5 Tips for Staying On a Budget While a Freelancer
Staying on a budget while a freelancer is often said to be one of the most difficult things about the freelance life.
To make matters worse, it seems as if a lot of the personal finance advice out there works great for someone that gets a paycheck and employee benefits, but there’s not as much practical advice available for freelancers.
Considering that one third of the American workforce already considers themselves a freelancer or self-employed, it’s high time we talk about staying on a budget while a freelancer.
Tip #1: Separate your business and personal finances.
If you’re trying to stay on a budget while a freelancer, you must realize that you actually have two budgets: a business budget and a personal budget.
The business budget refers to the money coming in and out of the business. It’s your revenue (client payments) and the expenses needed to actually get those clients (for example, marketing costs).
You’ll need a separate checking account for depositing and making payments. If you like to use credit cards, you’ll need a separate one for business expenses.
Your personal budget refers to your expenses that have nothing to do with your business, like groceries. These should be paid for with personal accounts.
It’s important to note that some things, like your cell phone or health insurance premiums, can be paid for by the business so there will be some overlap.
The mistake a lot of freelancers make is they don’t see themselves as business owners. Because of this, they end up making big mistakes like co-mingling their finances. This leads to massive headaches for taxes and managing money.
So the first step to staying on budget as a freelancer is to completely separate the business and personal finances. Once you’ve done that, it becomes easier to see how much money the business needs to make so you can pay yourself a paycheck.
“I have found that establishing a constant paycheck (regardless of how much cash is in the bank) helps alleviate the anxiety of cashflow fluctuations,” notes George Cuevas, freelancer designer and co-founder of CollabMiami.
In his case, he gets paid the same amount of money on the 1st and 15th of each month. This has also helped him prove his income to creditors throughout his career.
Tip #2: Reverse engineer your finances.
The next step to staying on budget while a freelancer is to reverse engineer your budget. This will help you figure out how much money you need to make each month to hit the basics.
All you have to do is add up your business expenses and your personal expenses to figure out the bare minimum of what you need to earn each month.
From there, figure out how much you’d like to save each month for things like retirement and emergencies. Once you have that number, add it to the number above.
For example, let’s say your business and personal expenses combined add up to $4,000 a month. Let’s also assume you’d like to save at least $500 a month for emergencies and retirement. That brings your total up to $4500.
Tip #3: Don’t forget about taxes.
Because you’re being taxed on any profit left over from the business, you’ll need to add extra cushioning depending on what your tax rate is.
Assuming your business expenses come out to $2000 each month and you’re being taxed 30% on profit (employment tax plus your tax bracket), you’ll need to save at least $750 for taxes each month to be on the safe side.
This would bring your monthly income goal to $5250.
If you end up over saving for taxes because of deductions, just throw the difference into savings after you make your estimated tax payments.
Of course, your best bet here is to speak with an accountant to help you tax plan for the year. That way you’ll know exactly what you need to do.
Tip #4: Never stop hustling.
One of the reasons freelancers complain about feast or famine is because they drop the ball when it comes to hustling.
Chances are they got a big project and feel like they can coast for a while, so they stop prospecting and selling to new clients.
When the project ends, they find themselves running out of money.
This is where you can run into problems staying on budget while freelancing.
The reality is your budget basically relies on your ability to bring income. That’s why you need to figure out the numbers we mentioned above and continue hustling.
Tip #5: Find a system that works for your personality type.
The last step in staying on budget while a freelancer is to find some sort of budget system that works for your personality type. This will help when you have high earning months and also lean months.
For example, “The Money Book For Freelancers, Part-Timers and the Self-Employed” talks about budgeting based on percentages. In the book, they use the example of 10 percent of your income is saved for emergencies and 15 percent for taxes (though this only covers employment tax).
Some people may not like percentages and instead try something like a Zero Sum Budget. This budget assigns each dollar a purpose. So if you make extra money one month you may decide that it’s purpose is to boost your savings.
The good news is both of these methods ensure that you’re saving as much as you can regardless of how much money you earn in any given month.
The key is to find something that works for you. Feel free to experiment with different methods until you find one you can stick to.
Final Thoughts
Staying on a budget while a freelancer can be tricky, but it’s not impossible. By following these tips you’ll have more control over your variable income and your finances.