income through an ITR proves your financial capability otherwise.
If you do not prioritize your finances, particularly your spending discipline, soon you’ll get stressed over how to manage your bills, lifestyle expenses, and social contributions. And then you’ll be spending more time dealing with your money problems as you are over your freelance job without noticing it. In fact, the most valuable money principle here is only to spend less than what you can earn.
Discovering the Simple Money Principles
Being frugal is just as important for any self-employed individual as delivering his outputs on time. Here are practical money-saving suggestions which you may consider to put yourself away from accumulated debts:
1. Know where your hard-earned money goes
Tracking down your actual expenses can help you determine the average monthly expenditures. Remember that you should only spend less than the amount you have earned to keep you away from overspending. Once you find out where your money goes, you’ll be able to learn the proper way of allocating your income.
You can do this by using any financial app or writing all possible expenditures in a spreadsheet or journal whichever you prefer. This aims to help you come up with an average figure of your monthly spending. By doing so, you’ll be able to identify what items to reduce or remove from your recurring expenses. Regular monthly expenses often include transportation cost, mortgage, utility bills, loans and of course taxes and government contributions.
If you aren’t sure how much you should pay for taxes, consider hiring a tax professional or a bookkeeper, preferably someone who handles freelancers and self-employed workers. Aside from recurring expenses, also check out your previous credit card bills to determine the items that fall under discretionary spending such as eating out, shopping, medicines, tuition fees, and other inevitable expenses. As the list goes on, you’ll come up with a conservative figure that will make you realize whether your income can cover it or not. What you should aim here is to create a budgeting plan that you can work on towards future savings.
2. Watch out for your discretionary spending
Before you became a freelancer, you had an idea on how much you could allocate for non-essential expenses and personal gifts since you still had that fixed monthly compensation. You didn’t need to worry about your money that much as your taxes, loan payments, and social security contributions were all set aside before receiving your paycheck.
However, as a freelancer, you have to do everything on your own from paying social contributions and setting aside an amount for your retirement. You may likely to forget how to budget your freelance income carefully if you are receiving paychecks in full amount. Temptations are everywhere, and being shopaholic may lead you in deep financial trouble. So what you can do is to control yourself and create a long-term budgeting plan that you can easily follow.
3. Create a baseline budget and stick with it
You can create a baseline budget based on your average income over the last three to six months. Do this approach by tracking your potential income for a few months and try not to spend beyond the average amount. Always remember that at least 20% of your baseline budget will go to government contributions and taxes especially if you are paying them by quarter. If the average amount is not enough to cover your monthly expenses, try to adjust your discretionary spending such as luxury trips and weekly shopping or the average amount itself since you really can’t do anything about the recurring expenses.
Now, if the baseline budget is more than enough, then consider setting aside the extra money as savings or retirement fund or use some of them to settle your previous debts. The key to success is to keep your average monthly expenses as manageable as possible to get away from impending debts.
4. Consider the 60-30-10 principle
The 60-30-10 principle is broken down into three parts, namely expenditures, savings or investment, and charity. Sixty percent of your established average monthly income will go to day-to-day expenses, monthly rental, utility bills, and other non-essential items. However, you should also take note that nearly 20% of the sixty-percent income should be allocated for taxes and contributions. These are inevitable expenditures every freelancer is dealing with, whether for his personal consumption or family needs.
The next 30% is composed of savings, investments, and emergency funds. Freelancers are encouraged to save some of their earnings for long-term investments that require down payment or monthly amortization, including life insurance and housing loans. There will be times that you need to set aside for any planned expenditures like special gifts and travel. If you wish not to go beyond your earning capacity, the key solution is to adjust your preference based on the baseline budget, therefore adjusting your food choices, leisure time, and mode of transport.
It is recommended to establish an early projection of your income to counteract potential work problems such as short-term contract and project termination. Though optional, the remaining 10% is intended for charity deeds.
This principle may not work for everyone, but you can create your own breakdown that may suit your exact preference and current financial situation.
5. Cut down your recurring expenses
You heard it, right? Cutting down your recurring expenses is possible if you try to remove some expenditure that deem unnecessary. For example, you can choose cheaper mobile phone post-paid subscriptions if you feel that you are not able to utilize the free calls, maximum data usage, and other features of the plan. You may also cancel your monthly gym subscription and walk around the neighborhood instead as part of your exercise routine. How about limiting your grocery purchases? Can you set an amount each week and prepare your meals at home rather than eating out?
As you see, you only need to scrutinize every single item written on your list of expenses, particularly the recurring ones and you can save enough for future expenditures. Opt to find a better deal that falls within your average monthly income if you plan to buy a new car or get a life insurance. What you should look forward to is to free up some extra money from fixed expenditures, unless you don’t want to choose being practical. Here are examples of how you can do it:
- Don’t spend your discretionary money over the things that don’t even bring you satisfaction or avoid being impulsive.
- Establish a shopping moratorium for at least six months if your weakness is going to branded boutiques and specialty stores.
- Introduce a number of inexpensive activities such as movie viewing at home or video conferencing if you love hanging out with friends.
- Only buy yourself or any family member a treat when you accomplish a certain milestone.
6. Establish a weekly allowance
For this approach, you need to establish a limit for your monthly discretionary spending after you have deducted a certain portion of your income for monthly bills, rent, and contributions. Once you’ve figured out the amount, divide the money into several weeks as your allowance and try not to overspend. When you do this, be sure to list down the expenses, including those items you purchase with a credit card, in a spreadsheet or a notebook to know where your weekly allowance is going. That information can help you determine what items are not important, thus further reducing your costs as time goes on.
Keeping your personal finances manageable requires steady commitment, self-control, and good spending decisions. By considering these saving principles, you can cover all expenses from investments to recurring ones without putting yourself in deep money troubles.
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