At its best, budgeting can feel like a chore you endure. At its worst, it can feel like a form of slow-burn torture. But freelancers and gig workers have it harder in some ways — because your income can go up and down like a roller coaster.
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In turn, it can be hard to map out your finances and save some beans. Many — myself included — can attest: Trying to get a handle on your finances can be a wild ride.
So how can you budget if the cash coming in each month changes?
As a money nerd who has been freelancing for the last decade and then some, I’ve played around with different systems and strategies to manage my money on a variable income. Here are a few simple tactics I’ve learned along the way:
1. I separate my business and personal finances to save time (and stress) at tax time.
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A super-common mistake freelancers make? Mixing their business and personal finances. You know what I’m talking about — when you spend and save from the same account.
This is something I was once guilty of doing. Come tax time, I found myself with a million tabs open on my computer, downloading bank and credit card statements, trying to make sense of everything. Hours wasted? Too many. Did I shed a tear or two of frustration? Maybe.
Do yourself a major favor. Spare yourself the headache, and keep your finances tidy. Open a business bank account, and use that to pay for anything business-related. That way you can make proper tweaks to your budget and create a separate business account from the start.There are a handful of great business accounts designed for freelancers — Lili, Oxygen, and Axos Bank, for starters. I had a business with the now-sunsetted Azlo Bank, and it didn’t charge any fees, there were no account minimums you had to keep, and there were some nifty tools like sending invoices from your account.
So look for a business bank that suits your needs. They’re out there.
2. I created a budget for work expenses too.
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Not only do you need a spending plan for your personal affairs, but you’ll also need one for your business matters, too. There were times when I didn’t set enough aside for those online tools that I signed up for during what must have been bouts of amnesia.
I came to the realization that I’m an owner of a freelance business, and I got more serious about tracking my business-related expenses. When I did, it made it easier for me to remember to stay on top of all my expenses, personal or freelancer-related.
Plus, it helped me be aware of all the costs that go into being a solopreneur — health insurance premiums, software and apps you need to do your work, web hosting, software and equipment such as a laptop, going to conferences, and what have you. It adds up quickly.
3. I linked income from steady gigs with specific bills.
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How can you stay on top of rent and bills if you don’t know when that money is coming in? Before I started using a different tactic of getting ahead one month — which I’ll get to in just a bit — I paid certain bills with steady-ish gigs. By my first year as a freelancer, I had a steady-ish, part-time gig at my old job for about half the year proofreading and editing calendars (yes, you read that correctly — calendars still exist). While the hours changed slightly, I made about $2,000 a month from that gig.
Because that’s money you can count on, use that money to pay some bills. Pro tip: Use steady income with larger amounts to the larger bills, and then use pay that you receive at random times of the month with more variable sums for other bills.
4. I prepare for gaps in cash flow with a baby buffer fund.
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A baby buffer fund is intended to be used when there’s a lull in work and you need some cash to tide you over for the time being.This is probably one of the things I still lean on the most. It’s a separate savings from an emergency fund, which ideally should be more flush with cash and is used for legit 911 situations — think your car breaking down, tending to urgent dental work, or needing to uproot from your home and evacuate ASAP due to an impending natural disaster.While I aim to keep my emergency fund stocked with at least six months of basic living expenses (the recommended amount is anywhere from three to six), I top the baby buffer fund off with a smaller sum. You can start with whatever seems feasible to you — maybe $100, or $200. And build from there.
5. I always save for taxes.
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When I made the switch to full-time freelancing, I very quickly realized how much that take-home pay shrinks after taxes are accounted for. A good freelancer friend of mine was not aware of this and ended up draining her savings one year. Another also was not aware and was backlogged in owing taxes for seven years.
So what exactly are these freelancer taxes I speak of? First, you need to pay both halves of FICA, aka self-employment tax. To be specific, in 2021 that’s 15.3% of your net earnings, and it is made up of 12.4% Social Security tax and 2.9% Medicare tax. It’s a lot.
Plus, you’re on the hook for paying Uncle Sam on your income taxes when tax season rolls around. I was lucky enough to learn from others’ mistakes, and aimed to set aside at least 25% to 30% of all my self-employed income to cover taxes. (Some folks I know save 50%.)
Chances are the amount you are on the hook for could be less than that, as you’ll most likely be writing off certain expenses and possibly socking money in tax-advantaged accounts (hello, traditional IRA!). But you want to err on the side of caution. It’s far better to have too much than not enough.
6. And I save money based on percentages of my income.
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The sweet sauce of freelancing is that you might have some awesome months income-wise. When I was riding a money high from these great months, I saved a portion of whatever was “left over.” That’s after I took into account taxes and personal living and business expenses.
For example: Let’s say I needed $3,000 to live on every month. And one month I raked in $5,000. After tucking away 30%, or $1,500, for taxes, I ended up with $500. I usually saved half of any surplus, but some months I saved more.
7. I’ve also saved based on my past income history.
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Another tactic I’ve used to figure out how much to save is by looking at how much I earned on average in the last, say, six months or a year. Obvs, this only became feasible after I got my toes wet with full-time freelancing and had past income to look back on. I did some basic math and figured out my average income from that time period. Then, I decided on an amount I felt comfortable stashing away each month.
While I did try this and some of my friends use this tactic, I found that my income still fluctuated too much to make it work for me. I prefer to save based on what I rake in during a given month.
8. I use an app to save a percentage of each paycheck.
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Because take-home pay as a freelancer isn’t a constant number, it’s hard to autosave a set amount each week.I’ve used Qapital, a personal favorite of mine, to save for all kinds of goals. Qapital has a built-in feature where you can auto-save a percentage each time a deposit drops into your account. I didn’t have to stress about having to move money from one account to another. Plus there was no pressure to commit to saving the same dollar amount each week.
9. Sometimes I’ll ask a steady client for speedier payment.
A net on an invoice is essentially the amount of time someone has to pay you back. The standard net is 30 days. But why not see if you can shorten the time you get paid from a job? While some gigs have set payment schedules or accounting systems in place that prevent them from being flexible, or while a client might not always bend, it certainly doesn’t hurt to ask.
With clients I’ve had good relationships with and were more flexible, I inquired about whether there was a possibility of getting paid sooner, as it would help me with my cash flow. And a handful of times they said they could.
10. Finally, I work hard to “get ahead” a month on my expenses.
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When I had a day job, I got paid every other week. So a few months out of the year, I got three payments instead of two. In turn, I saved those “extra” paychecks to stay one month ahead of my expenses. For example: By the end of September, I had enough in my bank account to cover expenses for all of October.
When I made the switch to freelancing full-time, I tried to stay ahead of my living expenses by a month whenever possible. This was only if no 911 money emergencies popped up and I was making enough to set some cash aside for this sole purpose.
In turn, I could set some bills on autopay instead of linking bills to steady-ish gigs, and I didn’t have to constantly check my bank balance to make sure I had enough to cover bills that would be due soon.
Now I’m super curious — what are the budgeting hacks that work for you? Share your favorite tips in the comments!
And for more stories about work and money, check out the rest of our personal finance posts.