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Chapter
1

Understand the importance of a financial plan

Are you thinking of making the switch to full-time freelancing? You’re not alone. The number of full-time freelancers has exploded in recent years, thanks to the proliferation of remote work and changing attitudes towards work-life balance. 

Freelancing has its benefits:

  • Flexibility.

  • The ability to be picky about the clients you collaborate with.

  • Opportunity to make more money.

  • Advance your career in the way you'd like.

But there are downsides, too. Financial inconsistency and unpredictability can be stressful, which is why the choice to become a full-time freelancer can be both exciting and nerve-wracking. It's a big decision, but with the right strategy and a strong financial plan, the transition can be pain-free. 

In this playbook, we'll go over some key financial things to keep in mind as you make the shift to being a full-time freelancer. Having a clear understanding of your finances can help decrease the stress associated with the feast-or-famine lifestyle that freelancing can be—and empower you to thrive as a freelancer along the way.

In this playbook, we’ll take you through a process to get a handle on your finances and create a savings plan.

  1. Get a holistic understanding of your personal and business expenses.

  2. Use this to identify a minimum salary goal (the lower end) and an ideal salary goal (the higher end).

  3. Add in taxes.

  4. Build a calendar so you can understand how much money you have coming in each month.

  5. Clarify if you need to cut back on spending and how and where you can do that.

  6. Use multiple bank accounts to track income, spending, and savings.

  7. And develop a plan to start saving!

Calculate your minimum monthly expenses 

The first step in easing the stress related to a fluctuating freelance income is to build a realistic personal budget. Calculating the amount it costs you to live is a crucial step in taking control of your finances. It allows you to see exactly where your money is going and figure out where you can cut back. It also helps you calculate your break-even number or the amount you need to earn to afford your lifestyle.

First, determine the essential expenses you can’t live without. These expenses represent the absolute minimum you need to earn as a full-time freelancer. Examples include:

  • Rent or mortgage payments.

  • Utilities, including gas, water, and electricity.

  • Phone and internet.

  • Groceries.

  • Health insurance (monthly payment, prescriptions, regular doctors appointments, etc).

  • Transportation (car payments and public transportation, etc).

  • Family expenses (if you support others).

  • Debt repayments (student loans or paying off credit card debt, etc). 

Fill all of these numbers into your workbook. Using the monthly expenses you input, the workbook will calculate annual expenses for you and give you a total annual minimum income you’ll need to afford your current lifestyle.

Some of your expenses you may pay annually, some monthly, and others daily or weekly. It’s important to multiply your expenses to find the monthly average for each. Some expenses (like groceries) fluctuate and can be hard to predict. Make your best guess — it helps to go back and look at spending patterns and past receipts to find an average. The figure in the purple square, the sum of all annual expenses, is your break-even number.

Now that you know how much you need to make each month to cover your basic living expenses, we’ll start developing a budget and financial goals. To get ahead financially, you'll need to figure out how to make more than your break-even number each month. But even if you're just trying to stay afloat, knowing your break-even point is an important step in the right direction. Remember, this is only a jumping-off point. In the next step, we’ll add other expenses that aren’t part of your minimum — including longer-term and business expenses. 

Recap

  • Reviewed how building a financial plan can help relieve stress and allow you to be successful.

  • Began to calculate your annual minimum expenses by reviewing past and upcoming spending.

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