Here, they swap notes and talk about why freelancers and businesses should use a zero dollar budget, including:
- Coping with irregular income
- Why tracking every pound doesn’t have to be a pain
- How a strong budget solves the biggest problems freelancers and small businesses face around their finances
As well as the upside of having more freedom, being self-employed can also mean living on an irregular income. What was the turning point when you realised that you needed a budget?
Seth: I have kept a budget for years, but I didn’t realise until recently that I was tracking my spending rather than planning what to do with my income. I used a spreadsheet to record my transactions for the month. I would go through cycles of being disciplined and then falling behind or feeling guilty about overspending. I registered as self-employed five years ago and realised how easy it was to spend money I had set aside for tax, so I decided that I needed a different way of managing my finances.
Stephen: I’m the other way around, actually. I’d be lying if I said I was strict about spending to my budgeted numbers. But, beyond the fact that I could see on my profit and loss how much money I had been paid in a month, I had no real visibility over where it all went. Occasionally I’d pull bank statements into Excel and get an historic view over spending, which was illuminating. So I figured it was time to find a way to do that in closer to real-time.
Many people use something basic like an Excel spreadsheet to plan their finances. Why choose a zero based budget such as YNAB?
Seth: I heard about zero dollar budgets through Dave Ramsey. Rather than capping what you spend and then leaving the rest in a savings account, you have to tell each dollar (or pound) where to go. It’s a useful approach for irregular incomes because you can prioritise essentials such as direct debits and food, and then set aside money for long-term categories such as clothes or holidays when you have a good month. The main reason I use YNAB is that it follows a similar approach to Dave Ramsey’s method of budgeting.
Stephen: In part, it’s because I was recommended YNAB and that’s the way they do it. But there was something practical and no-nonsense about giving every pound a job – even if that job was, you know, buying me things I didn’t really need. In practice, the zero-based approach makes it very quick and easy to weigh up the true cost of spending – not just the price of something, but that overspending in one area will take away from another. I can (and do) still choose to overspend on restaurants and takeaways, for example. But at least I can see that money is coming out of another category.
You both use YNAB for personal and business. Are there any differences between how you set these up?
Stephen: For a long time, I had one budget for everything, which included all my bank accounts, cash, and savings accounts. Any income from invoices would be marked as ‘Available Next Month’, so I’d see it accumulating but not actually be spending it. Then, at month end, I’d sweep the tax off to set aside and allocate the rest wherever it needed to go. I’ve now started using a separate budget for the business (which has recently become a limited company), and the only real difference there (other than the categories) is that I make revenue ‘Available This Month’. It’s just more freeing because it means there’s always a float there so the business can pay for necessary expenses, like travel or advertising.
Seth: I only added my business account to YNAB after speaking to Stephen! I work from home, and I have fairly consistent overheads, so it didn’t seem worth the effort to set up a business budget. I use the saving goals (where you set a target amount to save by a certain date) and now apply this to future business expenses. For instance, I know that I will need to replace my Mac in the next two years, so I save £75 a month towards that future expense. I set up two budgets within YNAB – business and personal – and only link one budget to one bank account to separate the two.
YNAB is different from simply tracking your spending. Was there a learning curve or any challenges you experienced early on?
Stephen: Like most people that use YNAB, I think there was a tricky period where I had to let go of the idea that I could plan far into the future. YNAB is explicitly for dealing with money you already have, not money you might have coming on an invoice later. Once you adapt, though, that seems like the only way to budget – especially with late client payments and that sort of thing. I also struggled at first to make sense of how to handle credit cards. The YNAB process for that isn’t ideal but, a couple of years in, I’ve finally made sense of it.
Seth: I almost gave up in the first month. It took me a while to adjust to focusing on my saving/spending priorities rather than worrying about how much I budgeted. It was also difficult to get my head around only budgeting what is in my account at that time, rather than fully funding every category in advance. This became much easier when I added the budget total and direct debit date in the category description (for instance “Netflix // £7.49 // 25th). If I don’t have enough in my account at the beginning of the month to fund this category (hopefully not the case!), then I can part fund it and top up the rest before the due date. This was probably the biggest turning point for me.
There is a mobile app and a desktop version of the software. How do you use these as part of your routine?
Stephen: 99% of what I do is on the desktop app. YNAB actually launched a browser-based version which seems to be the preferred model now, which I assume works in much the same way (with a few extra features!), but I still use the application, which is YNAB 4. Every so often I’ll make strong attempts to input spending on the mobile app, which ensures all my figures are 100% up-to-date. In practice, I’ve got very good at asking for receipts and sticking them in my wallet, and every day or two I’ll put them in on the desktop app.
Seth: I only use the mobile app for adding transactions when I’m out. It takes about five seconds, so I usually do this while I’m making the payment. If not, then I stuff the receipt in my pocket and add it to YNAB back at home. Everything else (planning my budget for next month, moving money between categories, clearing transactions) I do with the desktop version. I et a reminder on my phone at 5 pm every day to check my mobile banking app and update any transactions in YNAB that have cleared. This might not sound like much fun, but I find it’s the easiest way to make sure my account balance matches my YNAB account without having to trawl through bank statements.
There’s the option to modify the generic categories within each budget. How do you set up your budget and which category groups do you use?
Stephen: I basically have two broad halves – monthly stuff and ad-hoc stuff. Each of those is actually two master categories: one for the unavoidable expenses and others for ones I have control over. So, in ‘Monthly – Fixed’, you’ll have things like council tax. In ‘Monthly – Optional’, it’s more like Netflix. In terms of layout, all the fixed ones appear toward the top of the budget, with the optional ones further down and, unfortunately, savings goals and emergency funds right down the bottom. When I’m doing my monthly budget, that means I can work my way down populating the categories, and the further down the list I get, the more we’re getting into non-essential costs and luxuries.
