Financial Planning and Budgeting For Freelancers Raising a Family
One of the biggest struggles I had when I started my freelance business was not knowing how to do financial planning and budgeting properly as a self-employed person, especially with a family to provide for. I was a new dad and like most parents, I wanted a secure, stable and consistent income. My wife and son were depending on me to provide that. And freelancing was very unknown territory for me, so I was taking stabs in the dark when it came to finances. I hope to provide you with a clear understanding of how to plan your finances and budget when you’re self-employed so that you can have confidence as a freelancing parent.
Get on the same page as your wife with your financial goals.
Husbands and wives don’t always see eye to eye when it comes to what to spend money on and how to manage it. I was lucky enough that my wife and I already had very similar opinions when it came to what’s worth spending money on, but we weren’t on the same page with how to budget and manage our money.
Have a meeting with your wife and create a financial plan. Even if she isn’t working, she MUST be a part of your financial planning and goals. We made the mistake of making my wife take a back seat with our finances because she wasn’t working. That didn’t work out so well. We ended up with over $20,000 in credit card debt. Talk about what your short-term and long-term financial goals are. What do you want to save up for in the future? What’s most important for your family? How do you envision earning that money? Will only one of you work? And how will work harmonize with personal family life needs?
In order to properly create a financial plan, you must first audit where you’re at.
You must be totally honest with yourself about your current financial situation. Do you have debt? If so, how much? How much money is in your bank accounts? What’s your current income? Know all your numbers and make sure you and your wife fully understand the numbers. Ditch the shame if your situation isn’t good. One of the things that prevented me from being totally transparent with our financial situation with my wife was shame that I had failed, and couldn’t face her. I wanted to secretly fix the problem without involving her. And it wasn’t coming from a deceptive place. I didn’t want to cause her undue stress. I thought, “Earning income is my responsibility and I don’t want her to have to stress about it. She has plenty of other stresses to worry about with being a new Mom.”
But by me not including her fully in our finances, that actually did cause the very undue stress on her that I was trying to avoid. So, I decided to ditch the shame and unite with her in solving our financial problems. And that actually helped unlock my ability to grow my business in ways I could not have if I never came together with her. Why? Because my subconscious knew that my relationship with my wife was the most important thing, and if that wasn’t healthy and we weren’t on the same page, then it took up space in my brain and caused stress whether I knew it or not. And that clutter prevented me from getting inspired and taking the action I needed to grow my business.
Once you know where you’re at and you’ve decided to include your wife fully in the finances for your business and family, create financial priorities.
Where will your money go first, second, and third? This is where many couples tend to disagree, so keep talking until you come to a compromise. Part of these priorities will include working through any financial problems you have or goals you want to achieve. If you’re in consumer debt, then that becomes a priority over saving or spending on other things.
Here’s an example of what my financial priorities were, in order, back when I started my freelance business:
Not getting into any further debt (This required strict budgeting. We held this for 6 months before moving onto the next step)
Saving a $1,000 emergency fund
Paying off credit card debt
Paying off our car loan (For the second time, since I had to give up our car ownership to the bank to take out a personal loan because of the financial hole we were in)
Saving a bigger emergency fund to cover 3 months of expenses
Paying down student loans
Saving for a house.
Once we finished one, then we could move onto the other. My wife and I were in total agreement with these priorities. You must get to that point where your goals are aligned. And these priorities don’t have to cover the rest of your life, because it’s difficult to know what needs you’ll have 5 years from now, but ours covered the next year or so. It took a couple of years to get through all our initial priorities, but we got out of debt in only a few months because once we had a financial plan, my business took off. We paid off $20,000 in credit card debt in 6 months. Every year or every time you check one priority off, revisit them and have a meeting to discuss if the priorities need to change. Ours changed a few times.
Having control of your money puts your business and life in order, which makes you more trustworthy. Even though your clients won’t know your financial situation, they’ll pick up on whether you seem disheveled or not.
Now that your more urgent priorities are planned, map out long-term financial goals.
Where do you want to be financially many years down the road? What does retirement look like? How do you want to live as your family grows and what will that cost? What size house do you eventually want? What do vacations look like? Make sure you and your wife are on the same page about these goals and that you communicate regularly as your desires change.
Next, create a budget and tracking system.
You need to know the minimum income you need in order to avoid debt and to put money towards your financial priorities. Go through every expense you have. Get it all on a spreadsheet. Cut out unnecessary expenses. If you have credit card debt, you don’t need Netflix for now.
Many self-employed people get hung up on how to create a budget. They think because they don’t have guaranteed income that they are exempt from having to create a budget. You actually have even more of a need to have a disciplined budget for this reason. But it does look slightly different.
