Best Practice Budgeting Tips for Freelancers
If you’re a freelancer, you may wonder why you should bother budgeting. After all, income for freelancers can be unpredictable, so how can budgeting help? The truth is, budgeting is every bit as important for the freelancer as it is for the person with a traditional job.
There are many wonderful “perks” that come with being a freelancer, including schedule flexibility and more self-determination than most professions provide, but budgeting can be difficult with an unpredictable paycheck. However, once you get into the habit of budgeting, you’ll find you can enjoy the good things about being a freelancer even more. Here’s what you should know.
Variable Income Calls for Predictable Expenses
Budgeting for a freelancer is different from budgeting for people with traditional jobs. When you have a predictable paycheck, you can start with income and budget from there. But when your income is variable, sound budgeting requires that you keep expenses as predictable as possible.
Knowing what you spend on food, utilities, phone, internet service, and transportation helps you determine how much you need to earn each month to meet those expenses. Once you have a baseline income figure that covers your expenses, you can more easily gauge how much extra you’ll have each month for savings, extras, or your retirement account. To calculate the baseline income you need, consider the following:
•Food – minus restaurant meals and fast food stops. The best way to determine food costs is to track them for a few weeks. Don’t include the cost of meals out unless you rely on them for client meetings. Consider meals out and drive-thru meals as extras.
•Housing – including property taxes, homeowner’s insurance, or renter’s insurance in addition to your mortgage payment or rent.
•Utilities – which, granted, can be unpredictable. Look at a year’s worth of utility stubs (or ask your utility provider to print out how much your bills were over the past year) and make note of which months utilities are highest. If utility bills vary significantly, see if your provider offers budget billing, which averages out your costs and lets you pay a set amount each month. At the end of the year, you’ll have to make up any differences if you used more electricity than average, and some utilities charge for this service, so consider that factor as well.
•Internet and Phone – both of which are indispensable for most freelancers who work from home. You may not have many choices for internet providers, but you probably can compare several phone plans to get the best rates.
•Transportation – including the cost of car payments, gas, insurance, and registration
•Medical Costs – including the cost of any prescription or non-prescription medications you take regularly. If you have outstanding medical bills you’re working on paying off, include those monthly payments in your baseline budget.
It’s not easy to put away money for emergencies, particularly if you feel like your whole life is a financial emergency, but open an emergency savings account and put in what you can. This may mean giving up some of the extras, but you’ll thank yourself when there’s a hole in the roof or your washing machine quits.
When you’re self-employed, taxes aren’t taken from your paychecks, but you still have to pay them. Most freelancers have to pay taxes quarterly, and setting up a separate savings account just for taxes is a smart way to make sure you have the money available when Uncle Sam expects it.
You may not have access to a 401K, but you can start an Individual Retirement Account (IRA) and put up to $5,500 per year in it. If you’re older than age 50 ½, you can put up to $6,500 per year into your IRA. With traditional IRAs, the money you put in is pre-tax and can lower your Adjusted Gross Income (AGI) and the taxes you’ll owe on your 1040. With Roth IRAs, the money you put in does not lower your AGI, but will be tax-free when you are old enough to start making distributions from it.
Budgeting can be complicated if you’re a freelancer, but it’s every bit as important to financial health as it is for those with traditional employment. Budgeting gives you the truest picture of your financial situation as a freelancer, helps you manage your money better, and means you can more thoroughly enjoy the benefits of being your own boss.