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The Freelancer’s Guide to Automated Budgeting | Back To Basics

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Here's how most freelancers manage their money…
Step 1: They check their bank account
Step 2: They wonder where all their money went.
If that sounds like you, then I want to help you avoid running your business like that.
I've taken the time to simplify the budgeting process for you, focusing on creating an easy, actionable system that you can actually use. This episode is short, sweet, and perfect for those who are looking to get a handle on where all your damn money is going.
My goal is to help you be more intentional with your money and avoid that dreaded feeling of having your hard-earned cash just disappear. In this episode, I'll teach you how to automate your budgeting process so that you never spend what you don't have.
This podcast is specifically tailored for business owners and freelancers, but I believe anyone can benefit from the process I share in this episode. So, whether you're new to the show or a returning listener, I hope you'll join me on this journey back to the basics of budgeting.
In this episode you’ll discover:
  • How to budget and plan for your money
  • The pitfalls of not creating a budget
  • Splitting your funds into multiple accounts to ensure your liquidity
  • The limits of your operating expense account
  • Using the Profit First system for your business

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[00:00:00] Brian: Hello, and welcome to another episode of the six Figure Creative Podcast. I'm your host, Brian Hood. If this is your first time listening to the show, first of all, welcome. Thank you so much for checking this podcast out. There are millions of other podcasts you could listen to, and I'm grateful that you have chosen this one for some strange reason.

[00:00:13] Brian: This is the right podcast for you. If you are a freelancer trying to earn more money from your creative skills and you want to do it preferably without selling your soul, that sounds like you're in the right place. If you are a new or you're returning listener, you are an episode like three or four of our series on going back to the basics right now.

[00:00:27] Brian: And this episode, I am excited to talk about something that I haven't ever talked about before on this show and something that Franklin and I sucked at before in my past, and we're gonna talk about. Judging, go the title. I'm sure you already know this. We're gonna talk about budgeting, but before you turn this off, before you run away, before you're like, oh God, I don't wanna talk about budgeting, this is the most painstaking thing on earth.

[00:00:43] Brian: bear with me. Bear with me. Because my approach to this is a lot different than most people's. My approach to this before is probably still better than what you're doing right now. So you'll probably take something away from this episode that is tangible, it's actionable, something you can actually do, and it'll be a relatively short episode, bite size.

[00:00:56] Brian: That's my goal for these. Back to the basics episodes. My goal for you is to [00:01:00] make sure that you have more money than month. That's a stupid phrase where you always feel like, I feel like I got more month than money at the end of the month. I'll never have any money. Well, if that sounds like you and you feel like you're that way, this episode is gonna help you with that.

[00:01:11] Brian: For your business specifically, you can take elements of this probably, but this is really just specifically for business owners and more specifically, freelancers.

[00:01:18] Brian: Now, here's a note. Budgeting can be complex. You can make it really just like this crazy web of things that you must do. And for certain like engineer type brains, that's like the natural approach you'll take to your budgeting and you'll have this crazy spreadsheet with projections and whatever. That's not my approach.

[00:01:33] Brian: take a dead simple approach to budgeting something that I think anyone can do. and it's probably better than what you're doing right now because in most cases, most freelancers have no budget for their business at all. They're just aimlessly spending money. They don't know where that money went.

[00:01:44] Brian: They have no plan, no process. No method for what they're doing. And more than anything, they have no intention for their money. And money without an intention, without a plan, without anything that it's intended for is going to just disappear. And I know that many people, they feel like their money just disappears.

[00:01:59] Brian: And some people, they even have [00:02:00] really good months. 5, 6, 7, 8, 9, $10,000 months, and then they just don't have any money. They don't even know where to went, and if they ever actually investigate where that money went, they're always surprised. Like, Really, I spent this much on that piece of gear, or I spent this much on that software I never even used anymore.

[00:02:16] Brian: so it just seems to disappear. You never seem to have any money.

[00:02:18] Brian: Well, This episode, we're gonna try to address that and we're gonna try to do it in an automated way that way you never spend what you don't have. You feel secure and safe as a freelancer, which a lot of us struggle with this, the reason you're probably listening to the show is because something's happening in your business where you don't feel safe, you don't feel secure, you don't feel like you have a healthy, happy business, and.

[00:02:36] Brian: Honestly, if, if we get our budget right and we have enough money in the bank to where we're making decisions from a place of abundance instead of scarcity, we can be better creatives because we're not worried about paying bills at the end of the month. So that is my pitch to you on this episode.

[00:02:49] Brian: Hopefully you're interested.

[00:02:50] Brian: so let's talk about creating a budget for your business. The last thing I wanna do is for you to get overwhelmed. The last thing I want you to do is to feel like you have all these tasks to do, like I said, this can get really over outta [00:03:00] hand, really, complex.

