The skills and know-how to not only survive — but thrive — with an up-and-down, feast and famine income cycle can be challenging even for a seasoned freelancer. Those with unpredictable cash flow must arguably budget differently, or at least more carefully, to not only make end’s meet when work is scarse, but also to remain responsibly frugal when funds are flowing fast. A freelancer’s life is never dull–which is all the more reason to make sure your money situation stays remarkably reliable.
Track Your Spending
It’s prudent for those whose income is unstable to work “backwards”—starting with the total amount you spend first, in order to calculate how much you’ll need on an ongoing basis. Keep track of your spending for at least a few weeks or a couple months so you know what to “pay” yourself each month no matter what kind of money you’re making.
Using a 50/20/30 rule, the idea is to delegate all your money into three categories: essentials, priorities and lifestyle.
Get organized by setting up a few different bank accounts. As a freelancer, you might already have a business account, and all your income should be flowing into here, as this is the account you’ll write yourself a “paycheck” from. Your personal checking account is where you pay all your bills, including your priority spending.
Roughly half your income is probably caught up in true necessities like rent or mortgage, basic utilities including internet and phone — if you work from home, this is a necessity — as well as transportation and groceries. Only include dining out if it’s essential to your job such as for business meetings, etc.
Anything you make above this line goes to your priorities that help ensure a better future: paying down debt, adding to a retirement plan, and contributing to an emergency fund. At least 20% of your income should be delegated in this way. Aim to save at least 6-9 months of net income in this account, to be used only when you’re out of work or have had a medical, dental, home or auto emergency. For freelancers, the more you tuck away now for a rainy day ensures you can make it through times of tough employment drought.
Total Up Your Taxes
Taxes are another essential, one that can hurt come tax time if you failed to plan all year. Some freelancers recommend setting up yet another bank account to hold annual or semiannual payments for income taxes, property taxes, and home insurance — which you automatically contribute to so you don’t have to think about it. Use an online tax calculator to get a rough idea of how much you’ll owe, and this number gets added to your baseline. Farnoosh has many more tips in this column where she addresses a freelancer’s questions about paying Uncle Sam. Every month, after you’ve paid yourself for your essential expenses and transferred amounts into your financial priorities accounts, you’re ready to….
Live it up
No more than 30% of your income should be earmarked for lifestyle splurges, but what you do have in this account is fair game for fun. Whatever you have left over in your budget can determine what sorts of “extras” you pay for whether entertainment, eating out, fancy coffee drinks, vacation, clothes shopping, you name it — it’s is the category we work for so we can enjoy life to the fullest extent we can afford.
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