The Ultimate Guide to Budgeting and Investing for Your Retirement as a Freelancer

The freelancing movement is on the rise. People want autonomy in where and when they work. They want to seize their days as a digital nomad. And the Filipino community is catching on this big trend.

 

But then, is “carpe diem-ing” today affecting our future? Can we reach the road to financial freedom when we are literally on the road every time? After all, the freedom of today might be our downfall tomorrow.

 

With proper preparation and safeguards in place, we might reach this elusive dream. This is what we need to do.

 

Know What You Are Spending On

  Know what You Are Spending On The Ultimate Guide to Budgeting and Investing for Your Retirement as a Freelancer  

Before setting off your journey, make sure your finances are in place. It may sound like a cliché, but then it all starts with what you spend on every day. In management, if you can’t measure it, you can’t improve it. Do not be a beggar digital nomad.

 

Use a system of tracking your expenses. With today’s technology, you can use apps from your smartphone or your trusty old excel sheets. As for me, I use expense manager. It is pretty simple and I can sync my expenses over multiple devices.

 

From the data gathered, you can then create your working budget.

 

It All Starts With Budgeting

 
It All Starts with Budgeting The Ultimate Guide to Budgeting and Investing for Your Retirement as a Freelancer

Image Credit: Getty Images

 

Now that you have a baseline of expenses per month, we can now work on your monthly budget. We have to divide our monthly budget into three categories.

 
  • Necessities (Food, Transportation, Rent, etc.)

  • Fund for Financial Future (Savings, Payment for Debt, Fund for Retirement)

  • Discretionary Spending (Travel Fund, Shopping, Fun Fund, etc.)

 

Easy? Not really. The problem with freelancing is the cash flow might not be consistent. The solution for this is to conservatively estimate how much you are earning. This may be getting the average of all your previous monthly income after taxes or just budget based on your recurring freelance income after taxes.

 

(You can have a separate bank account for the taxes to be paid in year-end. Check out this guide to help you prepare your taxes in the Philippines.)

 

Slashing Out Unnecessary Expenses

 

Now, check your income versus your historical expenses. Does it cover your expenses? If not, you can try to look for recurring expenses to reduce.

 

Aren’t you going to the gym? No? Have a cable subscription but have no time to watch TV? Cancel the subscriptions. It may be a sacrifice for some. But sometimes, letting go of that Starbucks Frappe can lead you to a great amount of wealth.

 

Allocating to Your Expense Types

  Allocating to Your Expense Types The Ultimate Guide to Budgeting and Investing for Your Retirement as a Freelancer  

After slashing out unnecessary expenses, we can now logically divide our income into three categories. Most people use this as a baseline:

 
  • 50% Necessities (1)

  • 30% Discretionary Spending (2)

  • 20% Savings, Retirement, Debt (3)

 

It may be different for every person. A person having more liabilities can put more percentage on paying debt (3) than discretionary spending (2). Also, parents might lessen their discretionary spending (2) in favor of Necessities (1) for their kids.

 

The numbers are flexible based on your needs. It may be 60/20/20 or 30/30/40. But for what it’s worth, we have to set up these percentages to systematically live within our means.

 

Have an Allowance Per Week

 

Now that you have your taxes, necessities, and savings all covered, we must budget our discretionary spending PER WEEK.

 

What’s good about budgeting your discretionary spending is that your “pleasure expenses” are part of your budget. Now, you don’t have to feel guilty when you travel or when you buy that item you’ve been wanting.

 

This is best because of the concept of Hedonic Treadmill. The more we are tightly held with our money, the more we tend to make big impulse purchases in the future. This budgeting system embeds our clamor for happiness, making our cost to happiness all accounted for.

 

After getting the discretionary spending figure for the month, you can divide it into four weeks. This amount is the allowable expense you can make for that week. This is your weekly allowance.