[00:03:01] Brian: And if you actually look up budgeting for like big businesses, I would encourage you not to do that. It'll make you feel like you're inadequate because never gonna be able to do that as a solo freelancer. There are people that went to college, they got their mba they specialize in these sorts of things, and they know how to do this in their sleep.

[00:03:16] Brian: So let's really quick talk about what I used to do This is my approach before, and this is still probably better than a lot of your approaches. I kept $10,000 in a bank account for my business, and anything that went above that balance, I would just pay myself out to my personal account.

[00:03:27] Brian: That was it. That was my budgeting. I always had 10 K in that account, and anytime that number went above that 10, 12, 13, 15, 18 thousand dollars, I would just lop off the top and bring it back down to $10,000. I don't know what approach that is. I don't know where I learned that. I don't know why I did it that way, but it was just really simple way for me to always make sure I had money in reserve.

[00:03:46] Brian: So I was never really worried about money for my business, and it was a simple rule-based system where anything above that number is my payment I said, it's probably better than what a lot of people do because at least there's like a buffer in place.

[00:03:56] Brian: There was no way for me to actually control my spending.[00:04:00] I was literally just aimlessly spending all my business account money that was lumped into one big amount. So buying a new piece of gear, buying a new piece of software, setting up this thing, paying this, contractor, I was just slinging money out without any intention behind it.

[00:04:11] Brian: So it still doesn't solve the core issue of where did my money go?

[00:04:15] Brian: The only good part about that, it was super easy to do and it left me in a safe place financially where I always had a good runway for my business because my expenses were so low. $10,000 was enough to keep me going for like six months if all else failed and I had no income coming in. That buffer was there for my business, and I still also had a personal buffer, which I encourage people to do if you can do that.

[00:04:32] Brian: So let's talk about kind of two main approaches to budgeting. There's kind of the old school way, and that is where you take all of your income, you look at all your expenses, you do a bunch of things as far as categorizing and making sure you've put budget allocations to each kind of category, and then whatever's left over at the end of the month is your profit that's it in a nutshell. It is your income, minus your expenses equals your profit. I subscribe to the Profit First System. This is Mike Mcow. We actually had him back on episode

[00:04:57] Brian: 166 of this podcast, [00:05:00] the Three Simple Steps for Marketing That Can't Be Ignored with Mike Mcow. He came on here to talk about one of his books. profit First is his most popular book, his best selling book, and it's something that I think the business community as a whole has latched onto.

[00:05:10] Brian: Freelancers, probably not so much, but the Profit First System is this income profit equals expenses. Lemme say that one more time. Income minus profit equals expenses. The fundamental difference here is we first figure out how much we want to profit as a business before we spend any money, before we do anything else.

[00:05:30] Brian: And I encourage you to read his book Profit First. Maybe we could get him back on the show. But truth be told, he's been on so many podcasts to talk about the Profit First System. It's such a simple process anyways, that there's probably no reason for him to come on here, although I'd love to have him on again, but he's probably got better places to spend his time.

[00:05:43] Brian: So I'll try to do my best to relay that system to you and how it pertains to setting a budget for yourself. How to do profit first. First, determine your target profit percentage. What percentage of money do you wanna take home as a freelancer?

[00:05:54] Brian: Do you wanna have 5% profit margins, 10% profit margins, 15, 20, 30, 40, [00:06:00] 50%?

[00:06:00] Brian: First, you need to determine that.

[00:06:01] Brian: Now in a second I'll show you kind of a screenshot of what he recommends as far as a table for, depending on what your income level is, there's different numbers you can put down for what your profit percentage is. but we first determine what our profit is going to be.

[00:06:12] Brian: Next, you're gonna separate your income into five to six buckets. And when I say buckets, it really just means sub-accounts in your bank. If you listen to last week's episode, or actually last Tuesday's episode, we're talking about business banking. The bank that I recommend actually does all this automatically for you. It splits it into five to six sub-accounts so that this is already allocated this way.

[00:06:30] Brian: But the five accounts are this

[00:06:31] Brian: your incoming account, like the money, the holding account, that the money first comes to A profit account. That's the second account, and that's where all the money that is allocated as your profit, that's where that lives.

[00:06:40] Brian: The third account is operating expenses. So this is the actual account that your business operates from, The fourth is an owner pay account. This is separate from profit because you are paying yourself like an employee.

[00:06:50] Brian: That's how you should be doing it, and you might have to do it this way depending on your business entity, where you have to pay yourself a reasonable salary. This is where you would put that money. The fifth would be A tax bucket or a tax [00:07:00] account where all of your tax money is set aside so you don't accidentally spin it.

