Introduction
Individuals often pursue freelancing due to their desire for autonomy in direction and diversity in projects as well as work schedule flexibility. Within the financial implications of being a freelancer there are certain economic challenges related solely to freelancing. The unpredictable nature of income in freelancing, is one of the greatest challenges to this type of work. Because extra income from one month to the next could and often does vary, freelancers need to strategize and adopt specific financial working methods due to the lack of the regularized stability of the regular salaried job. Examinations of budgeting with freelance income focus on some of the most essential strategies, these include: income tracking, budgeting basics, target setting, emergency fund strategies, tax procedures, and financial management tools.
Understanding Freelance Income and Cash Flow
Before a freelancer is able to budget properly, they need to know how their income varies. Freelancers tend to not have consistent earnings, unlike “regular” employees, because of the nature of inconsistent workloads, client payments, and client demand. Therefore, the first important step is to establish income patterns.
Once freelancers understand their income, it is important to track and keep an accurate record of their income each month for at least one full year. Understanding income patterns is crucial and allows the freelancer to more accurately predict their income patterns moving forward. Freelancers can calculate their total income from the last 12 months, and take the average of each month for budget purposes. That average becomes the starting point for the budget. It’s also important to know cash flow; simply knowing when money is coming in and money is going out is particularly important for freelancers. Freelancers often have to wait for client payment due to their clients’ timelines, so knowing when money is coming in would help in forecasting expenses.
Creating a Baseline Budget
A baseline budget can be completed to determine the minimum level of money you need each month to afford all the necessities of living. If you do not include a baseline budget in your income plan, you may run the risk of spending every penny you make. The minimum living expenses that you should include in your baseline budget include: rent (or mortgage), utilities, groceries, transportation, insurance, and any debts you may owe. Identifying the non-negotiable expenses allows freelancers to determine the minimum income needed to maintain the same lifestyle.
1. Baseline budgets can be completed by;
2. Listing all fixed variable expenses.
3. Highlight the essential costs.
4. Tally up the total monthly costs.
5. In your income plan, baseline budgets can help freelance income to set realisitic income goals based on actual living expenses, and help you make good income decisions when you earn low, binge, or on-peak income.
Establishing Financial Goals
Establishing financial goals gives freelancers focus and motivation. Goals can include saving to build an emergency fund, for retirement saving, for things like professional development or investing back in the business, purchases for equipment and tools. Ideally, goals will have a certain specificity and/or level of clarity that fits the SMART (Specific, Measurable, Achievable, Relevant, Time-Bound) model.
Freelancers should develop short (1 year), medium (1 to 5 years) and long (5+ years) goal areas and set aside a portion of their income to these goals as it also helps them build safe and secure financial futures despite variable and sporadic incomes.
Building an Emergency Fund
For Finance for Freelancer , an emergency fund is a necessity due to the nature of inconsistent and variable income. Generally speaking, an emergency fund should cover 3 to 6 months of basic living expenses. It will provide a cushion to help you get through times when income is low, you are sick, dents unexpected expenses crop up.
Here’s how to build an emergency fund:
1) Set a goal each month and start small.
2) Automate your transfers to an account you don’t access.
3) Use any unexpected money or appreciation from the business to fund your emergency fund.
4) An emergency fund can help alleviate some financial stress and provide you with a little more peace of mind.
Managing Taxes
Freelancers, as self-employed individuals, are liable for their own taxes, including self-employment tax and income tax. It is important to put aside a portion of each payment (typically 25-30%) for taxes before spending it. A great way to do this is to put it in a separate savings account designated for taxes.
Storing income and expense records is very important for tax reporting, and also just as important, their deductions. They should also consider consulting an accountant or using tax software for the “self-employed.”
Saving for Lean Months
With income volatility, some months tend to be a little tighter than others. To prepare for our slow periods, a freelancer can save during the high-income months to cover their expenses during the slow period. To facilitate saving, a freelance worker can create a “buffer fund” or “income smoothing account”.
Directions for setting up a buffer fund include:
• First, a freelancer estimates their target monthly income based on their baseline budget.
• Second, during months when income exceeds target, the excess income would get transferred into the buffer fund.
• Finally, when the months are lean, freelancers can use their buffer fund to keep their cash flow level and not let a slow month derail their budget.
Diversifying Income Streams
Having a single client or source of income can be a source of risk. So diversifying your income creates a source of stability to your earnings. Freelancers can:
1. Provide services to multiple clients
2. Provide complimentary services
3. Create passive income via digital products or investments
4. Diversification reduces reliance on one source of income with potentially greater financial security overall
Using Financial Tools and Apps
There are so many tools to help freelancers. Budgeting apps (e.g. YNAB – You Need A Budget, Mint, EveryDollar) allow freelancers to easily track their income and expenses. Accounting software (e.g. QuickBooks, FreshBooks) allows freelancers to invoice clients and track expenses and taxes.
There are plenty of benefits to using tools including: simplifying financial management, tracking length of spending, and providing a sense of control.
Regularly Reviewing and Adjusting the Budget
Budgeting is not a one-time-event. Freelancers should actively monitor and reassess their budget on a monthly or quarterly basis to stay in touch with their financial health and to monitor any necessary changes based on income or expenses. Ask yourself:
1.) What did you spend compared to your budget?
2.) Which areas did you overspend in and where did you underspend?
3.) What changes do you need to make based on your income or expenses?
4.) The practice of reflecting on your income and expenses regularly helps freelancers discern between being on budget while developing bad financial habits and unique circumstances.
CONSCIOUS SPENDING & FRUGALITY
1.) One of the greatest benefits of being a freelancer is living below your means. Being frugal does not mean depriving yourself of life’s essentials; it means being mindful of your spending. Consider:
2.) Buy nothing on impulse.
3.) Think about what value a price represents.
4.) Give yourself a grace period to consider large purchases.
5.) Thoughtful spending allows you to spend your money on what you value and need which is a key to financial health and wellness.
INVEST IN YOUR ATTRACTIVENESS
While budgeting is more systemic method for eliminating costs, it is equally important for freelancers to set aside money in their budget for new skills, knowledge, and applicable tools that enhance their potential to earn a good income. That means putting aside a small portion of the budget to spend on career advancement: courses, certifications, tools that people will actually use, even when they may not need to use many of them.
When you invest in you, you can expect: better work, happier customers, and hopefully, more income.
DEVELOP A BUSINESS Mindset
Freelancers must think of themselves as business owners, which means:
1.) Treat personal and business finance as two separate accounts.
2.) Have a business plan with established income.
Conclusion
Having an irregular income as a freelancer means you need to rely on discipline, proper planning, and the ability to adapt. You’ll need to know when to look to your income patterns for guidelines, develop a baseline budget, plan ahead for financial goals, understand how to use financial tools, and be disciplined to see your way to a more stable financial future. Moreover, when you are freelancers, the potential to afford savings for slow months, proper tax management, diversifying income sources, and thinking from a business perspective all work together to build a financially resilient perspective. Given time with these practices, freelancers will be able to become less fearful of income uncertainty and are likely to achieve real financial stability.
Navigating the changing world of freelancing and all that finances encompass can easily be seen as a struggle, but it really is a space for serendipity and challenged opportunity. Letting go of the total unpredictability and out of control fear stays as part of the challenges freelancers face, and those challenges stand in front of success, making mastery of budgeting and planning for larger financial responsibilities a source of inspiration, creativity, and empowerment along the way. Together, those ideas and experiences can turn a fear of financial uncertainty into a faith-based, positive, confident relationship with finance as a whole and remember that financial volatility is not always bad and maybe sometimes leads to personal growth.
