Freelance work can pay inconsistently and slowly, but your bills don’t care. Here’s how you can stay ahead of your expenses when your finances are unclear.
Freelancing gives you the freedom to live a more independent life as well as the experience of getting paid for doing something you love. However, understanding the complicated world of personal finance as an independent contractor may be the most confusing part of the job.
This line of work doesn’t always pay steadily — the amount you take in can vary from month to month, and it’s often difficult to predict where you’ll be next month, let alone next year. This makes budgeting more challenging, but also more important. You need to be able to plan your finances adequately so you can pay your bills on time and save for retirement and times when work is slower.
A written budget is essential to financial health, but you may feel reluctant to write one when you don’t know how much money you’ll make. That’s why you have to budget based on your projected income. The best thing to do is make an educated guess about your income for the month and budget based on that. You can change your projected figures to match the real income you take in should your actual earnings vary from your projection.
During the first few months, your projections may turn out to be far off base. That’s okay. It simply means you’ll have to adjust your budget frequently. After three or four months of budgeting, you’ll learn to predict your income more accurately.
In addition to budgeting for the month, write a mini-budget for each payment you expect to receive. Write down how much each payment will be, how much you plan to put aside for taxes and emergency savings, and which bills you plan to pay with this income. Planning your spending in advance helps avoid reckless purchases when you’ve finally got money coming in, especially after having gone a while without a paycheck.
Before doing anything else when you get paid, put some money into your savings account. These savings are vital for making sure you can cover the following expenses:
Your taxes won’t be automatically deducted from your paychecks like they were when you were an employee. If you don’t put aside money after every paycheck, you’ll face an unpleasant surprise at tax time.
Open a separate savings account for your tax payments. After each payment, transfer 25 percent to your savings account. Use this money to pay your estimated taxes, which are due at the end of every quarter. Additionally, you should do some research ahead of time to make sure you know which taxes you owe, how much they amount to, and when you owe them so that you aren’t hit with unexpected expenses.
You need to put aside money for emergencies. There will be times when work is sparse or poorly compensated, and you’ll need that money to keep the lights on. The personal finance experts at Mint recommend having three to six months of post-tax income for emergencies.
If you can afford it, you should also put money into a retirement account. Financial experts recommend putting 15 percent of your income into retirement investments. However, you should not start until you have established your emergency fund. If you withdraw your retirement funds in an emergency you can incur severe tax penalties.
After you’ve put aside money for taxes, emergencies, and retirement savings, your next order of business is always to pay the essentials, or “fixed” expenses. If you aren’t consistently earning large sums of money, then you’ll have to prioritize your spending. Rent and mortgage payments, food, and utilities — including your cell phone and internet bills — should always come first.
Next, take care of bills like health and auto insurance before paying debts. If at all possible, leave a small amount in your account after paying bills — between $50 and $100 — so that you’ll have money for fun and for unexpected costs.
Budgeting is challenging when you don’t have a steady income, but it isn’t impossible. If you create a budget based on your projected income, plan your bill paying, set money aside for emergencies and taxes, and prioritize your spending, you can build a sound financial foundation and still have money to spend on the fun things.