 

There are some instances that you know that you would make a big purchase for the month. With this, you can divide the purchase and charge them into the four weeks. And then, live with that “allowance for the week”. You have to be frugal for those weeks because of that big purchase.

 

But this should not be abused. This is not an excuse to divide all your expenses for the week every single time. And then having you incur debt on the last weeks of the month. Watch yourself. This financial discipline might make or break our financial goals.

 

Creating Your Emergency Fund

 
Creating your Emergency Fund The Ultimate Guide to Budgeting and Investing for Your Retirement as a Freelancer

Image Credit: Thinkstock

 

Now that we talked about your Necessities (1) and Discretionary Spending (2). Let us delve more on Savings, Retirement, and Debt (3).

 

The first thing we need to do is build our emergency funds. It is advised to build a total of 6-months of your monthly spending in case of emergencies. With freelancers having to build 9-months to 1 year as some experts may say. But then, building 6-months worth is a good start.

 

What if you have a mountain of debt to pay? Should you focus on the debt alone? Focusing 100% on paying debt might lead you to another liability in case of emergencies. I mean, where do you get the money from that accident anyway? Yes, your credit card. And that leads to the debt cycle all over again.

 

With this case, it is best to have at least one month of emergency funds while you get out of debt. When you follow your budget and live below your means, that debt will ultimately be gone in the future.

 

Get a Health Insurance

 
Get a Health Insurance The Ultimate Guide to Budgeting and Investing for Your Retirement as a Freelancer

Image Credit: 123rf

As a freelancer, you might not have any health insurance provided by your company. After all, being a freelancer is like having your own business. With that, you are responsible for your own well-being.

 

In case of emergencies, a health insurance might be a good idea. This will allow you to lessen the hit in your emergency funds on sickness. And some even have unlimited check-ups for the year. For your financial safety, make sure to check this guide to get the best health insurance for you.

 

If you have kids or dependents, you might even want to get a life insurance for their future (*knock on wood*).

 

Investments and Retirement Fund

  Investments and Retirement Fund The Ultimate Guide to Budgeting and Investing for Your Retirement as a Freelancer  

Now that you have your safeguards in place, it is time to save up for your future. There are two funds to build in this regard. One is an investment fund and the other is a retirement fund.

 

The two funds are quite similar but are used for different purposes.

 

The investment fund is money set aside to grow. This growing “Nest Egg” can be used for future plans for a business or other investments. Basically, these assets can start with UITFs from banks and can be as complicated as investments in stocks or the Forex market.

 

You grow this money so that you don’t have to work for someone else in the future. You let money work for you.

 

And simply put, retirement funds are funds to be used for the sole purpose of your retirement. Why do you have to separate it you may ask? It is best to because you will never know what will happen. Your separate nest egg might get eaten by a snake, figuratively speaking.

 

With a separate retirement fund, you have a no-touch save-and-forget money for the future. Pretty much like an emergency fund for the future.

 

Open Your Personal Equity Retirement Account Account (PERA)

 

Well apparently, being prepared for the future gets rewarded.

 

Luckily, now the Philippines has a PERA Account for your retirement funds. You can get tax deductions from the savings from this account. You earn 5% tax credit from the amount you put in your PERA account. That’s 5% sure return from the money you invested.

 

What if I Have Nothing Left for Investing?

  What if I have nothing left for investing  The Ultimate Guide to Budgeting and Investing for Your Retirement as a Freelancer  

This may be a problem for most Filipino freelancers out there. What’s good is that there are investment options that amount to as low as P1,000 per month.  With this, anyone can build P1,000 a month for their future.

 

Conclusion

 

The prospect of the future and finances might be a heavy topic. But with the proper system, everyone can get there.   

Leandro Eclipse

Leandro Eclipse is an entrepreneur who loves to travel. He believes in garnering multiple Location-Independent Sources of Income. Because if you are going to work anyway, might as well do it while exploring the world. Self-proclaimed foodie and tech geek. Follow him on Twitter @MikoTheEclipse.

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