Working out your average monthly income

Calculating your rough monthly income can take several forms, but it’s common to use either an average figure taken from three to twelve months earnings; or a minimum figure if you tend to always receive at least a set amount each month.

Average income. This method works best if your earnings fluctuate throughout the year, especially if you tend to earn more in certain months. This basically involves adding up your earnings from the last year and dividing it by 12 to work out your average monthly income.

Minimum income. This method works best if your earnings are almost always above a certain amount (for example, if you always tend to earn at least $1000 per month from freelancing). This allows you to assume that you won’t earn more than this, so you can set aside any additional earnings for a rainy day or saving for something specific.

Budgeting

Once you’ve worked out your average or minimum monthly income, you need to apply it to your budget. Make sure that your budget includes all of your bills, including debt repayments. It’s not uncommon for freelancers to find that their budget doesn’t cover every outgoing some months, but this problem can be solved if you have savings to fall back on.

Saving

While your earnings may fall beneath your budget in some months, there will be better months in which you find yourself with surplus income. This should be transferred to a separate bank account to cover the leaner months when your income doesn’t cover your outgoings.

• Get your paperwork in order. It’s essential to keep track of your income and work-related expenditure when preparing self employment taxes. Keep records of all payments that are made to you and any expenses that you pay out for your business (such as setting up and maintaining your professional website, printing business cards, office supplies etc) as this will save a lot of time later on. If you’ve earnt more than $600 from a specific client in a given year, they should have sent you a 1099 form. You may also have filled in W-9 forms for some clients.

• Hiring a professional. This is often a personal choice and your situation may not warrant hiring a tax professional to sort out your tax affairs. It can be useful for finding ways to cut your tax bill with expenses, but a lot will depend on how much you’re going to be paying in taxes. If your tax bills are on the low side, you may not see the point.

• Setting money aside for taxes. Many self employed individuals have a business account into which their income is deposited and a set amount is left to cover taxes. This seems to be less common for freelancers, and I personally don’t have a business account. Instead, I have a separate bank account into which I transfer surplus money that is left over after my basic outgoings. This varies due to my irregular income, but I always ensure that there is enough in this account to cover my expected taxes (based on tracking my income as it comes in and estimating the amount that I’ll have to pay).

• Paying taxes in the UK. If you’re based in the UK, you also have to pay National Insurance (NI) contributions, unless your self employed earnings are low enough to exempt you. NI contributions are essential for qualifying for basic state pension in retirement as you need to have paid NI in enough qualifying years to be eligible. As a UK-based freelance writer, I pay my class 2 self employed  NI contributions through direct debit so that they are easily taken care of. My class 4 NI contributions are usually added to my yearly tax bill, which is one reason why I’m never 100 per cent confident of how much my tax bill will be and usually end up overbudgeting in my ‘tax’ bank account – better safe than sorry!

The employer asks for writing samples. I’m coming across an increasing amount of job adverts asking writers to submit samples. Most of these have no mention of pay if the sample is accepted and in most cases, you have no idea if the sample is ultimately accepted or rejected as the employer never contacts you about your application. I no longer bother applying to these jobs after several bad experiences. I’ve had my fingers burnt in the past with samples being used online with no payment in return and I’m far from the only one. Many writers have complained of the same experiences to the point where most will advise new writers to avoid applying to these types of job postings.  Even if the job posting promises payment on acceptance of your sample, it doesn’t mean that it’ll be forthcoming.

Assuming that you have a website which features samples of your writing in an online portfolio, this should be enough to demonstrate your writing style and how you adapt this to suit differing publications.

Of course, there are some legitimate employers out there who will genuinely use the sample to assess your suitability for their website, blog etc. and pay you for the effort that you’ve put in. Unfortunately though, these seem to be the exception rather than the norm.

You are asked to pay for training materials. Any job posting that asks you to pay money after being hired should be avoided like the plague. There are few (if any) legitimate writing jobs that require you to pay for training. Employers such as About.com and LoveToKnow frequently hire writers, but their training will not cost you anything.

You are asked for personal information. On my job hunt, I’ve come across job postings that ask writers to submit their Social Security Number (and other very sensitive information). This isn’t necessary for you to get paid. If you earn more than $600 in a year for one specific company, you will have to fill in a W-9 tax form (including your tax identification number or SSN), but the key difference here is that you’ve already earnt the money before a W-9 form needs to be filled in. Be extremely wary of any company or individual who is requesting highly personal information (especially financial information)  from the off. Find out all that you can about the person/people that you’d be working for as further alarm bells should ring if this information is hard to pin down.

