Hey, guys.
It's Chelsea from The Financial Diet,
and this week's video is sponsored by Lili.
And today, I am coming at you on a slightly unusual day
on a slightly unusual set for this show
because I want to answer one of the most frequently asked
questions all across TFD's platforms.
And that is, we provide a lot of advice
at TFD about how to budget and how to best manage and make
decisions for your money, but we don't always
talk about how to do that when you don't know what
you have coming in every month.
We encourage everyone who can and wishes
to diversify their income by adding streams
of passive income, side hustles, or picking up
occasional freelance gigs.
But doing so almost inherently means
that your income is going to vary month-to-month,
or you might just be someone who freelances full time, like I
used to do for many years.
And if you're in those situations,
the idea of creating a monthly budget
that you can set and forget really isn't available to you.
And if you try to automate things
as much as someone with a very regular predictable paycheck
does, you could end up missing out
on a lot of financial opportunities
or getting yourself into trouble on months where you earn less.
So this video is specifically on how
to budget when you don't know what
you're earning every month.
And for a lot of us, this question
is much more relevant post, or I guess, mid-pandemic.
Almost immediately when the pandemic hit,
the percentage of job postings that were temporary
jumped from 24% to 34%.
And despite the recovery in the job market,
the share of temporary jobs has remained elevated.
In certain occupations, the shift
to temporary or freelance workers
has been even more stark.
The share of temporary job postings and communications,
for example, was only 12% prior to COVID.
By April, it was four times higher.
And the share of temporary marketing jobs jumped to 28%
from just 8%.
Advertising and human resources jobs
are also being converted to temporary or freelance
positions.
Now, it's important to state that not all freelance jobs
are bad.
We at TFD work with many contractors,
and often the nature of work lends itself
really well to being an individual contracted gig.
And many workers prefer to be freelance
rather than to have one employer.
I used to be one of those people and I know many of the people
that we work with prefer the same.
It does add a great layer of flexibility and control
over your time.
But I do want to take a moment to differentiate
between the people who are freelancing out of choice
and are being well-compensated for their work,
or who are adding on other streams of income
as an optional choice, and people who are doing it out
of necessity, or who are being exploited in jobs that really
should be employed, but are abusing
the status of freelancer to get more for less.
These situations are not the same
and I don't want to pretend like they are,
but when it comes to how to manage your income,
in both situations, when your income is variable,
the strategy is pretty similar.
When I was a freelancer, for example,
I used to be extremely bad with managing my variable income.
Similarly to how it worked when I worked, for example,
in the restaurant industry and I was paid in tons of cash,
I really treated each influx of money
as something to be enjoyed because it
wasn't going to last.
I never really thought long term about my finances.
And, quite frankly, the idea that I could always
just pick up an extra gig or an extra shift
and get a quick hit of cash if I needed it
allowed me to be much more irresponsible than I otherwise
would have been.
And for the first several years at TFD,
when I was not earning a full time salary from the company,
my income was still largely as a freelancer
and varied month-to-month.
Meaning that as I was learning alongside TFD how
to have a better relationship with my money
and manage it in a steady way, I had
to learn real time that a lot of the budgeting advice
out there doesn't really apply if your income varies.
And one thing that I didn't have,
which is incredibly important for freelancers,
is the right financial tools to manage that money.
And if you're a freelancer, or someone with multiple streams
of income who's looking to manage it right,
we highly recommend you check out
opening an account with Lili.
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Lili's unique setup allows you to keep one checking account
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something that all freelancers should do,
but which usually necessitates opening up
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Lili also helps you determine what percentage of your income
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With Lili, you can put your savings safely on autopilot.
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Check it out at the link in our description.
But once you have the right tools
and you have this variable income that you
want to be managing intelligently,
really the best solution that I found
to managing my money in a way that allows me
to budget proactively without constantly leaving
me caught off guard is to have a two-tiered budget system.
I actually have a whole article about this
that I wrote on TFD back in 2015, when
I was going through the process of totally overhauling
how I manage my money as a freelancer.
For several years now, I've just taken a steady salary from TFD
that I'm paid as an employee, so I don't have
to use this system anymore.
But it's really helpful to go back and look at it
because some of the ways that I approached thinking about money
are still useful now in determining
where I should be prioritizing.
To quote myself, "I've had months in the past six
where I earn far above my monthly bills and some
where I earn below it.
And at this point, it's a question of allocation of time.
And it's important in freelancing
to make sure that you're maximizing
each hour of your week.
Sometimes you'll need to invest time
in things that are not immediately profitable,
like the website at the time, and thus, must make sure
that the rest of your hours are available.
