December can be a particularly stressful month for freelancers. We’re starting to feel the biggest financial insecurity crunch of the year, and that’s for two reasons: First, the holidays pressure us into throwing down some big money on dinners, gifts, decorations … you name it. Second, we face the uncertainty that comes with an often slower work season, and having to reassess our budget planning for the next year due to changing client needs.
If you’re taking on a major project or your clients are tightening up their budgets for next year, you’re probably thinking one thing: “How do I plan for a potentially drastic change to my income?” Here are some what-if scenarios and matching budget strategies to carry you through next year and many years to come.
When You Expect Your Income to Be Lower
1. Find Side Hustles
If you’re a freelancer, you’ve probably heard all about side hustles and how you should start one, too. Whether you feel financially secure or not, it’s always a good time to start looking for other gigs to boost your cash flow before you start to feel the crunch — especially before companies start to reassess their budgets for the new year. Even if you’re still busy at the end of November, it’s better to have too much work into December than to find yourself short as clients begin to cut back their creative funds.
While many freelancers accept that workloads will ebb and flow at different times of the year, others start getting more aggressive with their outreach well ahead of when they anticipate a downturn. Remember, some clients actually end up with excess budget that needs to be used before the end of the year. Pair that with a lot of people taking time off in December, and it can actually be the ideal time to pick up some extra gigs.
If you’re a graphic designer, consider offering additional services that your clients might be looking for at this time, like producing a visually appealing version of the end-of-year company newsletter, or proposing a new asset for their marketing mix next year. If you’re an accountant, advertise your end-of-year budget planning and tax preparation services. While some clients may be cutting back, others will be growing. And that’s where you should focus your efforts.
2. Automate Your Finances
It’s easy to spend too much time trying to catch up on all the administrative drudgery you’ve been putting off. In previous years, I thought I had a rough estimate of what I’d needed to put aside to cover taxes, only to discover that my estimate was way off. To avoid playing catch up with your taxes at the busiest time of the year, consider leveraging automation and easy-to-use apps that can handle it all for you. Using tools to plan and save proactively will ensure you have enough of a financial buffer to weather any downturns next year.
When You Expect Your Income to Be Higher
1. Don’t Spend More
It can be tempting to look at a potential increase in income as some extra cash to spend — but don’t fall into this trap. Remind yourself of the ebbs and flows of freelance life and put that extra money away. These funds will better serve you in a savings account or an investment account — where you can use them to pay your next tax installment, establish some passive income or boost your retirement fund.
A good rule of thumb is to never, ever spend money you don’t have just yet. Even if you’ve signed contracts with new clients for the new year, the money isn’t in the bank just yet. If you want to be a master financial planner, always act as if it’s still not a done deal.
2. Take a Closer Look at Tax-Deductible Expenses
If your extra income is threatening to push you into a higher tax bracket, it’s time to take a closer look at your tax-deductible expenses. If you aren’t already, you should be tracking your expenses regularly — something I try to do on a monthly basis. When you’re a freelancer, you’d be surprised at just how many expenses are deductible: A portion of home office rent (including utilities), phone and internet bills, transportation costs and capital expenditures like laptops, to name a few. This is a good time to consider upgrading equipment or making capital expenditures that can be set against your higher income next year.
Consider talking to a tax lawyer to help you plan, as some costs can be moved around a balance sheet to help offset higher or lower income in any given year. If you’re not a tax expert, hiring one is well worth it. Sure, you’ll be spending some extra cash on their fees, but these professionals can often end up saving you much more in the long run.
No Matter What, Do This
The most important way to prepare for possible changes to your financial situation is to plan ahead. Automate tasks that hold you back, like tax savings and filing, so you don’t have to worry about them. And make sure you keep your accounting records up-to-date so you’re prepared to track and handle any major financial changes that come your way. Finally, leverage a tax professional for guidance when you get stuck, confused or overwhelmed by certain processes.
Financial fluctuations are often par for the course as a freelancer, but you never want to be in a position of financial insecurity. Significant changes to your income can be challenging whether it’s a rise or fall, so anticipate and plan a course of action for both scenarios — just in case.