Budgeting and financial planning are great ideas, but how in the world do you budget or plan when you don't know from one month to the next how much money you're going to earn? You have months at a time when you earn very little money, and then during the prosperous months you're busy playing financial catch-up - and then comes another tough time.
It's a difficult situation, but there are ways to approach the problem that, over time, will provide some stability for your finances.
The first trick is finding out how much it actually costs you each month to live; chances are it costs more than you think it does. Add up all your expenses - food, gas for the car, rent or mortgage payment, utilities, car payments, car and health insurance, and so on. Don't forget periodic payments like license renewals and car registrations, birthday and holiday gifts and cards, Lotto tickets - anything that costs you money. A good exercise is to carry a small notepad around with you for a couple months and keep track of everything - I mean every penny - you spend. Allow yourself a certain amount for entertainment; if you put yourself on such a strict budget you can't enjoy yourself you won't maintain it.
Once you've decided what it costs you to live each month, that's what you live on. Open bank accounts for each broad category - monthly expenses, weekly expenses, and so on - and then deposit the amount of money you need per month into the appropriate accounts as the money comes in. Separating monthly from daily expenses actually frees you up; if you know you've got money stashed safely away for the rent, heat, etc., and you see a pair of shoes or a book you really want, just check out your daily expenses account; you may find that if you eat rice and beans for a few days you can spring for the impulse buy without wrecking your budget. Just don't, under any circumstances, raid the monthly expenses account!
If you have a month where you earn more than you need to spend based on your budget, put the extra into an interest-bearing savings account until you need it during the next low income period. Don't blow the extra on a luxury item, at least not until you've built up a substantial financial cushion.
The conventional wisdom is that if you have credit card debt, you should pay it off before you start saving money. On paper, that looks good; you're going to save a lot more in interest payments if you eliminate your credit card debt than you'll be earning in a conventional savings account. But you need to take into account your uncertain financial circumstances and your own human nature. Having a month or two of living expenses in the bank can do an amazing job of calming one's nerves, and can preclude the need for charging more money on your credit cards.
Here's a good approach: stop charging on credit cards, period. Unless you have a necessary expense that you can't pay any other way, don't charge it! (Those kicky shoes aren't a necessity unless you're barefoot.) Pay cash, or don't buy whatever it is you wanted to buy. Do your utmost to accumulate one to two months' living expenses in a savings account, to be used during slow months, and then start paying down your credit cards, getting rid of the balance with the highest interest rate first. One exception - if you've got some cards with big balances and one or two that have a hundred dollars or so on them, and you can pay the little ones off in one fell swoop, do it! The psychological boost you get from getting rid of one credit card balance is worth what little extra interest you'll pay by delaying paying the high balance card for a month. Once you pay off each credit card, cut it up, don't use it - but keep the account open. You've just improved your debt to available credit ratio!
And finally, we get to taxes. Freelancers really get socked; they have to pay regular income taxes plus self-employment taxes - their own and the employer's share of social security and Medicare taxes. Currently the self-employment tax is 15.3 percent. The best thing to do is to stash 20 to 25 percent of your income in a "tax account" as you receive it, and pay your quarterly estimated taxes as they are due; but you may not be able to do that, at least not initially.
Make sure you claim all the business expenses you can legitimately claim; your self-employment tax is figured on net profit after expenses, so the more you can get that profit figure down, the less your self-employment tax is going to be.
There are penalties for not paying enough tax - in 2004 if you owed over $1000 at the end of the year, you could be fined a penalty, unless you could demonstrate that your income was unpredictable during the course of the year. (You can do that, right? A hint -update your income and expense records regularly.)
If you get to April 15 and you can't pay up, the IRS will allow you to file certain forms and set up an installment payment account; they charge you penalties and fees, but they're not substantial, and this is a good alternative if you can't cough up the cash; and it's better than putting it on a high-interest-rate charge card. By law, the IRS can't turn you down for the installment plan.
Over time, you'll be able to budget for living expenses and taxes and put yourself on a pay-as-you-go schedule. Building this sound financial foundation is the first step toward prosperity!
About The Author
Aldene Fredenburg is a freelance writer living in southwestern New Hampshire and frequently contributes to Tips and Topics. She has published numerous articles in local and regional publications on a wide range of topics, including business, education, the arts, and local events. Her feature articles include an interview with independent documentary filmmaker Ken Burns and a feature on prisoners at the New Hampshire State Prison in Concord. She may be reached at amfredenburg@yahoo.com.
Written by: Aldene Fredenburg
