Hey Joe, I'm a freelancer, and my income varies quite often from month to month. “How can I create a flexible budget that accommodates fluctuations?"
So this is a really good question that a lot of people don't consider when they're creating their budget. As someone who runs my own business and works with freelancers, I know firsthand how tricky it can be to manage an inconsistent income.
I have freelance clients who, when they first started out, had no idea how to budget, especially when they never knew what next month's check would be. This was a bit challenging for us too, as we guided them on managing their finances and repairing their credit. It took some trial and error before I figured out a system that worked for me and my freelance contractors.
In this article, I'll share the budgeting tactics I now use both for my own variable income as an entrepreneur and the advice I give my freelance team. Whether you're just starting out or have been freelancing for years, read on for actionable tips to take control of your cash flow. I'll also sprinkle in some real-life examples of how these methods have helped me and my freelancers manage our finances through up and down months.
Let's dive in!
Contents:
- Talking About Income: What to Expect When Freelancing
- Calculate Your Average Monthly Net Income
- Set Aside Money for Taxes
- Look at Past Years for Seasonal Income
- Reevaluate and Adjust
- Income Fluctuations: Let's Talk Money Management
- Remember To Allocate Funds Wisely
- Conclusion
Talking About Income: What to Expect When Freelancing
So, what really is freelancing? Why is this topic important? Why they should be extra careful in managing their income. We’ll talk more about this on this section.
Here's a rundown of what are the pro’s and con’s of freelancing, specially when we are talking about money matters.
1. Freedom and Flexibility:
Pros:
You'll have the freedom to set your own schedule and work from anywhere.
Enjoy the flexibility to choose projects that align with your interests and values.
Cons:
Balancing work and personal life can be challenging without a structured routine.
Some freelancers struggle with self-discipline and time management.
2. Financial Uncertainty:
Pros:
The potential for higher earnings, especially with the ability to set your own rates.
Diverse income streams can lead to financial growth and stability.
Cons:
Income may fluctuate due to project delays, client fluctuations, or economic downturns.
Managing irregular cash flow and budgeting for taxes can be stressful.
3. Independence and Responsibility:
Pros:
You'll have full control over your career path and professional development.
Opportunity to explore different industries, niches, and creative projects.
Cons:
As a freelancer, you're responsible for marketing, client management, and administrative tasks.
Dealing with rejection, late payments, or difficult clients can be emotionally draining.
4. Work-Life Balance:
Pros:
The flexibility to prioritize personal commitments, hobbies, and self-care.
Avoid the traditional 9-to-5 grind and design a lifestyle that suits your preferences.
Cons:
Striking a balance between work and personal life requires discipline and boundary-setting.
Some freelancers struggle with overwork, burnout, or feeling isolated from peers.
5. Continuous Learning and Adaptation:
Pros:
Opportunities for professional growth, skill development, and expanding your network.
Embrace creativity, innovation, and lifelong learning in your chosen field.
Cons:
Keeping up with industry trends, technology advancements, and market demands can be overwhelming.
Staying competitive requires dedication to self-improvement and staying relevant in a rapidly changing landscape.
With resilience, adaptability, and a growth mindset, you can navigate the ups and downs of freelancing and build a successful and fulfilling career on your terms.
Calculate Your Average Monthly Net Income
As a freelancer, your income varies from month to month. To create a workable budget, you need to calculate the average monthly net income over the past 3 months. Since you don't have a fixed income, you need to take the net average of the last three months' income.
For example, if over the last 3 months I earned $4,000, $3,500 and $5,000, my average monthly net income would be $4,500 ($4,000+ $3,500+ $5,000 = $12,500/3 months = $4,500).
After you've kind of put away money for taxes, especially if you're a freelancer, you have to factor in that it is not your net income. Then it is your gross income, which means you need to set aside whatever your tax bracket's going to be. Remember, this is your gross income, so don't forget to set aside a portion for taxes. If you're unsure about your tax bracket, consider consulting a professional or using online tools to estimate your tax liability.
Set Aside Money for Taxes
Since you are self-employed, you have to pay self-employment taxes. You can start setting aside 30-40% of your income for taxes in a separate savings fund. Trust me, I know how tempting it can be to dip into that fund for other expenses but resist the urge. Keeping this money separate not only helps you stay organized but also prevents any last-minute scramble when tax season rolls around. That way you cannot be tempted to spend it, and it's there when the tax bill comes due.
I have this client who didn't account for quarterly taxes and ended up owing a huge amount come April 15th. Again, ensure you put aside 30% of each payment into a separate "Taxes" fund so you’ll never caught off guard. It's not the most fun way to spend your money, but paying the IRS penalty fees is even less fun.
Look at Past Years for Seasonal Income
For those with seasonal income, it's crucial to take a trip down memory lane. Look at what you earned during the same month last year and budget 3% less as a precaution. So it’s like, “My income usually dips in December and July", then I know I have to be careful. So, for those months I cut my budget by an extra 5-10% to be safe. It's easier to spend less than expected rather than scrambling to make up for a shortfall.
Let's break it down:
Reflect on Past Earnings: Look back at what you earned during the same months last year. This helps you understand your seasonal earning patterns better.
