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Freelancing dreams often begin with visions of saying goodbye to a demanding boss, escaping office politics and creating more time and freedom than a regular 9-5.
These and other benefits await those who take the leap and work for themselves.
Unfortunately, freelancers are often surprised by the realities of the solopreneur life.
Someone forgot to tell them that the reality of freelancing means lots of rejection before landing a great client, higher than expected expenses, varying income most months, and just plain slow times of the year.
Smart entrepreneurs know budgeting for freelancers looks different than financial planning for workers who receive a regular paycheck.
And as a result, it is critical that any freelancer creates a solid budget to ensure their finances thrive.
By taking the time to build a budget, you put in place a necessary financial planning tool that can help you meet work goals by identifying actual earnings and expenses.
Avoid using one and risk going out of business in a year or possibly less.
Here are our top tips and tricks on budgeting for freelancers that will start you off on the right track and help you reach your goals.
Budgeting For Freelancers 101
How To Budget Your Money
The foundation of a budget is income.
You first have to figure how much money you have coming in each month.
This is where budgeting for freelancers begins.
Once you know the dollar amount you can expect each month, then you can allocate money in your budget.
This works well when you receive a steady paycheck but what if like most freelancers your income varies month-to-month?
One month you’re making $5,000 and the next $8,000.
How should you budget your money?
There are a few options for you.
The first is the hardest, but long term, it is the best solution.
It is to figure out how much money you need and then charge that amount.
Sounds complicated but with the right hourly rate calculator, it’s a breeze.
The second option is faster, but isn’t as exact.
Use the lowest monthly figure from the last three months as the basis for your budget. Any excess funds can be used to support your overall financial goals.
Expenses can make or break a budget regardless of how much money you make.
If you don’t consistently account for your expenditures, you will most definitely go over budget. When you are budgeting as a freelancer, keep in mind that you will continue to have variable and constant expenses, the same as when you were receiving a regular paycheck from an employer.
- Variable Expenses = Costs that may change monthly, e.g., electric bill
- Constant Expenses = Costs that stay the same month after month, e.g. rent
You will also need to take into consideration the expenses incurred by your business. Remember the printer you had to buy two months ago to replace the old one? What about the software license upgrade you bought last week?
Include your Convertkit, SEMrush, MileIQ or (fill in the blank) subscription service. These expenses need to be considered when you’re establishing your budget.
By simply comparing income versus expenses, you may find that you need to raise your rates or secure additional clients.
Keep good records.
You want to make sure you keep track of all of your expenses related to your business so you can take advantage of any tax saving opportunities. This is because most expenses can be deducted from your income, resulting in you paying fewer taxes.
This is especially important as a freelancer since you are paying the full share of FICA taxes in addition to self employment taxes.
Don’t forget the tax man.
One of the most significant changes to working for yourself is having to take care of your taxes. As a freelancer, no one is paying taxes on your behalf. Unlike with an employer who took taxes out before you received your paycheck, you are now the person responsible for handling your Social Security and Medicare taxes which together make up the self employment tax.
As of this writing, the self employment tax rate is 15.3%.
If you delay paying your taxes, you may have a hard time meeting your tax obligation in a lump sum and may be subject to a late filing penalty. Many self-employed individuals file estimated taxes quarterly to offset a lump sum payment.
Remember, since you no longer have an employer withholding taxes from your earnings, it’s your responsibility to pay Self-Employment Tax.
For example, invoicing for $10,000 last month doesn’t mean you get to keep $10,000. Set aside money on at least a monthly basis. Experts recommend that freelancers put aside 25% to 30% of their income in a separate account to cover taxes.
The exact amount you must pay will depend on your overall financial status. Consult with a tax professional to avoid any unpleasant surprises.
Gone are the days of pre-tax matching 401k accounts but that doesn’t mean that your retirement planning should wane.
Retirement is another area of your budget you want earmarked. There are still plenty of choices for self-employment retirement plans for freelancers. Experts recommend 10% to 15% of your income should go towards retirement.
For many freelancers, they take their income for the month and take out taxes and put this money into a separate account for estimated taxes. Then they take out retirement contributions. Budgeting this way ensures you are saving for your retirement.
An emergency fund is a stash of cash that’s readily available in case the worst should happen.
If half of your clients leave you over the next several weeks, would you be able to pay your rent or mortgage? Emergency funds keep freelancers afloat in situations beyond their control.
Financial professionals recommend freelancers have at least 6 to 9 months worth of living expenses in their emergency fund.
A cushion account is a smart move that makes budgeting for freelancers less stressful.
Unlike an emergency fund, this account acts as your insurance in case a client doesn’t pay you on time or doesn’t pay you at all. Rent, mortgage and car payment obligations won’t wait, so use money from your cushion fund to make those payments when client payments are delayed.
Once you do get paid, replenish your cushion account. This account should contain at least 2 months of living expenses and serves to protect you in case something delays your expected income.
In some budgeting for freelancers spreadsheets, they simplify things by have a larger emergency fund and include the cushion account in it. You can decide which route works best for you.
Insurance is another important consideration for your budget.
One of the most popular topics when discussing budgeting tips for freelancers is health coverage. Ideally, you will have determined your health insurance options before going full-time as a freelancer.
But even once you have health insurance in place, it is not something to forget about. You should shop for free quotes every year to ensure you are getting the best coverage for the least amount of money.
Health insurance isn’t the only insurance to consider in your budget. Other types of insurance that may be relevant depending on the type of freelance work you perform is business insurance, general liability insurance, media insurance, etc.
Talk to an appropriate insurance professional who works with other freelancers to determine the best insurance options for your business.
Budgeting tools can simplify it all.
But, don’t expect them to make important decisions for you. There are budgeting apps for freelancers like Mint and You Need A Budget that come highly recommended. You can also kick it old school with a freelance budget spreadsheet based in an Excel document or Google Sheet.
My favorite by far is to use Tiller. It automates my budget but also allows me full control over the look and feel. You can learn more about Tiller by clicking here.
In either case, a budget for freelancers should include many of the items we’ve discussed such as income, expenses, taxes, retirement, an emergency fund, a cushion fund, and insurance.
Best Time Tracking Apps For Freelancers
In addition to budgeting for freelancers, if you want the greatest chance of success, then using time tracking apps is a must.
Using a time tracking app is like having a trusty assistant looking over your shoulder who quickly calculates billable time, project hours, time spent marketing and any other metric that’s important for your business.
Without a reliable time tracker, you’ll never know if your business is running as efficiently as it could.
Since we’ve been talking about budgeting, it makes sense that our recommendations for the best time tracking apps will lean towards those that have a free option. Take a few for a test drive then decide on a paid version that meets your needs. Our favorites are Harvest and toggl.
Best For: Tracking time and expenses, project management, invoicing via PayPal, freelancers who use other project management tools and accounting systems, e.g., Asana, Trello, Slack, QuickBooks, Stipe, plus many more integration’s
Best For: Simple time tracking, data miners, Pomodoro timer enthusiasts, team management, has 80+ app integrations which are great for the tech minded
Freelancing can be the best decision of your life if you begin with eyes wide open. This means being realistic about your responsibilities. It’s true, the freedoms of being a solopreneur often outweigh those of working a regular job but do so at a cost.
Successful freelancers are good planners (or they hire someone who is), and this includes your budget. Ultimately, budgeting for freelancers is building a budget that you will stick to, so be sure you do your research to find one that meets your needs.
After all, building the right budget can be the difference between your success or failure as a freelancer.