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Being a self-employed freelancer boasts plenty of benefits over full-time work, from freedom over your schedule to variety in the work you do. One of the biggest trade-offs, however, is the unpredictability of work and income, which can make it hard to budget and save money.
As a freelancer, it's a good idea to create a budget that adjusts for those monthly income fluctuations and factors in your fixed expenses―along with taxes. Here's how to budget your money as a freelancer.
1. Calculate Your Average Monthly Income
Budgeting is simply the art of knowing how much money is coming in and going out each month, and making sure there's enough to cover expenses.
When you have a full-time job with steady income, budgeting is more straightforward. But those who freelance, whether part-time or full-time, often experience significant ebbs and flows in income that make it difficult to plan.
The best way to create a budget in this situation is to calculate the average amount you earn each month throughout the year. While your actual monthly earnings may vary, it helps to have a sense of your average so you can create a budget.
This calculation is simple: take the total amount you earned over the past year and divide it by 12. Your income may vary from month to month, but this gives you the average you've earned each month so you have a baseline number to use for your monthly income when budgeting. If you've been working for a shorter time, say six months, you can do the same calculation but just divide by six. If you're just starting out and don't have much payment history, try to base your expectations on your current rates and how much work is available.
2. Plan for Taxes
New freelancers often experience a rude awakening when they realize taxes are not automatically withheld for freelance work like they are for full-time jobs. You're responsible for setting aside and paying taxes if you earn more than $400 per year.
You must pay both income taxes and self-employment taxes (this component is currently 15.3% and goes toward Social Security and Medicare). If you're new to freelancing, it's important to factor in taxes on your total income, since all of your payments will be pretax. This might mean you'll need to take on additional work and earn more than you originally expected in order to ensure you're left with enough after you pay your taxes.
Depending on how much you earn, you may be required to make quarterly estimated tax payments to the IRS. This typically applies to those who expect to owe at least $1,000 for the tax year. If you're unsure, consult with an accountant—failure to pay taxes properly can result in penalties.
Whether or not you owe quarterly taxes, it's wise to set aside money to handle your tax obligations when your paycheck arrives so you don't spend money that isn't yours. Not sure what tax bracket you fall into? Try using online calculators or hiring a tax professional. You can estimate how much of each paycheck you receive will go toward taxes.
Once you have a sense of how much you'll owe, every time you get paid you can immediately transfer that amount (say 20%) to a separate savings account so you're not tempted to spend it. Then, when your tax payment is due, you already have it ready to go.
3. Factor in Your Expenses
Now that you know your average earnings and are prepared for taxes, it's time to account for expenses in your budget. Once you've added your expenses, you'll know if your income can cover them, and how much you'll have left for savings and discretionary spending.
One way to look at expenses is if they're fixed or variable. Fixed expenses are the same every month, while variable costs can fluctuate and may not need to be paid every month.
- Rent or mortgage
- Car payments
- Student loans
- Food and other groceries
- Utility bills, including gas, water and electricity
- One-off equipment purchases, such as a new computer
- Advertising or marketing
- Shipping or delivery costs
- Medical bills
- Car or home repairs
As you build a budget, add up your fixed costs each month, and then add up your estimated monthly variable expenses. For recurring variable expenses like food or gas, you can check your recent statements and come up with an average cost, like you did for your income. It's also important to remember seasonal trends; your electricity bill may be higher in the summertime if you're constantly using the air conditioning, for instance.
Add up all of your expenses to gain a sense of how much you need to earn each month to break even. You may also find opportunities to cut unnecessary costs during tighter times. When budgeting for one-time variable expenses, such as new computer equipment or unexpected repairs, it may be best to rely on savings, which we dive into below.
4. Incorporate an Emergency Fund and Savings Into Your Budget
When your income varies, it can be difficult to set aside savings each month—but it's even more critical to do so as a freelancer so you'll have a financial buffer for months where work is slow.
A general rule of thumb is that it's ideal to have enough in your emergency fund that it could cover three to six months of life expenses if need be. That way, you'll be covered if you lose your job, are hurt and can't work or need to cover a major unexpected expense).
Freelancers may need to approach savings differently since there may be months where you don't have unexpected expenses, but your income simply isn't enough to cover everything.
There's a way to overcome this through careful budgeting.
Let's say you're a freelance graphic designer with monthly expenses that reach an average of $2,500. In this example, your average monthly income is $3,000, though it typically fluctuates between $2,000 and $4,000 per month.
With $2,500 in estimated monthly expenses, you'll have some months where you earn $500 less than what you need to pay all the bills—and some months where you earn $1,500 more.
The trick to smooth sailing year-round is to take advantage of the high-earning months by setting aside some (or all) of the money that's left over after you pay your expenses. You can put this toward your emergency fund, or in a separate account dedicated to surplus income. Then, when you have a low-earning month that doesn't bring in enough for your expenses, you can dip into your surplus to get by and avoid going into debt. You can also set aside some of this surplus money into savings for discretionary spending like vacations.
Don't Go It Alone
Budgeting as a freelancer can be challenging, especially if you're new to being self-employed and overwhelmed by the different taxation process.
It may be helpful to work with some professionals, at least to help you get started. A tax professional, especially an accountant who specializes in freelancers or self-employed individuals, is an excellent option. These experts can help you get a sense of how much you should be setting aside for taxes.
A certified financial planner who works with entrepreneurs can also help you assess your income and expenses, and make sure you've developed a budget that helps you both maintain a successful freelance business while also planning for the future.
Plan Ahead for Success
Doing the legwork to build a budget as a freelancer isn't exactly fun, but you'll thank yourself later. Mapping out and sticking to a budget helps ensure you're bringing in enough income overall to cover taxes and expenses, while also setting aside money for slower months and future goals. It helps you avoid coming short and falling into debt, which can hurt your credit score.
In addition to stabilizing your finances, minimizing debt and making all of your payments on time will also help your credit. So will signing up for Experian Boost®ø, which adds positive payment history for your phone, utilities and streaming services to your Experian credit report and can potentially lift your credit score.