Budgeting Smartly: Suppose your income tends to peak during certain months like mine does in November and December due to holiday promotions. Budgeting 3% lower than last year's income during those peak months provides a safety net.
Extra Precaution: Recognize any months where your income typically dips. For me, it's December and July. I slash my budget by an extra 5-10% for those months to prepare for any unexpected drops in income.
For example, as a freelance writer, income is often higher in November and December because of holiday promotion gigs. So for budgeting, aim 3% lower than last year's income during those months to be safe.
By following these steps, you'll find it easier to adjust your spending and navigate the highs and lows of seasonal income with confidence and ease. In the next section, let’s shift our focus on how to adjust your budget.
Reevaluate and Adjust
As a freelancer, the flexibility to adjust your budget and expenses based on the ups and downs of your income is essential. By accounting for taxes, planning for seasonal changes, and reevaluating regularly, you can create a budget that fits your fluctuating lifestyle and keep your finances under control. Staying on top of the numbers may not always be the most exciting part of freelancing, but it sure beats the stress of being caught unprepared when business slows down.
As for one of my freelance clients, my recommendation was to reevaluate his budget on a monthly basis at first to account for the ups and downs. If he has a good month, I advise him to invest more. if income drops, then he should only spend on critical items. As a freelancer, saving for those rainy days when work is scarce is key to avoiding financial stress. The key is starting with a basic budget and making changes over the next few months based on your actual income.
Using this approach of averaging your net income over 3 months, setting aside money for taxes, considering seasonal income, and frequently reevaluating has helped many of my freelance clients create a workable budget. Give it a try-having a solid budget in place can help reduce stress and allow you to enjoy the freedom of freelancing.
Income Fluctuations: Let's Talk Money Management
Alright, now that you've got a ballpark figure for your monthly income, it's time to divvy it up smartly. Think of it like pie – you want to slice it up in a way that covers your essentials first, leaving room for the cherry on top.
Cover the Essentials: First, make sure your basic needs are covered. That means allocating funds for rent, groceries, utilities, transportation—all the stuff you can't live without.
Prioritize Your Priorities: Once the essentials are squared away, it's time to prioritize. Decide how much you want to allocate towards discretionary spending, like dining out or buying that new gadget you've been eyeing. But remember, moderation is key here.
Tackle Debt: If you're carrying any debt, allocating a portion of your income towards paying it down is crucial. Whether it's student loans, credit card debt, or a car loan, chipping away at it bit by bit will help ease your financial burden in the long run.
Build Your Safety Net: Ah, the emergency fund—every freelancer's best friend. Aim to put at least 20% of your income into a savings account designated for emergencies. Trust me, having that cushion will provide peace of mind during slower months or unexpected expenses.
Stay Flexible: Here's the golden rule – don't lock yourself into too many fixed expenses. Flexibility is key when your income fluctuates, so keep your budget adaptable to changes in your earnings.
Creating a budget as a freelancer is all about finding that sweet spot between security and flexibility. It might take a bit of trial and error, but trust me, you'll get there.
So, remember to monitor your budget and tweak it as needed. Before you know it, you'll be a financial wizard, riding the waves of freelancing like a pro.
Remember To Allocate Funds Wisely
So, we talked about money management in the previous section. Now, lets dip in more on how we can allocate our funds wisely. When you allocate your funds, you're basically deciding where your money goes first. It's like deciding which bills to pay before treating yourself to anything extra.
Start by covering your basics—rent, groceries, bills—the stuff you absolutely need to survive. Once that's taken care of, consider setting aside some cash for emergencies. Trust me, having a little stash saved up can be a lifesaver when things get tough.
And don't forget about any debts you might have. Allocating some money to pay them off bit by bit can really help lighten the load over time.
As for me, I aim to put at least 20% of my income into an emergency fund in case of months when work is slow. The key is not to tie up too much of your budget in fixed expenses in case your income takes a dip.
With some trial and error, you as a freelancer can create a flexible budget that adapts to their unpredictable income. The most important things are accurately determining your average income, setting aside money for taxes, reevaluating often, and allocating your funds wisely between essential and discretionary expenses. If you follow these steps, you'll gain clarity and control over your finances.
Conclusion
At the end of the day, managing your income as a freelancer comes down to budgeting based on averages, planning for taxes, and staying flexible.
As someone who has worked with freelancers for years, the ones who thrive are able to roll with the punches when it comes to income fluctuations. My best advice is to be conservative with your estimates, have an emergency fund, and constantly re-evaluate your budget. It may seem daunting at first, but once you get into a rhythm of monitoring your income and planning ahead, you'll gain confidence in your ability to manage your freelance finances.
And hey, if you're feeling overwhelmed or just need some personalized guidance, don't hesitate to reach out. At ASAP Credit Repair, we're here to support you every step of the way. Whether you need help navigating your taxes or creating a budget that works for you, we've got your back.
The key is to start with a simple budget, stick to it, and make small tweaks over time rather than reacting drastically each month. With some diligence, you can take control of your freelance income, achieve financial stability, and pursue the dream of being your own boss.