If you freelance full-time, you’re concerned about money. Heck, we’re all concerned about money, but as a freelancer you have additional financial management responsibilities that salaried employees don’t have to worry about.
You have to set aside money for taxes, figure out your own health insurance, and keep a close eye on your personal and business expenses. That means you need to budget. But creating a budget isn’t so easy if your revenue varies from month to month. So what’s a freelancer to do?
Here’s some tips:
Since your problem is dealing with variable income, start by looking at what doesn’t vary. List out your fixed expenses. Fixed expenses do not change from month to month based on consumption. Here are some examples of fixed expenses you might have:
- Car note
- Student loan debt
- Insurance/medical coverage
- Phone bill (if your plan is the same every month)
Then determine your variable expenses. These are expenses that you consistently incur, but they aren’t the same every time. They vary based on consumption. Here are some examples of variable expenses:
- Credit card bills
Track the past year’s worth of these bills and find the average cost for each (add up each month’s worth of gas bills for the past 12 months, then divide the total number by 12). This will give you a realistic estimate for how much you can budget per month for each service. Seem high? Find places to reduce. Here are some great tips for saving money on groceries and here are some energy saving hacks for your home.
Adding up your fixed and variable costs for each month will tell you exactly how much money you need to get through each month.
When you are the business, it is vital that you keep business expenses and personal expenses separate. Your first move should be to establish separate bank accounts for your business. You can pay yourself from your business account just the same way you would pay an employee. That will help create a more stable income into your personal account from which your personal expenses need to be budgeted. Make your income to yourself as regular as possible. Pay yourself on the same day(s) each month, the same baseline amount.
Make sure you’re accounting for all business expenses (office rent, internet, craft supplies, whatever your case may be) and money for your taxes in your business account.
It is also smart to set up an emergency savings account. Most finance experts say that a $500 emergency fund is one of the best first steps to getting your money life in order.
Consistent income earners have the benefit of automated direct deposit. You may not. But you can still automate some parts of your financial life. Using apps to track your budget and spending can help you big time-- Mint is the leading option. You can even set push notifications to let you know when bills are due or if you’re about to hit your budget limit in a certain category.
This will also allow you to track what you’re spending money on and identify opportunities to reduce. If you’re old school, you can track within in a spreadsheet manually, but automating is exponentially easier.
Odds are that you’re typically working on a project basis. But you may be able to work out payment terms that benefit you. Talk to your clients about dividing up payments on a monthly basis. Recurring customers can pay monthly. This will help you budget based on recurring income and then you can supplement with the money from one-off projects towards paying down debt or beefing up savings.
As far as expenses go: prioritizing is key. Make sure your primary budget is covered every month before you decide to buy something extra. If an expense can wait, let it wait until you have time to save up for it rather than charging it to a credit card. Regularize your monthly spending so that the same amount goes out to expenses and paying yourself and any remaining money goes into savings, debt reduction, or emergency fund. For everything else, get as creative and thrifty as possible.
Budgeting for a variable income can seem daunting, but there are a few things you can do to simplify and stabilize your finances.
- Distinguish your fixed from variable expenses so that you can better determine where fluctuations occur in your costs, and where you can work to cut costs.
- Budget for your fixed costs + the average of your monthly variable costs. This is how much you need to get by each month.
- Create separate business, personal, and emergency bank accounts. Pay yourself a consistent paycheck on a regular schedule from your business to your personal account. Set aside money for taxes and business expenses within your business account before cutting each paycheck.
- Utilize automated apps to track your spending, like Mint.
- Regularize your income when possible by setting up regular monthly payment plans for recurring customers. If this is you, budget based on recurring income and put all supplemental income from one-off projects towards savings and paying down debt.
- Be sure to prioritize your expenses, so that your primary budget is covered before you make any additional purchases.
Now fly free, little freelancers! Go forth and conquer your finances.
Creative Community Developer at Snapfluence.
I'm the Oxford comma's biggest fan.