Quitting your secure 9 to 5 job for the freedom of freelance is a really hard transition to make mentally. For many of us out there, the 9 to 5 grind is all that we know. But a freelance life absolutely possible, once you take that leap (and for some, it’s a HUGE leap…) of faith.
A client of mine recently took that leap and decided to go freelance, so now, they’re wondering – How the heck do I budget?!
The biggest challenge as a freelancer is that your income is no longer as predictable as that biweekly check that came from your 9 to 5. As they say, it’s feast or famine – there’ll be months where the dough rolls in (feast) and there’ll be months where the dough trickles down (famine). Because of this, it can seem like a daunting task to figure out how to live on such variable income.
1. Get familiar with your personal monthly cash flow.
What are your personal expenses each month? Rent? Food? Utilities? Loan payments? Fun stuff? Go back to basics and truly understand what it costs to support your baseline lifestyle. It might help to go back a year and see what you spent month by month. I created a simple spreadsheet that you can download here to get you started. (Go to File –> Download –> Microsoft Excel to download a copy and make your own changes.)
2. Maintain an emergency fund.
I pretty much require all my clients to build an emergency fund, and it is no less important to have one as a freelancer. You may need to dip into your emergency fund during those famine months when income isn’t as high as it could be, or when an actual emergency comes up, like getting into a fender bender on the road or needing a root canal. (If you frequently find yourself in famine months, that means you need to generate more income overall.)
But when those feast months come, be absolutely sure to replenish your emergency fund back to its full glory.
How much should you set aside for your emergency fund? At least 3 months of necessary expenses. “Necessary expenses” is defined differently by each individual, so ask yourself – What is absolutely, non-negotiably necessary for me to live? For me, that means rent, food, and my student loan bill.
3. Get familiar with when you get paid and plan out those dollars in your budget.
When do your clients typically pay you? If you have regular clients, hopefully they pay reliably on a specific day of the month. Maybe it’s on the 1st, the 15th, or the 30th. Whatever that might be, track it. This will help you understand when money is likely to come in and when you need to stretch your dollars when it doesn’t, which brings me to my next tip.
4. Budget your money and track your expenses regularly.
No matter who my client is, I recommend budgeting on a monthly basis – in other words, plan your money for at least one month ahead. My husband and I do this together at the end of each month, where we forecast our income that month as well as our upcoming expenses.
I recently marked Finance Fridays to keep myself accountable (plus, I love the alliteration!), so I use this time to track my expenses, categorize them, and edit my budget as needed. This has been great for our household, as one week we may overspend in restaurants and know we need to cut back on it the following week.
This will definitely be helpful for you freelancers, as it will keep you more accountable in ensuring the dollars you plan out are going in the right places. And if you happen to overspend – I definitely do, and I know you will also (we’re only human!) – find a surplus somewhere in another budget line and cover your deficiency.
5. Set aside enough for taxes and for your own savings.
To avoid fines and getting an unexpected, huge tax bill, set enough aside as you generate income. The general rule of thumb is to set aside 25-30% of your gross revenue for taxes.
Also set aside some money for yourself! No matter what your short-term or long-term savings goals are, be sure to fund them with each invoice that’s paid. That could mean simply setting aside 5% or 10% and putting in your emergency fund or a general savings fund. Or perhaps you want to split that evenly among your vacation fund, professional development fund, and your future-child fund. Whatever those goals are for you, find a savings method that works best for you.
If your budgeting style includes separate savings accounts or if you have a line item in your overall budget, definitely add a Taxes budget as well as a Savings budget for this reason. Physically or mentally setting these dollars aside will help ensure you don’t dip into either taxes or savings for impulse buys.
6. Keep your work expenses separate from your personal bank account.
Speaking of taxes, separate work transactions from your personal transactions. In other words, get separate bank accounts for each. Opening a business bank account does take some front loading, such as filing your business license, but it will be worth it in the long run when tax season comes.
By doing this up front, there’ll be no need for you to sift through your personal bank account for all those times you paid for supplies, web hosting services, or for when a client paid you. Plus, by keeping your accounts separate, it’ll be very easy to know what other non-obvious expenses were work-related and tax deductible, like coffee dates, business lunches, or professional development classes.
Ready to become a freelancer but don’t know where to start?
I’d love to work with you! I have experience working with clients making this big transition, and I want to help as many people live their dreams. Schedule a free call with me here to see if working together makes sense.