The Way We Work
October 10, 2011 by Stephanie Gonzaga

Managing finances can be frustrating for freelancers, but it is essential if you want to keep your freelance business running.

The number one reason why you need to carefully budget your freelance income is that it is often unpredictable. Depending on how you work and how many contracts you're billing, your income could vary drastically from month to month.

Some freelancers would consider hiring an accountant to do this type of work, but you can budget your freelance income yourself by following these useful steps:

1. Define your projected monthly income.

The first step is to determine how much you are earning as a freelancer. Ask yourself, "How much have you earned and spent per month so far?"

One great way to do this if your income tends to be unpredictable, is to take your entire freelance income from the previous year and divide it by twelve. Only been freelancing six months? Add it up and divide by six. With the estimate in mind, you can now create a budget plan that will help you manage your income for the kinds of expenses and investments you will be making this year.

2. Open two bank accounts: business and personal.

As your freelance business grows, you'll notice that a portion of your income is now spent on various business expenses, whether it is new equipment, software, office supplies, mobile phone bills, etc.

As such, it's important to segregate your income by placing a portion into a business bank account and another portion into a personal bank account. Doing so will help you monitor how much money will go to business expenses and how much for personal spending.

To give you an idea of what a business expense is, here are common business expenses freelancers spend for:

  • Equipment (e.g. computers, all-in-one printers, furniture)
  • Software
  • Office supplies
  • Bills (e.g. electricity, water, internet service)
  • Marketing expenses
  • Training and career development (e.g. e-books, courses, seminars)

3. Give yourself a monthly salary.

monthly-pay-checkSo how do you effectively distribute your income between your business and personal accounts? One way to do this is giving yourself a monthly salary.

Get Rich Slowly founder J.D. Roth wrote an interesting article on the99percent.com regarding budgeting irregular income, and one of the tips he provided was giving yourself a monthly salary for the entire year. Roth had this to say:

"On a set date each month, write yourself a paycheck. Leave the rest of the money in your business account. At the end of each year, three things happen.

  1. First, you reset your salary. Based on the previous year's numbers, your income might increase — or it might decrease.
  2. Next, you use the "extra" money you've been accumulating in your business account to pay taxes. I could write an entire article on budgeting for taxes with an irregular income, but for now let's just note that it's very important that you remember to account for them, especially if nobody else is withholding them from your paycheck.
  3. Finally, if you have anything left after paying taxes, you pull this money out of the business account as personal income. It is, in essence, a year-end bonus. You can use it for whatever you see fit: debt reduction, long-term savings, a Mini Cooper."

You don't have to follow Roth's advice to the letter, of course. You can revise the system in ways that are more suitable to you and your circumstances.

What's important here is that you set aside money for your business expenses and taxes in your business account, while your "salary" is for personal expenses, long-term savings, leisure, and anything else that you'd like to buy or invest in.

4. Get thrifty. (You aren't likely to regret it.)

being-thrifty-couponsUnless you're earning top dollar consistently every month, you need to assure yourself that your freelance income will be able to support your freelance biz and your current lifestyle. If you're struggling just to cover your monthly expenses, and you feel you're spending more on leisure than in your business, you may need to cut your costs and set your priorities straight.

Make a list of all your personal and business expenses, then cross out items that are of less importance to you and your business. Are your monthly and yearly subscriptions worth it at this time? Do you think you can live without buying premium clothing, games, and other leisure items every week?

Once you have your final list of items to spend on, make sure that you don't betray this list by buying or adding new, unnecessary items. Keep telling yourself to stick to your monthly budget, to wait and be patient, and to only buy when necessary.

5. Create an emergency fund.

We may have survived the recession, but that doesn't assure us that nothing could affect the economy again. For all we know, the recession could hit us once more, so, to protect yourself, you need to have an emergency fund. This is money you will use for all sorts of emergencies in case your monthly income won't be enough to fully pay for your expenses. It will help you keep your freelance biz afloat while you're busy finding more work and more ways to sustain your monthly freelance income.

If you'd like to open a special bank account for your emergency fund, try to open one that offers a high interest rate. That way, your emergency savings will earn interest during the months when you don't need to touch it.

Is budgeting your freelance income part of your business routine already? What budgeting tips can you share with the freelance community? Share them in the comments below.

Stephanie Gonzaga

Freelancer, Blogger, and Creative Writer

Stephanie Gonzaga is a freelancer on oDesk and blogger of The Freelance Pinoy, a freelancing blog for the Pinoy solo professional.