• Set up a savings account

While it is likely that most of your income will be spent on rent and bills, you should aim to pay as much of the surplus into a savings account. Ideally, this should be a savings account that gives you easy access to your money in case you need to use it at a later date. If you are confident that you will not need to touch the money for a set period (for example, six months or one year), you can “lock away” your money, which often offers a more attractive interest rate than instant access savings accounts. Sometimes, these accounts may specify that you cannot make a withdrawal during the set period, or that you will lose interest for the month in which you make a withdrawal.

Look for a savings account that offers a good rate of interest, as this will obviously mean that you will see maximum reward for your savings. If you already have a savings account, you might want to consider switching your money to one that has a better interest rate. In either situation, make sure that there are no hidden conditions attached to the savings account or interest rate. For example, some savings accounts offer a very attractive interest rate to new customers for the first year only. After this, you are demoted to an interest rate that is average, at best. If you already have a savings account, you might want to consider switching your money to one that has a better interest rate.

Tax-free savings accounts are the best option, as nothing is deducted from your interest. Unfortunately you cannot put an unlimited amount of money into a tax-free savings account. They are capped, meaning that you can pay in a certain amount of money per tax year. While the government is keen to encourage as many people as possible to have savings, they do not want to be waiving tax too much as they gain nothing from it.

• Budgeting

Drawing up a budget is a handy way to see whether your outgoings are in line with your income. This might seem obvious, but many people are shocked to find that outgoings such as rent, bills, food and socialising far exceed their monthly income. Listing all of your outgoings is also a good way to pinpoint exactly where your money is going each month. It is often the little things that add up the most. Buying a coffee on the way to work can soon cost you several hundred dollars over the course of a year.

Once you have worked out where your money is going, look at any areas where you can cut down on frivolous or unnecessary spending. Most people will find at least one area in which they can cut down on their expenditure. It is vital that you stick to this plan if you want to see an improvement in your finances.

Many college graduates are afraid to sit down and work out how best to take control of their finances, but it is something that should be done to avoid sliding into debt. With a little bit of research or help from a financial advisor, you can seek out the best ways to make your money work for you.

• Outgoings

Start by working out your outgoings over the course of the last year. You will probably need to root out utility bills (for your gas, electricity, water and telephone outgoings) and bank statements to do this accurately. Other recommended bills to find include tax bills, insurance bills and any standing order payments that you have set up. After this, look at how much you spend on everyday items such as food, clothes and petrol. Finally, tot up your less frequent outgoings, such as dental bills, optician bills, and repairs to the car or house. Combining all of this should give you a clear picture of your yearly outgoings. Dividing this figure by either fifty-two or twelve gives you a daily or monthly outgoings.

• Income

Depending on your circumstances, calculating your income may require more than simply gathering together your paperwork for the past year. If you receive any form of benefits, you need to factor these in, along with any rent or financial contributions from lodgers or family members.

• Cutting Back

If you find that you are experiencing a “shortfall” (your income does not match your outgoings), you will need to cut back on any outgoings that are not strictly necessary. Prioritize your outgoings according to their importance. For example, utility bills, food and repayments on any outstanding debts that you may have should be at the top of the list as there will be serious repercussions if you neglect these! If you think that you are paying over the odds for electricity, gas and phone services, consider shopping around to find a better deal. If you use the price comparison websites to do this, be aware that not all available deals are listed, so you could potentially still be missing out on a good deal. Some companies offer discounts on bills if you pay by direct debit.

If your budget can stretch far enough, it is a good idea to put a little something aside for the unexpected emergencies that will undoubtedly crop up at some point. However, it is more important to deal with the outgoings that already exist.

Take advantage of the January sales to snap up presents to give as birthday and Christmas gifts later in the year. Generally speaking, you will find some great bargains that will help you to save money – especially as presents do not fall into the essential outgoings category. You will probably also be able to pick up items such as wrapping paper, Christmas trees (and decorations) and Christmas cards for less money.

• Save money each month

Set up an emergency fund by saving a set amount of money every month and putting it in a separate savings account. This can be as little as $5 or $10 per month, but obviously the more money you can save, the more you will have to play with if an emergency crops up, and you suddenly need extra money. You might consider having a certain amount of money deducted from your paycheck each month, and deposited into a savings or retirement account. You can also put your spare change in a jar, and take it to a change machine every few months as a way of generating a little extra cash. As the saying goes, “every little helps.”

• Join the company pension scheme

Being part of your company’s pension scheme is a good way of saving for your future retirement, but many of us don‘t actually contribute to this. The 401 (k) plan takes money out of your paycheck before taxes, which means that your taxes are reduced. You aren’t taxed on this money until you start using it in your retirement. You can decide how much money you want to be deducted from your paycheck before you start the plan. If you or your partner aren’t currently a member of your company’s 401 (k) plan, the human resources department can give you information on how to sign up for it.

