In another article, we showed you how to budget as a freelancer by projecting your income and expenses. But knowing the steps to building a freelance budget and actually putting it into practice are two different beasts. That’s why we’re back with some handy tips to simplify your freelancer budget – and, hopefully, avoid triggering a surprise audit by the IRS.
1. Separate your business and personal finances
Have you ever heard the phrase, “Good fences make good neighbors?” As it turns out, the same is true of your freelancing finances.
One of the most common mistakes when hanging your own shingle is blending business and pleasure. On its face, spending and saving from the same accounts seems simpler. Fewer accounts to track means less time spent managing your finances, right?
Wrong.
Mixing finances actually makes it harder to build and manage your budget, as you’ll spend more time sorting your expenses and calculating your tax bill.
Plus, come filing season, blended accounts means more time swimming in a sea of open computer tabs, financial statements, and misplaced receipts as you attempt to sort business and personal expenses. Was that $12.99 cheeseburger for a business lunch or a personal lunch? Without your receipt, you'll never know!
The better option is to keep your finances tidy from the get-go by opening separate business accounts. Ideally, that means maintaining at least one business checking account with a high-interest savings account for your tax withholdings.
The same goes for your debts: if it’s a business expense, charge it to a business card or take out a business loan.
Shuffling and tracking separate cards and accounts may take some getting used to. But as you stick with your routine, managing your finances will become second nature.
2. Set a healthy “salary” that fits in your freelancer budget
Once you’ve separated your finances, it’s time to cement that divide by giving yourself a “salary.”
One common pay structure is to pay a set rate, such as $1,000 per week or $2,000 every other week. Alternatively, you might pay yourself a percentage of your after-tax and expense earnings, such as 50% or 75%.
Either way, you’ll want to be sure to cover your business expenses first, then stash the remainder in your business account. At the end of the year, you might pay yourself the rest as a bonus or reinvest the remainder into future growth.
Why set a salary?
Setting a salary accomplishes several goals.
For starters, it ensures that you don’t bleed your business dry – you’ll need some of your income to cover taxes and business expenses.
Establishing a regular payment system also helps smooth over income fluctuations. It’s common for freelancers to see $7,000 in one month and $2,000 the next based on differing workloads and client pay schedules. Without a regular payment system, you may fall prey to overspending in rich months and failing to save enough for lean ones.
That leads to the third perk: your budget. If you can reasonably count on a set salary each month, budgeting for personal needs and wants becomes that much easier.
3. Contribute to an emergency fund
Emergency savings are an essential part of any complete freelance budget. Not having liquid funds set aside increases the risk that losing a client or suffering a medical event means racking up unnecessary credit card debt.
Generally, experts recommend saving at least 3-6 months’ worth of household expenses in an emergency fund for worst-case scenarios. As a freelancer, you might aim even higher – say, saving 1-2 years’ worth of expenses.
Of course, saving that much doesn’t happen overnight. Start with small goals – 1 month, 6 months, 9 months, etc. – and take yourself out for a fancy meal when you reach them. Ideally, you’ll stash your cash in a high-yield savings account or penalty-free certificate of deposit (CD) to reap the benefits of compound interest, too.
And if you have to tap your fund for any reason, hop right back on that savings train as soon as possible!
4. Get ahead with a buffer account
Another freelancer budgeting tip is to set up an interest-bearing “buffer” account separate from your tax and emergency funds. This is just what it sounds like: a place to stash cash to buffer against unstable cash flows and future expenses.
You can fund this account using different strategies. For instance, you might save any extra dollars that your regular freelancer budget doesn’t account for. Or you might save a percentage – say, 30% or 50% – of any extra freelance dollars and put the rest into your personal savings.
However you decide to save, a buffer fund gives you the flexibility to breathe in lean months, save for future growth projects, or even take a “paid” vacation without worrying where next month’s paycheck will come from.
5. “Assign” steady income to steady bills
You might have recognized a common theme here: as a freelancer, a fluctuating income is a fact of life. When you have regular bills to pay and mouths to feed, that reality can grow anxiety-inducing.
One way to ensure your obligations are covered is to “assign” relatively steady income to your most important bills.
For instance, say you have three clients: a two-year contract that pays $1,500 monthly; a one-year contract that pays $2,000; and a six-month contract that pays $1,000. Under this structure, you might allocate:
- $1,500 per month to business expenses, taxes, and savings
- $2,000 per month to rent, utility, and grocery expenses
- $1,000 per month to savings and entertainment spending
By assigning your income to regular expenses, you can breathe a little easier knowing your essentials are covered for at least a year. Then, you can use any extra contracts to supercharge your savings or fund next summer’s vacation.
(On a related note, if you also work a W-2 job, consider assigning that paycheck to your essential bills. That frees up your freelance income to shore up your savings and build your business even faster.)
Consider looping in an expert to build your freelancer budget
At the end of the day, freelancing provides the freedom and flexibility to live life on your terms…once you’ve mastered your finances, that is. A proper freelance budget is just one tool to help you meet your savings milestones head-on.
However, not everyone has the time or confidence to set up their first budget alone – and that’s okay!
Many freelancers work with a professional, like a certified public accountant (CPA), to start building good habits from the beginning. A qualified CPA can help you assess your income and expenses, establish a budget, and find the right tax-advantaged retirement accounts to protect your future.