If you are a freelancer or work this way already, budgeting is crucially important, so that your expenses can be separated into personal expenses and business expenses. A good way of overseeing your finances is to open a separate business bank account and create an emergency fund, as well as setting goals.
Since freelancers don’t have regular wages deposited predictably into their bank accounts, it’s important to be prudent in planning for the leaner months and for taxes, and to save accordingly. Here are some suggestions.
Creating a budget
Because freelancers and entrepreneurs have to manage income and expense (which can both be very sporadic), and as many expenses can fluctuate month to month, creating goals (and thinking about how a proposed expense can be paid for in the future) are both self-motivating and an important part of staying on track. Freelance budgets keep you on track and your projects running smoothly. This guide will tell you everything you need to know about creating and using a freelance budget.
First, identify all the income sources: client payments, sales revenue, advertising revenue or other. Once you have all the sources figured out, consider their rhythm and guess at what amount you might make each month for each. Then list the expenses: fixed (rent or utilities payments) and varying (food and entertainment that differ month by month) – be sure to track these separately for tax purposes!
Mint can help freelancers to budget and track expenses, while Quickbooks and FreshBooks can help with time management, invoicing, and saving on office supplies.
You also want to budget some savings, as this will give you peace of mind and let you focus on other aspects of running your freelance business. You can automate these contributions to savings as well.
It’s understandable that, when times get tough, freelancers might resort to credit cards or loans, and that this could easily spiral into unmanageable debt. With interest being added daily to a loan, it’s important to pay it off as quickly as possible; if it starts to feel too much, seek professional help from a financial advisor or tax expert.
Tracking expenses
Financial management is not easy for freelancers. Independently working without buyers or employees to take care of managing money, I personally find it difficult to keep track of my expenses and incomes. An effective way for me as an independent worker to track expenses and incomes is to make a budget. It can prevent you from spending more than you can afford, although it cannot make you rich. In addition, a budget will tell you how much money needs to be brought in every month to cover living expenses and build an emergency fund for yourself.
You make the tax season easier and also assess profitability better when personal and business expenses are not intermingled, but it is a time and labour-intensive process. An expense-tracking app can automate this process: they load bank and credit card transactions automatically, categorise them and, furthermore, have an intuitive way for you to look at all your transactions in a pretty slick user interface, and also identify valid tax-deductible items.
It’s always tough for a freelancer to put savings aside, especially when your income fluctuates. However, if you set yourself a savings goal, this will help you ensure your freelance work is sustainable. If you don’t know how much money you should be putting aside, use an expense calculator.
While full-time employees often have taxes automatically withheld from their regular paychecks, freelancers are responsible for planning a tax payment of their own (which can be unnerving to some, but a budget can help make sure you have enough money set aside for when tax time rolls around).
Lastly, you will need to build up an emergency fund of up to six months’ living expenses in case your freelance work slows down in the off season, in order to take advantage of increased opportunity to get more work done. And of course, adequate insurance policies are a must; you’ll have plenty of choices through online shopping.
Taxes
However, as a freelancer, you also incur many additional outlaid costs that salaried employees do not. This could include taxes, the cost for business insurance or health benefits that should be built into your rates and budgets. Adjusting your rates on a regular basis at least once a year helps you stay competitive while at the same time helps you to keep your books on track, so that you meet tax deadlines on time.
Good financial organisation is important for each freelancer; it helps them to have realistic financial goals, set up a budget, track their spending and save up for their needs. Emergency savings, a savings fund for future needs (such as repairs for your home, or trips or vacations) are very important and can help any freelancer to avoid problems. One option to save money is to allocate 5-10 per cent of your income to an emergency fund as part of your savings plan; you should also consider opening a separate bank account specifically for your freelancing business in order to track your expenses and income.
Financial flexibility takes some time to build as a new freelancer. Having a tax professional to consult and coach is often helpful; likewise, tracking what you make and spend with a spreadsheet or online budgeting tool might help you identify where you’re overspending.
Variations in income should also be factored into your budget. For salaried employees, income is fairly consistent, but it can be incredibly variable for freelancers. If you are looking to set a budget, a good place to start is to estimate your total yearly income and divide it by 12 to get an average monthly earnings number that can serve as a base for your budget.
Utilise high-earning months to prevent having to use credit to pay for expenses in low-earning months, and place surplus income in an emergency fund, or in an account designated for surplus income. This will help to ensure unexpected expenses are not burdensome, and will help a person to establish a cushion against them.
Savings
A freelancer is rowing her own boat, and often setting her own course, but that does not mitigate the need to prepare for the unexpected cost of a storm or sea-creature attack. While salaried workers get regular paycheques from an employer, freelancers must contend with uncertain income and a potentially unreliable taxman. Fortunately, there are tools and strategies to help today’s freelancer weather these waters.
They should first list all their sources of income, and then estimate how much they would be making each month so they can live within their means and save for the inevitable lean months. They ought to open an emergency savings account as well.
One option could be to set up a budgeting app, such as You Need a Budget or N26 Spaces, which enables you split up expenses into fixed and variable budget categories. Then you can set a savings goal within the budget for each category (such as debt payoff or emergency fund). You could then calculate how much you would need to put aside each month by looking at your credit card and/or bank statements (or even receipts) over the past three months to allow you to see what your average monthly outgoings have been.
In addition to saving accounts, freelancers should keep checking and savings accounts separate from personal finances for easier handling and overspending protection. They should also use software such as FreshBooks or Moon Invoice to track invoices and payments while making the workflow easy and clear.
Freelancers also need to have some financial ‘backstop’ in place in case of unforeseen circumstances like illness or unemployment. A simple approach is to choose a modest threshold, and save a set percentage from every payment to a special ‘just in case’ fund.
Freelancers can also shelter some of their income in tax-advantaged retirement accounts, including an SIEA (self-employed individual retirement account), a SEP IRA or a solo 401(k). Meanwhile, you can augment your professional autonomy at the same time as you cut costs: by shopping for the best prices at any given retailer, negotiating service provider contracts, and dropping the subscriptions you don’t need.