• Set aside time to manage your bills

Time is one of the biggest hurdles when it comes to trying to overhaul your finances. Most of us are so busy with the rest of our lives, keeping on top of our financial situation often gets pushed aside. The task becomes a lot less daunting if you divide it into segments. For example, you can set aside half an hour to sort out all of your bills for the week, and another half an hour to sort through your checkbook, and make a note of what has been paid in and withdrawn. It’s also useful to spend some time entering your expenses into a spreadsheet to show how well you’re sticking to your budgeting plan. By spending just an hour and a half a week, you can really overhaul your finances.

• Reduce regular expenses

Work out which of your regular household expenses are costing you the most money every month, and look for ways to save money on them. For example, you might want to do your grocery shopping at a cheaper supermarket for a while to see how much money you can save. For household items, look on price comparison websites to find the stores that are selling them for the cheapest price. This can be misleading though. If the store in question is out of town, you will have to spend more on gas to get there, which means that it might cost you a similar price in the end anyway, so you will have to consider this. It’s best to concentrate on the items that are costing you a significant chunk of your income each month – don’t waste time trying to save fifteen cents on diapers, as this will make little impression on your overall household expenses by the end of the month.

It’s tempting to put everything on your credit card, but this is only going to store up trouble for the future. The average American has $8,000 of debt on their credit cards. When you come to pay off your credit cards, you will be unlikely to remember all of the very small expenses that you used the card to pay for, and finding out how much you really owe can be a big shock. Use cash to pay for small expenses such as gas, magazines and sweets for the children. Work out how much you can spare for your weekly cash fund, and make sure that you stick to it. If you don’t think your willpower will stretch that far, leave the credit cards at home. If you only have twenty dollars in your pocket, you won’t be able to splurge on things that you aren‘t strictly necessary. If you do this on a regular basis, you might be surprised at how many items you buy that you don’t really need, and how much money you can save if you don’t do this.

• Stick to your budget

Work out how much you can afford to spend, and stick to this budget. Many people find that their expenses are actually more than their income, and this is why so many of us are in debt. We spend more than we can afford to by putting it on the plastic, and then find out much later that we have no real means of paying this back. You can avoid that nightmare scenario by sticking rigidly to your budget, so that you don’t spend any more than you have to. It’s essential that you keep track of your income and expenses, so that you’re fully on top of your financial situation. This is important if you’re looking to overhaul your finances.

When devising your budget, it’s useful to keep your receipts from the last six months. This means that you can instantly see where the money actually went, and it can help you to factor in hidden expenses, such as repairs to the car and house, as well as the usual expenses. You might find that you’re spending a good chunk of your income on frivolous items, such as getting a coffee every morning on your way to work. Over time, these expenses will start to add up.

• Check your credit rating

Your credit rating can have a big effect on your financial future. Lenders use your credit rating to decide how risky it will be for them to lend you money. A poor credit rating can lead to you being refused credit when you want to buy something expensive, such as a new television or dishwasher. To improve your credit rating, pay off your credit card debts as soon as you possibly can – the more debt you have, the worse your credit rating will be. Paying off your loans and credit card debts will show the lenders that you can be trusted to repay your credit on time.

• Sell your junk

Hold a garage sale to get rid of your unwanted junk. Not only will it create a lot more space in your house, it will also generate some extra cash.

When you start to overhaul your finances, it’s important to tackle your debt problems first, before you start saving for the future. Being in debt will affect your credit rating, which will then affect your ability to get credit. Once you’ve paid off your debts, these tips should help you to avoid getting into debt again, and help you to really keep track of your finances.

In a nutshell, an emergency fund is a cash stash that should only be used in absolute emergencies. Examples include you or your partner losing your job, medical expenses and the replacements of essential household items such as your water heater. To ensure that you can get at it easily as and when you need to, it should be in an easy access account that doesn’t penalize you for making withdrawals. If money is tight, you’re probably wondering how you can afford to build an emergency fund, especially if you’re also paying off debt. Here are a few tips:

Aim low to begin with. If you can only spare $10 per month once you’ve met your outgoings and paid at least the minimum on debt repayments, add this to the emergency fund anyway. If it remains in your checking account, it’s likely to be spent but if you transfer it to your emergency fund, it boosts your savings. You can always add more as and when it is available.

Make regular payments. Get into the habit of adding something to your emergency fund every month, even if it doesn’t seem much. In the early days, literally everything helps and it is a painless introduction to regular saving.

Reduce expenses. Try to decrease your spending as much as you can to free up some extra to go into the emergency fund. For example, get rid of any treats that aren’t strictly essential and always look for the most cost-effective option when shopping around.

Up your income. If you can’t shave any more off your monthly budget, you might want to go about increasing your income to help you build your emergency fund. On a short-term basis, this can involve selling unwanted or unneeded things on eBay and Amazon, doing mystery shopping or paid surveys or taking on part-time work such as selling party products at home.