If you’re a Filipino freelancer, you’ve likely experienced the ups and downs of an unpredictable income. This feast-or-famine cycle can make managing your finances a daunting task. However, one of the most crucial steps is to create a budget process that works for you.
In this article, we’ll explore the significance of setting a healthy budget process, the advantages and disadvantages of extreme budgeting, and some tips to help you manage your finances for the long-term.
What is a budget?
A budget outlines your expected income and expenses over a specific period, typically a month. It helps you track your spending habits and live within your means.
Creating a budget proposal for your freelance business can help you achieve your long-term financial goals, whether saving for an emergency fund, paying off debt, or investing in your future. It requires discipline and commitment, but the benefits can be significant, including reduced financial stress, improved financial security, and greater peace of mind.
Why is budgeting important for freelancers?
Freelancers don’t have a fixed income, and their earnings may fluctuate monthly. Budgeting can help you manage your cash flow and save enough money to cover expenses during slower months.
Here are some reasons why freelancers should create a budget:
- Helps you stay on top of your monthly income and expenses: Creating a monthly or annual budget allows you to record your earnings and expenditures. You’ll know where your money is coming from and where it’s going, and you can use that information to determine whether you need to get more clients or reduce expenses in the future.
- Allows you to plan for future expenses: With a budget, you can anticipate and prepare for your expenses. This way, you’ll be better equipped to handle unexpected costs and have spare cash for rainy days.
- Helps you stay within your means: Having a clear budget ensures that you don’t overspend and stay within your means. Since your income is inconsistent, having a budget limits how much you should spend for the week or month without sacrificing your needs.
- Helps you save money: A budget can help you identify areas where to cut back on expenses and save money. Sticking to a budget allows you to meet your savings goals, whether planning a long trip or investing in new office furniture.
- Helps you avoid bad debt: Since your income fluctuates, you cannot afford to drown in debt. A budget can guide you in determining whether you have the means to spend on a new car, work device, or smartphone. By having a budget you can always refer to, you can avoid unnecessary spending and stay out of debt.
- Allows you to set financial goals: With a budget, you can set and work towards achieving them. This could be anything from saving for a down payment on a house to investing in your business.
- Helps you make better financial decisions: A budget gives you a clear picture of your financial situation, which can help you make better decisions about spending and saving. For instance, if you have a financial goal of saving for a house, you can adjust your budget to allocate more money towards that goal and less towards non-essential expenses.
- Helps you prepare for taxes: As a freelancer, you must pay taxes independently. Creating a budget can help you anticipate your tax obligations for the financial year and prepare for them.
- Helps you maintain a healthy cash flow: If you have a big project that would require significant investment, you can plan for that expense in advance and adjust your budget to ensure that you have the necessary funds available when the time comes. By managing your cash flow effectively through budgeting, you can also avoid running into cash flow problems, such as overdraft fees or missed payments.
Pros and cons of extreme budgeting
Extreme budgeting involves living on a strict budget and cutting unnecessary expenses. While extreme budgeting can be effective in helping individuals or households achieve their financial goals quickly, it can also be challenging and require significant lifestyle changes. It is essential to balance frugality and quality of life to avoid burnout or frustration.
If you plan to undergo drastic changes in your life to change your budgeting process, we’ve outlined the advantages and disadvantages for you.
Pros of extreme budgeting
- Faster debt repayment
By cutting back on expenses and focusing on debt repayment, extreme budgeting can help you pay off debt more quickly and reduce the overall amount of interest paid over time.
- Increased savings
Extreme budgeting can help you build up savings more quickly by prioritizing saving over spending. This can provide a financial cushion for emergencies or future expenses.
- Better financial habits
Extreme budgeting requires discipline and self-control, which can help you develop better financial habits such as sticking to a spending plan and avoiding impulse purchases.
- Reduced stress
By taking control of your finances and setting clear financial goals, you can reduce financial stress and improve your overall well-being by challenging yourself to save more.
- Improved financial literacy
Extreme budgeting can help you better understand your finances and how to manage them effectively, which can be a valuable skill for achieving long-term financial success.
Cons of extreme budgeting
- Reduced quality of life
Extreme budgeting may require individuals or households to cut back significantly on expenses, which could result in a reduced quality of life and limited access to certain goods and services.
- Burnout or frustration
Strict budgeting regimens can be challenging and require discipline and self-control, leading to burnout or frustration over time.
- Social isolation
Extreme budgeting can sometimes lead to social isolation if you cannot participate in social activities or events due to financial constraints.
- Potential for unhealthy financial behaviors
Extreme budgeting can sometimes lead to unhealthy financial behaviors such as hoarding or fear of spending, which can be counterproductive to achieving long-term financial success.
It’s worth noting that extreme budgeting may not be suitable for everyone and may require significant lifestyle changes. Considering individual circumstances and financial goals before embarking on a strict budgeting regimen is essential.
Where does the budget process begin?
You can use three proven methods to create a healthy budgeting process: track your income and expenses, manage your money, and use budgeting tools. By sticking to these three crucial methods, you’ll be more able to achieve financial freedom and overcome hurdles.