Instead of writing down what your income is every month or every 2 weeks, you write down what income you need to earn, and then that’s your goal, to do everything you can to hit that minimum mark. And sometimes that requires you having multiple jobs at first as you’re building up a client base. You must do whatever you need to in order to avoid debt and to cover your monthly expenses. Then grow from there.
A budget is worthless if you don’t track your expenses. You’ll have regular monthly bills that don’t change. But your weekly spending on groceries and other needs will fluctuate. You must track every dollar spent. And even though you’re self-employed, you still must set a weekly spending budget. The trick with this though is that if you didn’t earn enough money the week before to cover your weekly spending budget, then that budget changes.
There were times where our weekly spending budget was $400, and because I didn’t earn enough to cover bills and $400 of spending, we had to adjust it to $300 or less. You only spend the money you actually have. This means credit cards are completely off limits until you have consistent income for at least a year, and you have extra money to spare. The initial way that you budget will not work if you’re putting money on a credit card. That’s how we got into $20,000 in debt without realizing it over time.
In the video above, you’ll see how I do my weekly accounting and budgeting for my business. I’ll relay some of the information here.
Accounting as a freelancer.
I suggest setting up multiple bank accounts for your personal expenses. Obviously, you definitely need to have a separate bank account for your business. All business expenses are run through that account, and all business income gets deposited there first. But how do you pay yourself and do your accounting?
Here’s how I do it. Every Friday, I go into my business bank account and I see what money got deposited there from clients paying me. I then open up my spreadsheet and I look at what the next week’s business expenses will be. Then, I take the total money in the account and subtract those business expenses. Then I subtract about $50 as a buffer to cover any errors. Whatever’s left is what I can then pay myself with as personal income. It’s called an Owner’s Draw. I then transfer that money into my personal bank account as an Owner’s Draw.
After that, I put aside 15% into a savings account to cover taxes and charitable donations. I know because of my business deductions that I usually end up owing around 5% of my total income in taxes. I have an accountant helping me with that though, so don’t take my word for it. You must do your own calculations. Your deductions will look different depending on how many kids you have, whether you own a house etc.
I then look at the personal bills on my spreadsheet coming up in the next week before my next paycheck. I subtract those from the total in my checking account. Then I subtract at least $200 to provide enough of a buffer in the checking account to avoid overdrafting. This came from the PTSD of me having too many overdraft fees in my early days, so I like to keep a couple hundred dollars in my checking account.
Now, this is the most important part of how I manage my spending on top of my bills. This is something very few people do. I have a separate checking account that is only used for spending. No bills are processed here, only weekly spending to buy things we need or want. So whatever is left in my primary checking account will then determine what I can transfer to my spending bank account as the next week’s spending budget. It’s been a while since I’ve had to adjust my budget due to not earning enough money the week prior, but you’ll get there. At first, be okay with having to sometimes drop that spending budget because you didn’t earn enough. That’ll motivate you to do better next week and to keep learning.
If there is enough money to transfer $500 to my spending account, and that’s my budget, then great. This is like the debit card version of the cash method. I can only spend what is on that debit card, and all that is on it is that week’s spending budget or overflow from the previous week if I didn’t spend it all. This method was key to our success in staying out of debt, getting out of debt, and moving through our financial priorities. I still practice this method today. In our modern world, you can’t really do the cash method because so much of what we buy is online.
And when you do spend money, the only way to not max out your spending budget on things you didn’t absolutely need is by tracking every dollar you spend. I downloaded a cheap app onto my phone that tracks my weekly spending. Every time a single dollar is spent, I subtract it from that app so I know how much money is left for that week. And my wife is always aware of where we’re at, so if she has ideas of things she wants or needs to buy, we have to talk about it to make sure it’s a priority. We still use that app today. Dumb millionaires stop budgeting. Smart ones realize that budgeting isn’t just for the poor, it’s for everyone, because it’s simply just telling your money where to go. Without a budget, you aren't being responsible with your money, and it can slip through your fingers.
Throughout the week you must prioritize your spending. Buy the most important things first like food and toiletries. Then later in the week you can buy other things that aren’t as needed for survival, but provide more comfort. And then lastly, you can buy things you don’t need at all but want. I can say though, when you and your wife are motivated to get through your financial priorities, you usually don’t even want to spend money on frivolous things because you know what you really want. You would rather get into a house than buy a cool new TV. It’s very easy to avoid spending money on things that don’t matter when your financial priorities are mapped out and you’re motivated to achieve them.
You don’t get to live like you want to live unless you stop trying to live like you want to live before you’re financially ready. Get your finances in order, and not only will your business thrive, but your marriage will too. Being the super hero dad that your wife and kids see you as starts with becoming very disciplined with how you manage money.