I've consistently raised my floor payment-wise
since going freelance because it's the only way
to ensure that my bills will get paid
while still doing other work.
It's not always a perfect system,
but I've gotten it to where I can
cover my bills with fewer than about
10 projects consistently."
So in raising the floor of what I charged,
which is not only something that I highly
recommend for freelancers, but something
that we do here everyday at TFD, to get to a place
where I could reliably finance my minimum standard of living
with a fairly limited number of projects.
I then divided my categories of spending
into tiers where I could either raise or lower or even
eliminate a given tier based on what I was going
to be taking in that month.
And it's important to remember as a freelancer
that, what you may be billing for in a given month
or closing in a given month, can often be completely removed
from what you're actually seeing in your bank.
We still see this all the time as a small business,
and I honestly think there's no other way
to deal with it except to have a strong cash fund so that you're
not waiting on every single invoice.
And if someone pays you really late,
which is almost universally guaranteed to happen,
it doesn't throw off all your plans.
But you have to base your month's "tier,"
quote unquote, based on what you're actually
going to receive in your bank, not what you're closing.
But the two-tiered system is basically
one in which these categories shift upwards or downwards
or are eliminated based on earnings.
You have a flush month budget, where you're maybe
allocating more towards savings or spending more
on the things that are nice, but not need to have.
And months where you're just doing your minimums.
And if you actually map this out mathematically,
you can easily turn the faucet on and off
based on your earnings that month.
For me, I broke it down a little bit like this.
To quote myself from 2015 again, "my biggest categories
were transport.
It's an unavoidable expense, but I've
been able to cut it down to less than $40 a month
total by walking almost everywhere.
I'll take an hour walk over a $3 metro ride quite often
because A, it's my exercise.
And B, it's an easy way to cut back on bills.
Beauty.
Another unavoidable expense, but again, one that's
easy to adjust.
As I mentioned before, I did a month free of face makeup
and that's been super helpful.
But I do have my basics and things
I'm willing to switch to drugstore on,
and to only invest in nicer things
during a month of plenty.
For clothes and accessories, the last item I bought
was a pair of shorts.
The first I've owned in years because I
wanted to add a single pair of versatile denim shorts
to my wardrobe after much searching.
I have no plans to buy clothes for the month of June,
and I won't let myself until I see
a fuller picture of my earnings and see
if I have more wiggle room.
It's an easy place to cut.
Coffee shops, I almost never go to them now.
Like, three times a month max, and I don't really miss them.
My homemade iced coffee is quite good.
Dog stuff.
In good months, Mona gets some treats and a new toy.
In a tighter month, she just gets the basics and that's it.
Travel.
As I've mentioned before, my boyfriend's constant travel
for work--" Spoiler alert.
He's my husband now.
"My boyfriend's constant travel for work results
in an excess of miles and hotel points for us to use.
It's a great #privilege, but I rarely pay for travel."
And I'm not going to get into the granular details,
but I had a version of my budget down to,
if not quite the dollar, pretty close to the dollar,
where I knew what I could and couldn't
afford to spend in a given month,
depending on what I was earning.
My low end budget was around $1,000
less than my high end budget and, in both cases,
they were undershooting what I was likely to earn even
in a relatively limited month.
Being able to switch between those two budgets,
whether you do it on an Excel sheet or in an app or even
on a piece of paper--
I don't know your life.
Is a relatively painless way to be intuitive about your money
and not having to overthink it.
What you want to avoid as a freelancer
is a situation in which you're constantly
having to guesstimate whether or not you can afford something
in a given month.
And you want to avoid missing out
on being able to save more or be more proactive about your goals
when you happen to be earning more.
Mapping out this two-tier budget down to the details
and down to the individual spending
choices is the best way you can get ahead of this
and ensure that, like I used to, when
you get an extra bit of money in a given month,
you're not just immediately blowing it.
Sometimes being freelance can lead
us to feel like we don't have to be proactive about our money
because there's always another gig around the corner,
but that is not how to build a sustainable life.
How to raise our rates as we go or how to insure ourselves
against things like a global pandemic
that might disrupt your business.
In any case, budgeting is something
that should be available to anyone regardless of how much
or how consistently you earn.
And if you earn inconsistently, the right tools
are all the more important, which
is why you should check out setting up an account with Lili
at the link in our description.
And as always, guys, thank you for watching.
And don't forget to hit the Subscribe button,
and to come back every Monday, Tuesday, and Thursday
for new and awesome videos.
Goodbye.