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Budgeting for freelancers is essential in navigating the unpredictable nature of independent work. The freelance lifestyle is fantastic when client work is steady and money flows into your bank account. But it has a downside. In the freelance world, we often use the self-explanatory term “feast or famine” to describe our income.
Sometimes, we lose clients, or they don’t pay. We don’t earn money if we’re on holiday or become ill. To survive, it is crucial that freelancers become experts in managing irregular incomes. If you’re a new freelancer or considering taking the plunge into freelance work, these steps can help you budget for the leaner times.
1. Create a Budget
Open a spreadsheet and create income and expenditure worksheets. List your monthly outgoings, such as rent or mortgage, subscriptions, utility bills, Internet and mobile phone, food, vehicle running costs, and anything else that leaves your bank account regularly.
Don’t forget to budget for taxes. It’s always best to put a little more aside than you think.
2. Budget for Your Lowest Income
Note your lowest monthly or annual income. If you’ve just started a business and don’t have enough data to work with, ask colleagues or peers about the minimum monthly income you can expect. After that, arrange your entire budget based on those numbers.
Even when your income exceeds the budget, stick to those numbers because it will enable you to put money aside for a rainy day.
3. Save for a Rainy Day
In addition to putting money aside for taxes, start building an emergency fund. Open a separate account, set aside a monthly amount (as much as possible), and aim to build up at least one year’s income as an emergency fund.
A freelancer’s workload can change in an instant. A long-term client may suddenly go bust, editors leave, and budgets change. Other incidents, like illness, divorce, car repairs, and unexpected household expenses, can also eat into the cash flow.
4. Diversify Your Income
Never put all your income eggs in one basket. That high-paying retainer client who asks for exclusivity can suddenly stop providing work. It’s natural to feel comfortable during the “feast” stages of business, but they don’t last.
Commit to learning new skills so you can diversify your income. For example, if you are a web designer, learn copywriting or digital marketing skills to offer clients additional services.
5. Ask Clients for a Retainer
One of the trickiest aspects of self-employment is not having a set monthly salary as employees do. An excellent way around that is to ask long-term clients for a monthly retainer payment. For instance, if you’re a copywriter, agree on a set amount of work each month for a predetermined fee. Anything over that amount of work has an agreed rate.
You might offer an incentive to encourage clients to commit to a retainer, such as additional services.
6. Invoice Promptly
Few people enjoy the paperwork aspects of self-employment, but prompt invoicing is essential to maintain a healthy cash flow. Depending on the agreed client payment frequency, commit to spending time invoicing each week or month and follow up if the client delays payment.
7. Budget for Taxes
When you first become self-employed, notify the tax office of your start date. Each country has different tax rates. For instance, the rate is 15.3% in the United States and 20% in the United Kingdom (2024).
You may also have to pay tax in advance over a certain threshold on your profits. The best route is to hire an accountant and discuss potential tax liabilities.
8. Pay Yourself a Regular Income
After completing your budget based on your lowest income and putting aside some money for taxes and a rainy day, decide on a realistic figure for a regular monthly income.
Working for yourself can sometimes be challenging, so if possible, allow enough money to enjoy time out or a treat. Stepping away from the business occasionally for much-needed fun enables you to return to work with extra zest.
9. Invest in Retirement
Retirement might seem like a faraway event when you’re young, but age creeps up on you uninvited. The best time to start a retirement fund is when you’re in your twenties and thirties because it allows you to plan for early retirement with enough money to have a comfortable lifestyle in your later years.
Consult with a professional financial advisor and formulate a plan and a budget for your retirement.
10. Keep Business and Personal Finances Separate
You may not want to open a business account immediately, although, in some countries, it’s mandatory. Keeping business and personal finances separate is an excellent plan, especially when submitting taxes.
Additionally, if the tax office ever decides to audit your business, it can be tricky if business accounts aren’t separate.
11. Cut Unnecessary Expenditure
Go through your bank statements and identify subscriptions, memberships, standing orders, etc. that you don’t need or aren’t using. It’s incredible how much you can save on outgoings by cutting back on unnecessary expenses. If you slash $50 a month, that’s $600 a year in your pocket.
12. Prioritize Essentials
When a business is in the “feast” stage, and the money is rolling in, it’s easy to get carried away and overcommit to things we don’t genuinely need. Each month, assess your outgoings and focus on prioritizing only the essentials.
13. Live Within Your Means
Everything in life is transitory, meaning there’s a natural ebb and flow we don’t have much control over. When cash flow is good, you may impulse spend or overcommit financially. Then, suddenly, circumstances change, money becomes tight, and as if by some weird universal law, an enormous bill lands on your doorstep.
Live within your means, and it will feel like you have more control over that ebb and flow.
14. Consider Income Protection Insurance
Nobody knows the future; even when life seems perfect, it can suddenly kick your feet from under you. Income protection insurance may seem unnecessary as it only covers illness and accident and pays part of your average income, not all. However, if you have budgeted to your lowest income, income insurance may cover the outgoings and provide peace of mind until you can work again.
15. Automate Bills and Savings
It’s easy to forget to pay a bill when we’re busy and fail to put money aside for savings or an emergency fund. Put all of your bills on a direct debit. It will free up considerable time and mean no late payment charges.
Automate a fixed monthly amount into your savings account, and increase this figure each year as your income increases.
16. Research What You Can Claim for Taxes
One of the primary benefits of working for yourself is that you can claim business expenses, including Internet, mobile phone, vehicle repairs, fuel, home office, and more. Request a meeting with your accountant and take notes on what you can legitimately claim as a tax expense.
The Purpose of a Budget and 11 Reasons Why You Need One
The primary purpose of a budget is to track your income and expenses. A budget also ensures your bills are paid on time, helps you plan for the future, helps identify any bad spending habits or areas where you could reduce your spending, and ensures that your spending reflects your priorities.
By creating a budget and sticking to it, you can ensure your needs are met, your bills are paid on time, you get out of debt, and you meet your financial goals.
The Purpose of a Budget and 11 Reasons Why You Need One
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