[00:07:03] Brian: And the optional sixth bucket is for payroll. That's for my agency owners listening to this podcast. I know we have a few people who have own agencies with, larger teams. That's where you'd also have a bucket for that. Now you could say instead of, owner pay, just put it all into one payroll account.

[00:07:16] Brian: It's up to you. So you could still do this in five accounts if you have an agency.

[00:07:20] Brian: Now Mike Mcit he says to do five separate bank accounts. And actually back when he wrote the book, the only way to do it was to literally just have five different bank accounts and you had to manually move the money around no one does it that way anymore well, you shouldn't do it that way anymore, Like I said, banks do this automatically.

[00:07:34] Brian: The one I use isn't the only one, and Mike actually has a bank he's partnered with as the official profit First Bank. I tried it. I didn't love it. You can go to that one if you want,

[00:07:42] Brian: but since I don't like it, I'm not gonna recommend it on this podcast. You can go look it up for yourself if you wanna look up that specific bank. So now that you have these five accounts, I'm gonna focus on the five. Right now you have five accounts. Your money gets split into all of these accounts automatically based on your income as a business owner.

[00:07:56] Brian: and I'm sharing my screen right now for anyone watching on YouTube, but if you aren't on YouTube right [00:08:00] now, you can just go to our show notesPage@sixfigurecreative.com slash 2 53 and that'll have this screenshot on there. This is what the profit First system recommends if you are zero and $250,000 in revenue as a business, which is most people listening to the show right now, Account one, which is your revenue account. the money that's coming in, that's gonna get obviously a hundred percent of the income. it all touches that account. This is essentially the top level account. And then these sub-accounts, it'll split out this way at zero to $250,000.

[00:08:26] Brian: Your profit is 5%. Really low number. But there's a reason for this and that's because in account number two, owners pay, you put 50% in that account. So technically at a low income level, because you have such low operating expenses, as a freelancer, you should be paying yourself about 55%.

[00:08:41] Brian: That's the money you should be paying yourself out of the business into your bank account. If you're less than that, there's maybe something broken. Maybe you're overspending in certain areas. Maybe you have really high overhead in for some reason. You should be able to operate your business essentially off of 45% and actually less than 45% of your income because 15% of that, if you're following my, screen here, 15% of [00:09:00] that goes to taxes.

[00:09:01] Brian: So the tax account gets 15%. And you're probably wondering, Brian, my, I pay more than 15% in taxes. Well, you're not thinking about aside taxes for your actual profit, so you're only setting aside taxes for what you've paid yourself as a freelancer. So owners pay and profit is what you're setting aside taxes for not operating expenses, and that's 30% of your money goes into the operating expense category If you're making less than a quarter million dollars a year.

[00:09:23] Brian: Now, if you're watching this, you can just see that as your income goes up, so does your profit margin number to a certain extent. For some reason, if you're between half a million and a million, your profit percentage is S 15%, but if you're from a million to 5 million, it goes back down to 10%. I'm not exactly sure where that is.

[00:09:36] Brian: I think it's because as you're scaling or growing at a certain point you need to in reinvest back into the business, you need more in the operating expense category. but every business is different. Every business is unique, so every business is gonna have slightly different numbers for how this all pans out.

[00:09:49] Brian: Even mine are slightly different than this just because I'm in a growth season right now. my profit percentage is lower. My owner's pay is lower. because I'm hiring, I'm bringing on employees who are not yet profitable because I'm [00:10:00] onboarding and training them right now.

[00:10:01] Brian: So if you set this all up correctly, this should all be automated for you. Money comes into your account from Stripe, from PayPal, from checks, from cash deposits, whatever. They show up in your main hub account, the operating account or the income account, and then they are instantly swept into the sub-accounts.

[00:10:16] Brian: That's how most of these banks work is their sweep accounts, and they just instantly get swept into those other accounts. So what you have now in your operating expense category, that sub-account that has operating expenses in it, that is literally what you have to make your business run on, period.

[00:10:28] Brian: You cannot spend more than that. So if you have rent that's more than that amount, or you have contractors that is more than that amount, or you have software that is more than that amount, you now have to start pairing away expenses in order to make that amount work. this is just budgeting. We also have to make sure your business isn't in wild swings and feast and famine. That's your business model and your pricing structure and your payment terms and your cash flow, and all these things are in your favor so that you're not ever struggling from month to month to month to month, and you're not always running outta money in the operating account, having to pull into your profit account or your owner pay account, or [00:11:00] your worst even taxes account if you do things correctly and you have a very healthy business.

[00:11:04] Brian: This system works really, really well now, like I said, the operating expense category is what you run your business out of. If you can't afford it from that account, you just can't afford it, period.

