Create Your Budget
Now that you’ve gotten good and comfortable with your money, have a handle on your expected income and basic expenses, and know what it’s going to take to reach your short- and long-term goals, it’s time to get serious. Open up your favourite spreadsheet and let’s plug in some numbers!
We’ve already talked about tracking expenditures, so now it’s just a matter of combining all that we’ve discussed in this planner into one main file or spreadsheet that you can use for easy reference. If the app you’re using for expense tracking has a budget function, that’s even easier to use, but you should still understand the idea of a budget. Remember, you are in control of your financial destiny!
When creating your budget, the idea is to spend only as much as you earn without going into debt. So to begin, enter your estimated monthly income. Look back at your income for the last year and calculate the monthly average. Enter that amount on your spreadsheet.
Now think of the most important items in your business and allocate money to those line items first. If you have a home office, then maybe your website hosting/design and maintenance would be the most important line item. Compile those monthly costs and plug that in on your spreadsheet. If you have a physical office outside of your home, then your rent and utilities should be the most important line items. Input those numbers. Your Estimated Taxes should be line item #2 to avoid hefty penalties. Continue down the spreadsheet with the various categories and expenses you use in your business.
Should You Pay Yourself First?
Many financial experts argue that you need to pay yourself first before paying your business expenses; after all, why are you in business if you aren’t bringing home any money? There is some validity to that but very often you’ll have to go through the budgeting process calculating your income versus expenses first so you know at the bare minimum that your business can continue to operate without a huge debt hanging over your head. Once you calculate those numbers, you can determine how much of your profit you can afford to pay yourself.
Now, look at your numbers. Are you making a profit or are you in debt? If you’re in the red (aka you’re spending more than you’re bringing in) it’s time to figure out how to earn more money while cutting expenses at the same time. If you’re in the profit zone, congratulations! Now you have a firm grasp of how much you spend and you can continue brainstorming ideas for making even more money so you can reach those long-term goals.
Financial freedom is within reach but only if you take control of your company’s books and fully understand how much is coming in versus how much is being spent. Once you have a firm understanding of how much it takes to make your company work, you can get excited about earning more money and treating yourself to something wonderful!