Seth: Savings is at the top of my budget. I have several savings categories, and this is where I use the ‘goal’ feature to measure my progress. For instance, I save for holidays every month, and I also set up a ‘car fund’ where I save the equivalent of a car repayment every month to repair or replace my car in the future. Then I have a ‘household’ category for house-related costs including things like council tax and broadband, a subscriptions category for services like Spotify and Netflix, a ‘living’ category for everyday items (this is split between groceries, fuel/transport, eating out, entertainment, and ‘forgot to budget’). Lastly, I have a ‘luxury’ category, which is basically clothing and fun money for reckless spending.
Part of the YNAB philosophy is that your budget rolls over at the end of the month. What difference does this make to how you view budgeting?
Stephen: You can actually let overspending carry over to your overall budget (ie. It takes it off your lump sum for next month), or send it directly to the right budget category (ie. If you overspend on groceries, you’ll have less for groceries next month). Particularly towards the end of the month, that can be a useful way for you to take control and decide where you want overspending to hit you. Which is the lesser of two evils? Of course, it goes the other way, too – it’s great to reach the end of a month, realise you’ve underspent in a certain category, and be able to take advantage of that. It makes savings feel more flexible and less like locking money away: just spend less now, then have more later.
Seth: This is one of my favourite things about YNAB. If you spend less than you budget, then the money for each category carries over to the next month. In theory, this means you can allocate money for living expenses several months in advance. You can see how ‘old’ your money is in the top corner of your budget. You can use the goal feature to save an ‘emergency fund’ (anything between 3-6 months of living expenses), which gives you a buffer against late payments or an unexpected drop in work.
Unless you automatically import transactions, you need to add these manually. Is it worth the time and effort of keeping a budget?
Stephen: It’s incredibly fast if you keep on top of it, but I’m not going to lie, it takes a shift in mentality. At the same time, when I think about the peace of mind that comes from better visibility over your spending and more effective decision-making, it’s definitely worth the time it takes.
Seth: I use the mobile app to add transactions. There is a function to automatically sync to your bank account or upload a bank statement, but I prefer to enter transactions manually. I check my account on my mobile banking app and mark any transactions that I previously entered in YNAB once they have cleared. I now have a routine of doing this every day, and it only takes me about two minutes. That’s less time than in takes me to make a cup of tea.
In your opinion, what are the biggest financial challenges for freelancers and small businesses? How can YNAB help with this?
Stephen: If I had to guess, I’d say it’s cashflow, tax and the feast-famine cycle. I can tell you how YNAB helped me in those three ways. For cashflow: it let me see what I was working with, and then build emergency funds that I could use to bridge those cashflow gaps. For tax, it allowed me to get an accurate view of what I’d taken in a month, sweep a percentage off all at once, and see what I was left working with. And for the feast-famine cycle, it’s actually been the biggest help in terms of putting feasts into perspective. It’s too easy for freelancers and small businesses to work based on their bank balance. That tells you that, when that big invoice gets paid, you can start spending. YNAB helps you see how much of that money is really yours to spend freely, and how much of it is already taken up by your upcoming expenses, tax, and all those other frustrating things.
Seth: Tax was always a tricky area in the past. It took me a while to find the discipline to set up a dedicated account (separate from my business account) and set aside a percentage of my income every month. I spoke to a taxi driver once who put his tax money into premium bonds. I thought that was a pretty cool idea. The other challenge for freelancers is late payments and preparing for quiet periods like December and January. By planning ahead, YNAB helps me to anticipate future expenses and takes the stress out of paying tax.
What advice would you give to freelancers or small business owners who are using YNAB for the first time?
Stephen: Just jump in and start doing it. YNAB is incredibly flexible and, as such, there’s no right or wrong time to begin. It doesn’t matter if you can’t budget a full month. It doesn’t matter that your income is so irregular. Just take a guess at which categories you need and give it 30 days – I think you can probably get a free trial, even. In that time you’ll see what works, you’ll change your categories a thousand times, but eventually you just might find it makes managing your finances that much easier.
Seth: If you are budgeting first time then there’s a chance that your bank account might not be in the best shape. If so, set up a ‘break even’ category, which represents the amount of money you need to budget for a full month in advance. Then write the total budget amount for each category in the category description and ‘pay as you go’. So, if you don’t have enough in your bank account to budget for groceries for the month ahead then allocate enough for one week, and then top up again when you receive your next payment.
What other apps or services do you use?
Stephen: I use Quickbooks Online for my day-to-day business accounting, but that’s been a fairly recent change so if I want to look at historic details, I have the raw data from my old accounting software in Excel. That’s basically the extent of my financial software. Beyond that, it’s the winning combination of Wunderlist for planning and tracking projects and the Mac’s built-in Notes application. It’s not fancy, but it works!
Seth: I use Harvest to track my time. This allows me to set up budgets for projects and keep tabs on how much time I spend on each job. I use OmniFocus for managing my workflow and planning each day. This is based on David Allen’s GTD (getting things done) method. I also use FreeAgent as a cloud-based accounts package. This gives me a clear overview of everything from outstanding invoices to monthly cashflow.
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Seth Rowden – Copywriter
Seth is an independent copywriter for branding and design, working with companies to define their brand message and tone of voice.
His main interest is in collaborations that bridge the gap between visual and written communication.
Find out more at www.sethrowden.com