You might have a fantastic one month and then the very next month have an absolutely horrible one. You just never know what will happen.
What about my experience? Some months I don’t make any income for a few weeks, and then it all comes in at the end of the month. Other times, all of my income comes in at one week and the other 3 weeks almost feel like a complete loss. This is usually because work can vary from week to week, and also because sometimes clients have a 45 day or 60 day wait before they can pay me for my services. As a freelancer, weeks where I don’t get paid much almost feel like everything is just going downhill, even though I know it’s not. It’s hard to get out of that mindset.
Here are my tips for budgeting as a freelancer:
Have a budget!
This should be your very first step. You need to create a budget with your actual expenses so that you have an idea of how much income you need to bring in.
The main way I recommend freelancers to make a budget is to base it off your lowest monthly income. So, if a “bad” month for you is $3,000, then try to make your budget at $3,000 or lower.
However, this is all up to you. If you have an emergency fund (as discussed below), then you may be able to base your budget off of an average instead. For me, I’d rather be more comfortable and base it off a bad month because you never know how long a “bad month” will be. It could just be one month, but what if it happened for 6 months?
Save for taxes.
Saving the correct amount for taxes can be difficult because as a freelancer it is unlikely that you will know the exact dollar figure that you will owe at the end of the year. However, there are ways to help you estimate your taxes.
Two different ways include saving 25% to 35% (or whatever percent you think is realistic for you and your business) of how much you make each month. Or, you can try to estimate how much you will make throughout the whole year and save the amount of taxes that you think you will owe each month.
Have an emergency fund.
If you are a freelancer, I really hope you have an emergency fund. I know that some people are forced into the freelancing lifestyle suddenly for different reasons, but I think that you should work towards having a well-funded emergency fund no matter what.
Having an emergency fund is a good idea for many reasons. If you have a bad month, an emergency fund can help you through that so that you don’t feel like it’s the end of the world. An emergency fund can also help you get through a month with higher expenses, such as due to car or home repairs.
Read How Much Do I Need in My Emergency Fund for more information.
Keep your business and personal finances separate.
Keeping your finances separate is something that you definitely need to do. It’s easier just to keep everything separate so that you can keep track of business and personal financial goals, and it also makes it easier when it comes around to tax time.
You don’t want to have to weed through hundreds or thousands of transactions when it’s tax time to try to figure out if it was a business or personal expense.
Don’t forget to save for retirement.
One thing that some freelancers forget to do is to save for retirement. You should have a line item in your budget for retirement so that you are “paying yourself” in your budget as well.
How do you budget as a freelancer?
Image via Flickr by Seniorliving.org