While being an indy certainly has it perks, living with a variable income can be challenging. During my first full year of freelancing, I struggled with the irregular cycles of swells and gaps in my cash flow. Now, let’s fast forward a little over two years: My money flow still isn’t perfect, but I’ve developed a useful system that helps me stay on top of my bills and save for the future.
Want to avoid making the same financial mistakes I made? Read on for my tips on budgeting for freelancers.
Determine Your Monthly Income
By no means should you fly by the seat of your pants and spend money as client payments roll in. Instead, aim to “pay yourself” the same amount each month. Wondering where you should start? Consider trying these two budgeting approaches on for size:
- Average out your income from the last six to 12 months to determine how much you can expect to make down the line. For instance, let’s say you made $60,000 last year. That averages out to $5,000 a month. Voila! When planning out your budget for the year, keep this average monthly income level in mind. Of course, this strategy only works well when you have a handful of steady retainer clients.
- Figure out your average monthly expenses and pay yourself that number each month. Whatever is leftover can go toward savings. I allocate any extra funds based on percentages. For instance, 25 percent might go toward my rainy day fund (which I’ll get to shortly), while 30 percent could go toward investing and the rest toward retirement goals.
Determine which type of plan works best for you and the current stage of your career, and build your budget from there.
Come Up With Two Separate Budgets
When you have a variable income, your financial status can change every month. That’s because you might have an amazing few weeks of client work and income, immediately followed by a dry spell. As you can imagine, these inevitable highs and lows can make it hard to nail down an exact budget. So it might help you to have two separate budgets:
- The lean budget: This budget covers your barebone expenses. To go this route, you’ll need to figure out how much money you need to scrape by when you’re experiencing a work lull. What are the payments you absolutely have to make each month? Leave out anything that you would consider a “want” rather than a “need.”
- The luxe budget: A luxe budget has a bit more padding — meaning you can probably afford a few dinners out these months. In this budget, you can add in a few of those “wants.” However, keep in mind that you may want to use some of this extra cash flow to invest in growing your business and expanding your expertise.
Depending on what kind of month it is, you can toggle between your two budgets to find the right fit for your financial needs.
Stay a Month Ahead of Your Bills
This is my favorite tactic when it comes to budgeting for freelancers. What exactly do I mean here? I set up my finances so that by the end of this month, I’ll have enough to cover my living expenses for the next. When you save a month ahead, you can even put your bills on autopay — so you won’t have to anxiously wait for that client payment to drop. And the best part is that you only need to set a one-time savings goal to get ahead.
Have a Robust Rainy Day Fund
It’s a classic money tip, but having an emergency fund is worth mentioning. The amount you keep in this fund really depends on how much you can realistically afford to save. Before I took the leap into freelancing, I had about a year’s worth of living expenses saved up. I know, I know. Having an entire year of living expenses socked away is no easy feat. If that won’t work for you, start by saving three months of expenses, then strive to push it up to six and so on.
Create a Baby Buffer
A baby buffer is that bit of padding in your budget that helps you stay on top of bills. What’s the difference between a baby buffer and a rainy day fund? A rainy day fund is for true emergencies, like if your laptop dies or you need some urgent dental work done.
A baby buffer fund can be made up of anywhere from a few hundred bucks to one month’s living expenses. Before I deposit any client checks into savings, I replenish my buffer fund. That way, if I’m short one month, I can dip into this saved money for a little help. Just make sure you always have easy access to your baby buffer fund.
Save for Quarterly Taxes
I’ve heard horror stories of freelancers wiping out their savings because they didn’t have enough stashed away for self-employment taxes. Don’t let this happen to you. Sure, it’s not the most pleasant feeling to remove a chunk of each paycheck for taxes, but you never want to come up short.
But how much should you squirrel away for taxes? While there’s no magic percentage — since it depends on multiple factors, including your income, deductions and where you live — you’ll need to save anywhere from 30 to 50 percent of your income. When I first started freelancing full-time, I saved 25 percent — and that ended up not being enough. These days, I’ve upped the amount to 40 percent. Over time, you’ll figure out just how much you need to set aside for your own freelance taxes.
These tips are just a few things I’ve discovered by tinkering with different budgeting methods and living the freelance lifestyle for the past two years. While you work on your own budget, keep in mind that setting up the right “money flow” system will help you run your freelancing business more effectively. In time, you’ll learn which methods work best for you.