Most freelancers rely on unconventional ways to earn money that cover their basic expenses. Some don’t know when clients will pay them, so they don’t rely on traditional budgeting methods. According to a 2019 survey sponsored by Upwork and the Freelance Workforce Composition, 57 million Americans are freelancers. They represent 35 percent of the labor force, an increase of four percent since 2014.

If you’re a freelancer, it may be nearly impossible for you to create a real budget since you don’t know when your next paycheck will arrive. Bestselling author, Ramit Sethi, has developed an alternative method to traditional budgeting called Conscious Spending. It’s a simple plan that helps you stay aware of your spending habits while saving money for your future.

In this article, you’ll learn the basics of Conscious Spending and how this method can help you as a freelancer.

Get to Know Your Clients’ Spending Habits

Some freelancers have clients they work with consistently. If you have regular customers, know when each one usually pays. It will help you budget your money, so you can cover any bills coming due.

Your best clients will behave in the same way, so document how often your customers pay, so you’ll know how they behaved in the past. It means you can estimate when to pay additional expenses when additional funds arrive. Whenever a client misses payments, consider dropping them.

Why Budgets Don’t Work

Some freelance platforms encourage professionals to track their expenses regularly, so they can develop a budget. In theory, a freelancer would use an expense ledger to track how much money they make and spend each month.

Unfortunately, most people who start budgets don’t stick with them. Budgets primarily focus on what a person needs, not what they desire. It requires people to make cutbacks and give up things they enjoy, like a streaming service subscription or dining out at a restaurant.

Ramit Sethi, author of “I Will Teach You To Be Rich,” budgets only make people feel horrible about themselves. He says they cause people to look back at their mistakes when they should look forward.

Sethi recommends a strategy called Conscious Spending, which is a theory that builds positive spending habits. This practice doesn’t ban you from spending money. Instead, you use a method to categorize your spending habits. He uses the 50/30/20 spending formula. Sethi says fifty percent of your take-home pay should cover essentials, 30 percent used for savings, and 20 percent goes into wants.

Step One: Categorize your Spending

Most people use 90 percent of their income for their fixed expenses. Under the Conscious Spending method, Sethi encourages people to pay themselves first.

Blogger Kara Copple provided a step-by-step summary of Sethi’s spending method in a recent post. He recommends freelancers to categorize their spending habits into four categories.

• Fixed Costs – In this category, list everything you spend during the month. It should include fixed expenses like your rent, car payments, utility bills, and insurance. After you’ve compiled the list, add 15 percent to cover any surprise bills. Subtract this amount from your take-home pay. It should 50 percent of your net income. You can use the remaining money for the other categories. Sethi says that people shouldn’t build up their fixed costs so high that they don’t have enough money for the other things.
• Saving Goals – Once you fund your retirement savings, you’ll determine how much money goes into your savings. Sethi recommends establishing three savings accounts: short-term (10 percent), mid-term (10 percent), and long-term (10 percent). Use your short-term savings for smaller purchases you want, such as the latest gaming system. Reserve mid-term savings for higher ticket items, like a down payment for a vehicle. Long-term savings (10 percent) is reserved for your retirement.
• Retirement Savings – Sethi says you must save enough money for your future. As mentioned earlier, ten percent of your money should fund your retirement. These accounts can include a 401 K, Roth IRA, stocks, and real estate. You can also use a retirement calculator to learn how much you need to save; however, your goal should be at least five to ten percent of your income.
• Guilt-free spending – You may reserve the last savings category (20 percent) for things like clothing, dining out, Netflix, and other expenses.

Step Two: Set Up an Automated System

Once you know how to spend your money, it’s time to set up automated processes to separate your take-home pay into each category. For instance, you can establish a process to transfer money from your checking account into your savings account every month.

When you automate these transfers, you will have better control over your money.

After you set up your automation process, you can download a financial app, like Mint, Tiller Money, or others, to track your savings and spending.

Step Three: Your Cut Costs

Another thing freelancers should consider is how to cut costs. Most people purchase things they want but never even use. For instance, you may have subscriptions to five different streaming services, but you don’t even use three of them.

Review all of your expenses to find out how to cut costs.  First, identify the things you love and others you don’t enjoy. Next, write down which services you rarely use. For instance, if you like watching movies, you don’t need to eliminate them. You can select two channels you watch the most.

If you binge books or music, you can buy releases from artists you enjoy, instead of every release. You can also borrow books from your local library. This step will help you save money while allowing you to enjoy the things you love.

Are you a new freelancer? Follow Freelance Mojo for tips and tricks that can help your career flourish.