The Professional Contractors Group (PCG) have released some top tips and advice for contractors on how to budget successfully.
It’s vital for limited company contractors and freelancers to budget correctly, as being self-employed can bring with it the likeliness of irregular income; for example, one month you could find yourself with your highest ever pay, whereas the following month could be below average.
The PCG, which is the organisation that aims to be the ‘voice of freelancers’, says that firstly you need to work your average monthly income by adding up last year’s income and then dividing it by 12. However, this could be difficult if you are new to the world of contracting, so you will need to estimate this to the best of your ability.
When working out your monthly income, don’t make the mistake of including a month where you may have made a one off amount of money that you’re unlikely to earn again.
The freelancing organisation also recommends living as sparingly as possible for the first few months, as you can then get a good idea of how much you’re going to have each month, so that it makes it easier for you to work out your monthly essential expenditure.
This of course includes things like rent, car insurance, food etc, and once you’ve calculated for these (don’t forget to account for tax!), you can then work out what is left over to spend on luxuries.
Also, make allowance for savings for cases of emergency spending; the PCG advises to leave around ten per cent of your income for this, and you can also use this money for treating yourself!
Lastly, create another bank account to keep the money you will owe for tax and make sure you don’t go into it.