Method 1: Track your income and expenses
1. Record where your money is coming from
One of the simplest methods to track your income and expenses is to start by writing down how much money you bring monthly. Your net income per month is the total amount of money you take home every month after subtracting all the deductions.
This includes the payments from your customer, cashback, bonuses, and any other payments you receive. Write everything down in a financial statement and total the items up.
2. List all your monthly fixed expenses
Fixed expenses are expenses you must pay every month, no matter what. These expenses change from month to month, but for the most part you have a ballpark figure of how much it will cost you. Some common examples of fixed expenses include mortgage or rent payments, utility bills such as electricity and Internet, car payments, health insurance, and payments for loans.
Calculate your fluctuating expenses by looking at your bills from the previous year, adding up the monthly amounts due. Then, divide that total by 12. Use that average to create your budget.
3. Take a look at your flexible expenses
Use your bank statements and receipts to add up flexible expenses. Flexible expenses are necessary monthly, but you have some control over how much you’ll spend. Typical flexible expenses include:
Household and grocery items.
Clothing and shoes.
Personal hygiene items.
Parking and transportation costs.
4. List your discretionary expenses
Last but not least, make a list of all your discretionary expenses and total them up. Discretionary expenses are non-essential expenses, like entertainment, that you have complete control over. Non-essential expenses include entertainment, recreation, gym membership, dining out, concerts, and gifts.
5. Check if you’re financially on track
To determine if you’re on track with your budget process, subtract your monthly expenses from your monthly income. If the expense total is less than the total income, you’re more or less on track financially. However, if the expense is more than the income total, you’re off-track and need to prioritize your expenses before saving.
Method 2: Manage your money
1. Allocate money for monthly expenses to stay on top of your finances.
Prioritize your fixed expenses by setting aside the amount you’ve budgeted each month as soon as you receive your income. This way, you will avoid overspending and falling short when paying bills is time.
Once you’ve covered your fixed expenses, you can decide how to allocate any leftover money toward other essential expenses, such as groceries, gas, or clothing. If you get paid weekly, make it a habit to regularly allocate a portion of your paycheck towards your monthly expenses to avoid any financial stress or challenges.
2. Save any remaining funds after expenses for future purchases or emergencies.
Determine how much money you have remaining after covering all your expenses. Look at your monthly income and subtract your fixed and variable expenses to determine your leftover funds.
If you have a specific financial goal, like saving for a down payment on a property or paying for your child’s tuition, consider putting some or all of your leftover funds towards achieving that goal. This will help you stay motivated to achieve your financial objectives.
3. Identify expenses you can eliminate if your budget is off track.
To better manage your finances, start by keeping a record of your daily expenses by taking notes or using a budgeting app. This will help you identify and eliminate any unnecessary expenditures, putting your finances back on track. Remember that seemingly minor expenses, like eating out, coffee runs, or movie tickets, can add up over time.
For instance, if you spend P200 on a cup of coffee daily, imagine how much you could save by redirecting those funds towards other financial goals.
4. Review your budget monthly and adjust as needed.
At the end of each month, review your spending against your budget to see if you stayed on track. If your spending exceeds your budget, you may need to adjust your discretionary expenses or cut some to prepare for the next month.
In addition, it’s essential to consider any fluctuations in your income. For instance, if you got paid for a new project, you could allocate more funds towards discretionary expenses or increase your savings goals. Conversely, suppose your project ends, or you lose a client. Reducing discretionary expenditures, such as a gym membership, may be necessary until your financial situation becomes more stable.
Method 3: Use Budgeting Tools
1. Utilize a pre-made budget worksheet to simplify the process.
Creating a budget can be overwhelming, especially if it’s your first time. A pre-made budget worksheet can help you start by listing common expenses and calculating them.
2. Download a secure budget app for easy tracking.
Budgeting apps make tracking expenses simple and convenient. They allow you to monitor your spending in real time, set up payment alerts, and catch suspicious activity.
This is where an all-in-one financial management solution like the Beppo App comes in. Beppo is designed for freelancers who need a budgeting app that allows them to have a high-level view of their income and expenses, track their expenses, send invoices to clients, and get assisted tax filing.
Here are some of the features you can enjoy with Beppo:
- Consolidate your income and expenses into a single platform
- Send timely invoices to your clients via SMS, Viber, and email
- Set budget limits and automate your budget to streamline your financial management process
- Receive estimates of your taxes to help you plan and budget accordingly
- Connect and network with other freelancers
- Access professional assistance when filing your taxes
3. Use a spreadsheet to stay organized and reduce errors.
If you prefer a more hands-on approach, a budget spreadsheet can help you stay organized and save time. You can create your own using Microsoft Excel or download a free template. Refer to a budget worksheet template if you need help building your spreadsheet.
4. Track expenses throughout the month and review at the end.
To stay on top of your expenses, it’s important to record them as they happen instead of waiting until the end of the month. Many budgeting apps, such as Beppo, can make this process easier by automatically tracking your transactions. However, recording every expense, no matter how small, is crucial to get an accurate picture of your spending habits.
No better time to improve your budgeting process than now
Budgeting is essential for freelancers to manage their finances effectively. By creating a budget, freelancers can ensure they live within their means, save for their future, and avoid unnecessary debt.