Earning and spending plans are sort of like budgets, but they have much more flexibility.
An earning plan is a tool I use to help me keep track of my uncertain income. Like most freelancers my income totals vary from week-to-week, year-to-year.
Twice a year using a spreadsheet (this year I’m using the spreadsheet at Google Docs) I create several categories of income:
- Contracted Income - these are signed contracts I have every reason to believe will actually get completed, including my pay.
- Probable Income – these are contracts I believe will come in. Usually I’m in the process of negotiation when I add these.
- Royalty Income - I get royalty income from both ebooks and from a couple of publishers. Although the numbers I enter here are guesses, I’ve had enough experience to make an decent guess. For planning purposes I deliberately underestimate.
- Blog income - I make an educated guess about this too. Again, I deliberately underestimate.
- Other Regular Income - here’s where I put social security payments; if I had a pension or other regular income I’d add that in this category.
I run a total on this income because it’s realatively certain, generally varying only 5 percent or so either way.
Next I add my final category – Speculative Income. This is truly guess work. For example, I’m still planning on offering a class about book writing. Now it will happen, I hope, sometime in the first quarter of next year. I’ve made a guess about how much that will bring in. However, the class is also designed to be repeated. Once I’ve run it once I’ll have a sense of how much it might bring in the next time.
For next year I’ve also assumed I’ll ghostwrite at least one more book, even though I have no idea what book or when or even how much. I’ve added that guess in speculative income even though I’ve never gone a year without at least one book.
I actually create an earning plan for the year, and then one for every month of the year.
One unexpected result of the earning plan is I can use it to help me decide if I’ve got time to take on another project. I can see what I’m doing in one place. That’s not why I started earning plans, but it’s just one more reason they work for me.
The spending plan is just that – a plan to spend the income you earn.
Again, I use a spreadsheet and first create an annual plan. It contains the usual categories like housing, utilities, groceries, etc.
I also plan for self-employment tax (12 percent in my case, a number I got from my accountant), savings (both personal and retirement plus several other smaller savings accounts. I also plan my charitable contributions.
Once I’ve got the annual plan done, each month get’s its own spreadsheet which in my case goes next to the earning plan for the month in question.
Actuals Bring It All Together
All this planning is fine as far as it goes, but it needs one more element to make it really productive and that’s a record of what I actually earn and what I actually spend.
On each spreadsheets I create a column next to the projected expenses column and next to the earning as well and title them Actual. Once a week I take the tally from each category and enter it in the appropriate place.
For example, if I plan to spend say $60 a week for groceries, when I look at my weekly expense for that category I’ll enter the real number, say $58.17. The next week I’ll add whatever, maybe $65.02. At the end of the month I’ll know if I was over or under my grocery spending plan. If after a month or two I realize I’m regularly over or under by $10 or $20 a week or even more, I will either spend a bit more or less or adjust the plan.
Or perhaps I realize I need a new pair of shoes and I haven’t spent any month on clothes for the last three months. If I’ve given myself a monthly clothes budget I know I can spend up to three months worth on shoes if I choose to.
When I suddenly discover a new expense that doesn’t fit into miscellaneous or I know will show up regularly I just create a new category for it.
Today as I was putting together earning and spending plans for next year I added a guess at a car payment. That amount will go into savings until I decide to actually buy a car. Who knows; maybe I can run the old Honda long enough to save enough for a new used car and continue my car-payment-free life.
The real joy of this is the freedom it creates. Because I know how much money I have and how much I’m spending I find I have a great deal of choice. Tracking my money, sorting it into categories, creating earning and spending plans and adding actuals takes me maybe half an hour. Getting it set up takes another hour or so.
The result is sanity.
How do you create an overview of your money?
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