Some lifestyle entrepreneurs have no problem projecting their income and expenses to come up with a budget. However, developing a financial independence budget is one issue most lifestyle entrepreneurs do not address.  Previously I talked about how to create your business project by predicting your level of activity. This time I am going to discuss how to create your personal budget based on what you plan to achieve on your business.

Most lifestyle entrepreneurs start out as freelancers/ consultants and earn very inconsistent income. Due to this fact, having a budget becomes even more important for the freelancer than it is for the wage earner. If you do not plan wisely, there will be months where you will starve because of no income.

So what is a budget? A budget is a plan that guides your spending habit. However, for the freelance and small business owner where income is not consistent, where do you start? You might budget $400 for food, but $400 ends up being more than one fifth of your budget that month. So what do you do when your wages cannot be predicted on a weekly or monthly basis? There are four steps you must take

1. Have a life plan
   
2. Project
   
3. Income Smoothing
   
4. Sacrifice
   

    

Have a life plan

The best motivation for having your dream life is to have a plan to get there. If you do not know where you are going, any road will get you there. I have heard all the reasons on why you cannot have a plan as a freelancer. Well my question to you is how do you ever plan to make a transition from free lancer to small business owner? As a single parent myself, I know how difficult that transition could be and if I can do it, anyone with self discipline can. A plan does two things, one it creates hope when it looks like all is lost. Secondly, it tells you the next step to take when things are no longer clear. I guarantee in the world of business, there will be lots of fog to blur your view. However, if you have a plan you have a point of reference.

Your life plan should include your plan to financial independence. By that, I mean that if you chose not to work anymore you still make enough income to support your lifestyle. Once you know your financial independence plan, then the next step is to gradually develop a plan to get there each year.

Project
Before I start talking about projections, let me first explain what I mean by a fiscal year. A fiscal year is the period an entity reports its financial statements. For instance most non profits have fiscal year beginning in July. On the other hand, most small businesses have fiscal years that begin in January. If you are a seasonal business, I will recommend you change your fiscal year to begin in the first month of your busiest time of the year.

At the beginning of your fiscal year, it is important to do reasonable projections as to how you expect to perform in the coming year. I have heard it said many times, that projections are meaningless because you cannot really control what happens. I am sorry to say, I strongly disagree because even though I cannot control events that happen, I can plan for predictability.

Once you have your projections and business budget done, you can use these numbers to craft your personal financial statements. More on how to do this will come later in this article so keep reading.

Income Smoothing
As a freelancer/consultant with inconsistent income, a budget is even more helpful because it helps you level your high earning days with your low earning days. Using the projected number from step two above, plan your income for the year. Next divide that into twelve months and this will be the amount you will be allowed to spend each month. This means that you do not spend more in months that you make more, but of course you could always spend less. You will also need to project your expenses to make sure your monthly income is enough to meet your needs.

Lastly, if the amount you project is not enough to meet your living needs then a part time job might be needed till your business or freelance job is able to fully support you.

Sacrifice
In the first few years when your business is still striving to break even, it will be best to be thrifty about what you spend. Being thrifty frees you up to spend time promoting yourself while spending less.

I will love to say that if you all do this all will go well with you. But we all know life tends to throw those odd balls we have a hard time catching. So sadly, you are not always going to reach your goals so adjustments will be necessary.

Now that we know the steps to take, how do we create a financial independence budget? Well, the first thing you will need to know is your financial independence number. This can be calculated in two ways:

1. Accumulate enough assets for financial independence
   
2. Create a perpetual system that supports your lifestyle
   

This article will expand on accumulating enough assets for financial independence. Creating a perpetual system will be discussed in future articles.

Accumulating enough assets for financial independence

If you plan to accumulate enough assets for financial independence, then it is important to understand your financial position. That is you need to know how much assets and debt you have. This amount enables you to calculate your net worth. Your net worth helps you determine if you have enough to cover your needs. Financial independence is not based on what you have but what you need to have. Therefore, when you have enough assets that produce enough income to meet your needs you are financially independent. To compute your financial independence number, click on this link for a financial independence calculator.

I have included a sample of what a financial independence budget looks like. As you can see there are three parts to developing your financial independence statement name:

1. Income and expense projection
   
2. Actual financial position
   
3. Goal financial position
   

Part 1: Income and Expense Projection

Now your turn, have you begun your road to financial independence? Are you confused on how to get there? Leave comments below about your journey (or lack of) to financial independence.