[00:11:13] Brian: And you can get even more granular if you want to. As far as what do I allocate these sort of expenses too from this account. again, I keep my stuff simple. I don't have a crazy categorical setup for how I spend that money.

[00:11:25] Brian: I just know that I can operate my business well under what that percentage is, and as long as I'm okay with that, as long as that number is good from month to month to month and always growing, I know how I can expand my business by hiring, taking on any other contractors, by investing in tools, software.

[00:11:41] Brian: Hardware, et cetera. Now, the owner's pay account, that just goes to you every single month, or you can do it every single week, or you can do it every two weeks, however way you wanna pay yourself. I just tend to do mine once a month.

[00:11:51] Brian: And then your tax account should go out quarterly. So the money that's in the tax account, you should be paying your quarterly estimated taxes. If you're in the USA and your cpa, your tax [00:12:00] professionals should be able to give you these little slips If you're old school that you could write checks for and send in, or if you have a better way of doing it, where you can actually pay through online.

[00:12:07] Brian: Some banks actually integrate with the I R S and you can pay your estimated taxes online. That's the preferable way of doing it if you're set up to do it that way. Now, the last category is your profit category, and this was the most interesting one because you have a few options for what you could do with the profit category, with the owners pay.

[00:12:20] Brian: Again, that's paying your bills every month. That's going directly to you and your bank account. Making sure your bills are paid, making sure your reserves are full, your emergency fund is all healthy and and big, and you got at least six months in the bank. But the profit account, you could do a number of things. The first thing you could do with this profit account is save it for emergencies.

[00:12:36] Brian: As a rainy day fund, I would encourage business owners to have six months of expenses for their business saved up. That's separate from personal six months for business expenses to where if you had no money for six months in the business, you'll still be okay. Some people, that's a lot of money if you have high expenses.

[00:12:51] Brian: For some people, they look at that cash, especially with the inflation environment, especially with what you could do to invest it somewhere, and think, I don't wanna do that. I don't want my money to be devalued every single [00:13:00] year. I promise you that trade off is absolutely worth it for the peace of mind.

[00:13:04] Brian: It is so much easier to run a business when you know that you could make $0 for the next six months, and you can still pay every single team member, every single bill, in your business. You could still pay for six months and the same for your personal life. that is a really good feeling when you have both of those things taken care of.

[00:13:20] Brian: but once you have an emergency fund set up, you can now start using that profit to either pay off debt faster. If you have debt, you could do it to reinvest into your business. So that's the actual category you would pull from if you wanna buy gear, invest into some sort of crazy buildout for your facilities or some other thing that you want to invest in to grow your business.

[00:13:37] Brian: And finally, you can use this profit category to actually pay yourself, which is what it's there for. So they recommend, or Mike recommends doing quarterly bonuses. And here's how he says to do it. He says, the profit first system suggests that business owners take 50% of their profit accounts each quarter as a profit distribution.

[00:13:52] Brian: So for example, if you had $10,000 in that profit account, at the end of a quarter, you would take 5,000 out, pay it to yourself as a quarterly [00:14:00] bonus, leave $5,000 in that account as kind of a buffer or a safety account, to be reinvested into the business or save your future goals. That's what he says to do.

[00:14:07] Brian: It's your business. You can run it however you want. But setting up a system like this where money comes in, it goes into those categories. You know what you have to spend in each of those categories. You always have your taxes set aside. So it's not a big surprise at the end of the year. You always have your operating expense account that you can look to, to see, can I afford this, yes or no.

[00:14:24] Brian: And you always have your profit account paying yourself and beyond what your owner's pay account sends you. So again, if you want the bank account that I use, you can either listen to last week's episode, episode 252 of the podcast, or you can go to six figure creative.com/bank, B a N k number six figure creative.com/bank.

[00:14:42] Brian: And there's a whole video there talking through top to bottom my bank. How I use it, what I use it for, which bank it is, how you can sign up for it, et cetera, et cetera. So that is it for this episode. Hopefully this was helpful. Again, not super technical, not super nerdy. If you're a budgeting pro, you probably hate this episode, I just wanna make sure that people have money siloed off [00:15:00] in easy, simple ways that they can now make easy decisions as a solo freelancer on where that money should go, how it should be spent.

[00:15:06] Brian: So that there's never a surprise of having too much month for how much money you have. You always have reserves, you always have taxes taken care of. There's just so many benefits to doing a system like this. But if you have any questions about this or you have any concerns or anything you wanna yell at me about, just email me Podcast six figure creative.com.

[00:15:22] Brian: Happy to hear from you. Otherwise, I will see you all next week on the next episode. Until next time, thank you so much for listening or watching. If on YouTube, the six Figure Creative Podcast.

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