Budgeting and Survival Tips for Freelancers: A Roundup of Advice

A freelancer budgeting

Budgeting and survival tips for freelancers abound on the web. We’ve trolled freelance budgeting articles and distilled this wisdom down to 9 nuggets compiled here for your convenience. The best advice is often gained from those who have walked in your shoes. If you are a freelancer, and you are currently operating without a budget…you are not alone, but, there are many reasons to budget.

Budgeting? Isn’t that for Larger Businesses?

Many freelancers (myself included), consider budgeting a discipline for larger businesses not freelance businesses. This mindset, for me anyway, stems from thinking that because my income and expenses are smaller than those of small businesses, I can “freewheel” and because my income can fluctuate wildly (the nature of freelancing) it’s difficult to estimate monthly income.

This ad-hoc way of managing freelance business finances is like driving with your eyes closed. I’ve learned from experience of the hazards of doing so. I recall, at the end of my first year freelancing, a larger than expected tax bill that made me fall off my chair upon reading the total due. It was a long and painful drop onto my rear, but one which certainly made me take heed. Some lessons you only need to learn once!

Following are a few gems of budgeting and survival wisdom you can use in your freelance business.

Flareapps.com small business tip #941) Build your budget around your lowest-earning month

In “8 Budgeting Tips for Freelancers” , Austin L. Church, entrepreneur, writer/renaissance man, suggests building a budget using your worst month as the basis for monthly budgeting. “The goal is stability in the midst of unpredictability”, he writes. Because a freelancer’s income can fluctuate drastically, using a “worst-case scenario budget” is the safest approach. If you earn more than your worst-case month, great!

Flareapps.com small business tip #952) Set up a retirement account

If you’re freelancing, the only person taking care of you is…well…you. In “Budgeting for the Self-Employed“, Erica Gellerman, small business strategy and finance expert, advises freelancers to set up a retirement account. “Another truth about self-employment”,  she says, “is that if you don’t save for retirement, no one else will”. Gellerman suggests putting 10%/month into a retirement account (after you’ve put aside approximately 30% for taxes).

Flareapps.com small business tip #963) Open business bank accounts (don’t use personal bank accounts for business)

Tracking income and expenses is made more difficult if you are using your personal financial accounts for both personal and business use.  In “How Freelancers Can Manage Their Finances Automatically“, Sajad Ghanizada suggests opening separate business accounts. Separating personal accounts from business accounts makes parsing out business income, expenses, and bank charges much easier.

Flareapps.com small business tip #974) Track everything!

This one comes from yours truly and Flare. It nearly goes without saying that you should know, to the penny, how much you earn and how much you spend in any month. I’m not just talking “averages” here. I mean exactly. The only way to do that is to record every transaction…somewhere. Whether you are recording income and expenses in a spreadsheet or using accounting and finance software like Flare, the important thing is to do it. Make recording income and expenses as natural as breathing, because doing so could keep your business breathing!

Tracking everything you earn and spend will help you: determine monthly net earnings; identify deductions at tax time; see income and expense trends over the year so you can plan for seasonal peaks and valleys; see wasteful expenditures you can eliminate or reduce; and, budget more precisely and plan for profit.

This would be a good time to suggest you sign up for a free trial of Flare. Not only is it awesome accounting software for small businesses, solopreneurs and freelancers, it comes with a powerful budgeting feature.

Flareapps.com small business tip #985) Know your discretionary expenses

Discretionary expenses are those that you have control over. Some will be for business and many will be personal. While freelancing, you owe it to yourself to examine your spending habits. After noting what you spend on discretionary items in a month, ask yourself tough questions. Do you really need:  180 channels in your super-duper cable package; a bigger TV; to trade up to a new smartphone with each release; a week in Mexico this winter; that new desktop or laptop you’ve been salivating over; to dine out every Friday?

Discretionary expenses add up, sometimes to many hundreds of dollars per month. If you are determined to freelance, you should also be determined to do everything you can to make it work. Making a few personal sacrifices, like a smaller cable TV package or dining out less often could save you hundreds per month.

In “9 Keys to Budgeting on a Fluctuating Income“, Holly Johnson writes “Sometimes, taking a cold, hard look at spending from previous month’s expenses is all it takes to discover huge, painful leaks in your spending. If you don’t like what you see, now is the perfect time to put yourself on spending diet and whittle those numbers down”.

Flareapps.com small business tip #996) Adopt invoicing practices that help you manage cash flow

Our blog post “5 Invoicing Best Practices for Better Cash Flow“, we provide a few tips that will help you get those earnings into the bank where they belong!

  1. Use invoicing software.
  2. Define shorter payments terms so you get paid faster.
  3. Take some payment up front.
  4. Provide incentives such as discounts or future discounts (credits) for early payment.
  5. Stay on top of unpaid invoices. Send reminders soon after the payment due date.

Flareapps.com small business tip #1007) Put aside 30% for taxes each month

As a self-employed person, you are responsible for paying your taxes. Back when you worked a day job, your employer took that money off the top, so you likely paid more attention to your net income than your before-tax income. Not anymore! When freelancing, it’s vital to set aside about 30% every month.

In “How to Create a Self-Employed Budget“, Rebecca Healy, founder of kontrary.com writes “Since the IRS requires taxes to be paid at the time the income is earned, you may be subject to a penalty if you do not pay enough by the due date each quarter. Don’t forget, the self-employment tax is in addition to income tax. So plan to set aside 30 percent of your income minus expenses into a short-term savings account, and set aside money each time you are paid.”

Flareapps.com small business tip #1018) Budget your rainy-day fund

When you are freelancing, you need a safety net more than ever. Putting aside something each month is will help you survive if lean times come – and they will. Some suggest a savings of 3 months’ net income in your rainy-day fund. It may take some time to save that amount, but if you put something aside each month, you’ll build that safety net without even noticing.

In Emma Lunn’s The Guardian article, “Freelance or Self-Employed? Here’s How to Survive“, Maike Currie, an investment director, suggests “…the general guideline is to hold the equivalent of 3 to 6 months of your earnings.” To provide a deeper safety net, Maike says that freelancers may want to put away 6 months in a savings account.

Flareapps.com small business tip #1029) Consider budgeting for health insurance

In “A New Way for Freelancers to Find Health Insurance“, Anne Fisher, writer and Fortune columnist, writes “Anyone who’s tried to buy health insurance by searching online or through a government exchange knows how daunting it can be. You confront a seemingly limitless range of choices, each with its own premiums, deductibles, co-pays, provider networks, and other details, often buried in fine print.”

If you live in the U.S, you can search the HealthCare.gov marketplace for plans in your state. The drawback is comparing the plans and reading all the fine print! Freelancers Union, and organization of 250,000 member freelancers, has created the National Benefits Platform. Freelancers Union researchers have already sifted through providers and identified good matches for freelancers. The platform allows you to search for more than health insurance. You can also find term life and disability, two options that freelancers may want to consider if family members are depending on their income.

In Canada, health coverage is not such an issue for freelancers. Government health care is predominantly taxpayer funded (not really “free” but certainly affordable). Only three provinces (British Columbia, Alberta, and Ontario) charge additional affordable monthly premiums.

Canadian freelancers with family members who are dependent on their income may also want consider additional insurance such as term life and disability.

Have Tip #10?

We leave you at an uneven 9 tips. If you have a tip that you’d like to see as tip number 10, let us know!

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